Double-entry bookkeeping - Wikipedia

The double-entry system has two equal and corresponding sides known as debit and credit. A transaction in double-entry bookkeeping always affects at least two ... Double-entrybookkeeping FromWikipedia,thefreeencyclopedia Jumptonavigation Jumptosearch Recordingatransactionasdebitandcredit Thisarticleneedsadditionalcitationsforverification.Pleasehelpimprovethisarticlebyaddingcitationstoreliablesources.Unsourcedmaterialmaybechallengedandremoved.Findsources: "Double-entrybookkeeping" – news ·newspapers ·books ·scholar ·JSTOR(December2013)(Learnhowandwhentoremovethistemplatemessage) Bookkeeping Keyconcepts Daybooks Double-entry Generalledger TAccounts Trialbalance Journal Debitsandcredits Chartofaccounts Pettycash Imprestsystem Bankreconciliation Ledger Single-entry Bookkeeper Assets Liabilities Equity Income Expenses Depreciation Accruals Prepayments VAT/GST Financialstatements Balancesheet Incomestatement Relatedprofessions Accountant Accountingtechnician Accountsclerk vte Double-entrybookkeeping,alsoknownasdouble-entryaccounting,isamethodofbookkeepingthatreliesonatwo-sidedaccountingentrytomaintainfinancialinformation.Everyentrytoanaccountrequiresacorrespondingandoppositeentrytoadifferentaccount.Thedouble-entrysystemhastwoequalandcorrespondingsidesknownasdebitandcredit.Atransactionindouble-entrybookkeepingalwaysaffectsatleasttwoaccounts,alwaysincludesatleastonedebitandonecredit,andalwayshastotaldebitsandtotalcreditsthatareequal.Thepurposeofdouble-entrybookkeepingistoallowthedetectionoffinancialerrorsandfraud. Forexample,ifabusinesstakesoutabankloanfor$10,000,recordingthetransactionwouldrequireadebitof$10,000toanassetaccountcalled"Cash",aswellasacreditof$10,000toaliabilityaccountcalled"NotesPayable". Thebasicentrytorecordthistransactioninageneralledgerwilllooklikethis: Debit Credit Cash $10,000 NotesPayable $10,000 Double-entrybookkeepingisbasedonbalancingtheaccountingequation.Theaccountingequationservesasanerrordetectiontool;ifatanypointthesumofdebitsforallaccountsdoesnotequalthecorrespondingsumofcreditsforallaccounts,anerrorhasoccurred.However,satisfyingtheequationdoesnotguaranteealackoferrors;theledgermaystill"balance"evenifthewrongledgeraccountshavebeendebitedorcredited. Contents 1History 2Otherclaimants 3Accountingentries 4Approaches 4.1Traditionalapproach 4.2Accountingequationapproach 5Booksofaccounts 6Debitsandcredits 7Seealso 8Notesandreferences 9Furtherreading 10Externallinks History[edit] Mainarticle:Historyofaccounting Theearliestextantaccountingrecordsthatfollowthemoderndouble-entrysysteminEuropecomefromAmatinoManucci,aFlorentinemerchantattheendofthe13thcentury.[1]ManucciwasemployedbytheFarolfifirmandthefirm'sledgerof1299–1300evidencesfulldouble-entrybookkeeping.GiovanninoFarolfi&Company,afirmofFlorentinemerchantsheadquarteredinNîmes,actedasmoneylenderstotheArchbishopofArles,theirmostimportantcustomer.[2]SomesourcessuggestthatGiovannidiBiccide'MediciintroducedthismethodfortheMedicibankinthe14thcentury,thoughevidenceforthisislacking.[3] Thedouble-entrysystembegantopropagateforpracticeinItalianmerchantcitiesduringthe14thcentury.Beforethistheremayhavebeensystemsofaccountingrecordsonmultiplebookswhich,however,donotyethavetheformalandmethodicalrigornecessarytocontrolthebusinesseconomy.Inthecourseofthe16thcentury,VeniceproducedthetheoreticalaccountingsciencebythewritingsofLucaPacioli,DomenicoManzoni,BartolomeoFontana,theaccountantAlviseCasanova[4]andtheeruditeGiovanniAntonioTagliente. RagusanprecursorBenedettoCotrugli's1458treatiseDellamercaturaedelmercanteperfettocontainedtheearliestknowndescriptionofadouble-entrysystem,publishedinprintinVenicein1573.[5][6]LucaPacioli,aFranciscanfriarandcollaboratorofLeonardodaVinci,firstcodifiedthesysteminhismathematicstextbookSummadearithmetica,geometria,proportionietproportionalitàpublishedinVenicein1494.[7]Pacioliisoftencalledthe"fatherofaccounting"becausehewasthefirsttopublishadetaileddescriptionofthedouble-entrysystem,thusenablingotherstostudyanduseit.[8][9][10] Inpre-modernEurope,double-entrybookkeepinghadtheologicalandcosmologicalconnotations,recalling"boththescalesofjusticeandthesymmetryofGod'sworld".[11] Otherclaimants[edit] Double-entrybookkeepingwasfirstlyallegedlypioneeredbytheRomansandintheJewishcommunityoftheearly-medievalMiddleEast.[12]InAD70PlinytheElderdescribedthestructureofthe"TabulaeRationum"as"Ononepageallthedisbursementsareentered,ontheotherpageallthereceipts;bothpagesconstituteawholeforeachoperation ofeveryman".[13] 11thcenturyJewishbankersinCairousedanintermediaryformofcredit-debitaccountsinsomeoftheirdocumentation.[14]TheItaliansystemhassimilaritieswiththeolderIndian"Jama–Nama"systemwhichhaddebitsandcreditsinareverseorder[citationneeded].ItisB.M.LallNigam'sopinionthattheItalianmerchantslikelylearnedthemethodfromtheirinteractionwithancientIndianmerchantsduringtheGreekandRomanseatraderelations,thoughheisunabletosubstantiatethiswithevidence.[15]TheoldestEuropeanrecordofacompletedouble-entrysystemistheMessari(Italian:Treasurer's)accountsoftheRepublicofGenoain1340.TheMessariaccountscontaindebitsandcreditsjournalisedinabilateralform,andincludebalancescarriedforwardfromtheprecedingyear,andthereforeenjoygeneralrecognitionasadouble-entrysystem.[16]Bytheendofthe15thcentury,thebankersandmerchantsofFlorence,Genoa,VeniceandLübeckusedthissystemwidely. DellamercaturaedelmercanteperfettobyBenedettoCotrugli,coverof1602edition;originallywrittenin1458 Thedouble-entryaccountingmethodwassaidtobedevelopedindependentlyearlierinKoreaduringtheGoryeodynasty(918–1392)whenKaesongwasacenteroftradeandindustry.TheFour-elementbookkeepingsystemwassaidtooriginateinthe11thor12thcentury.[17][18][19] Accountingentries[edit] Inthedouble-entryaccountingsystem,atleasttwoaccountingentriesarerequiredtorecordeachfinancialtransaction.Theseentriesmayoccurinasset,liability,equity,expense,orrevenueaccounts.Recordingofadebitamounttooneormoreaccountsandanequalcreditamounttooneormoreaccountsresultsintotaldebitsbeingequaltototalcreditswhenconsideringallaccountsinthegeneralledger.Iftheaccountingentriesarerecordedwithouterror,theaggregatebalanceofallaccountshavingDebitbalanceswillbeequaltotheaggregatebalanceofallaccountshavingCreditbalances.Accountingentriesthatdebitandcreditrelatedaccountstypicallyincludethesamedateandidentifyingcodeinbothaccounts,sothatincaseoferror,eachdebitandcreditcanbetracedbacktoajournalandtransactionsourcedocument,thuspreservinganaudittrail.Theaccountingentriesarerecordedinthe"BooksofAccounts".Regardlessofwhichaccountsandhowmanyareinvolvedbyagiventransaction,thefundamentalaccountingequationofassetsequalliabilitiesplusequitywillhold. Approaches[edit] Therearetwodifferentwaystorecordtheeffectsofdebitsandcreditsonaccountsinthedouble-entrysystemofbookkeeping.TheyaretheTraditionalApproachandtheAccountingEquationApproach.Irrespectiveoftheapproachused,theeffectonthebooksofaccountsremainsthesame,withtwoaspects(debitandcredit)ineachofthetransactions. Traditionalapproach[edit] FollowingtheTraditionalApproach(alsocalledtheBritishApproach)accountsareclassifiedasreal,personal,andnominalaccounts.[20]Realaccountsareaccountsrelatingtoassetsbothtangibleandintangibleinnature.Personalaccountsareaccountsrelatingtopersonsororganisationswithwhomthebusinesshastransactionsandwillmainlyconsistofaccountsofdebtorsandcreditors.Nominalaccountsareaccountsrelatingtorevenue,expenses,gains,andlosses.Transactionsareenteredinthebooksofaccountsbyapplyingthefollowinggoldenrulesofaccounting: Realaccount:Debitwhatcomesinandcreditwhatgoesout. Personalaccount:Debitthereceiverandcreditthegiver. Nominalaccount:Debitallexpenses&lossesandcreditallincomes&gains[21][22] Accountingequationapproach[edit] ThisapproachisalsocalledtheAmericanapproach.Underthisapproachtransactionsarerecordedbasedontheaccountingequation,i.e.,Assets=Liabilities+Capital.[20]Theaccountingequationisastatementofequalitybetweenthedebitsandthecredits.Therulesofdebitandcreditdependonthenatureofanaccount.Forthepurposeoftheaccountingequationapproach,alltheaccountsareclassifiedintothefollowingfivetypes:assets,capital,liabilities,revenues/incomes,orexpenses/losses. Ifthereisanincreaseordecreaseinasetofaccounts,therewillbeequaldecreaseorincreaseinanothersetofaccounts.Accordingly,thefollowingrulesofdebitandcreditholdforthevariouscategoriesofaccounts: AssetsAccounts:debitentryrepresentsanincreaseinassetsandacreditentryrepresentsadecreaseinassets. CapitalAccount:creditentryrepresentsanincreaseincapitalandadebitentryrepresentsadecreaseincapital. LiabilitiesAccounts:creditentryrepresentsanincreaseinliabilitiesandadebitentryrepresentsadecreaseinliabilities. RevenuesorIncomesAccounts:creditentryrepresentsanincreaseinincomesandgains,anddebitentryrepresentsadecreaseinincomesandgains. ExpensesorLossesAccounts:debitentryrepresentsanincreaseinexpensesandlosses,andcreditentryrepresentsadecreaseinexpensesandlosses. Thesefiveruleshelplearningaboutaccountingentriesandalsoarecomparablewithtraditional(British)accountingrules. Booksofaccounts[edit] Thissectiondoesnotciteanysources.Pleasehelpimprovethissectionbyaddingcitationstoreliablesources.Unsourcedmaterialmaybechallengedandremoved.(October2014)(Learnhowandwhentoremovethistemplatemessage) Eachfinancialtransactionisrecordedinatleasttwodifferentnominalledgeraccountswithinthefinancialaccountingsystem,sothatthetotaldebitsequalsthetotalcreditsinthegeneralledger,i.e.theaccountsbalance.Thisisapartialcheckthateachandeverytransactionhasbeencorrectlyrecorded.Thetransactionisrecordedasa"debitentry"(Dr)inoneaccount,anda"creditentry"(Cr)inasecondaccount.Thedebitentrywillberecordedonthedebitside(left-handside)ofageneralledgeraccount,andthecreditentrywillberecordedonthecreditside(right-handside)ofageneralledgeraccount.Ifthetotaloftheentriesonthedebitsideofoneaccountisgreaterthanthetotalonthecreditsideofthesamenominalaccount,thataccountissaidtohaveadebitbalance. Doubleentryisusedonlyinnominalledgers.Itisnotusedindaybooks(journals),whichnormallydonotformpartofthenominalledgersystem.Theinformationfromthedaybookswillbeusedinthenominalledgeranditisthenominalledgersthatwillensuretheintegrityoftheresultingfinancialinformationcreatedfromthedaybooks(providedthattheinformationrecordedinthedaybooksiscorrect). Thereasonforthisistolimitthenumberofentriesinthenominalledger:entriesinthedaybookscanbetotalledbeforetheyareenteredinthenominalledger.Ifthereareonlyarelativelysmallnumberoftransactionsitmaybesimplerinsteadtotreatthedaybooksasanintegralpartofthenominalledgerandthusofthedouble-entrysystem. However,ascanbeseenfromtheexamplesofdaybooksshownbelow,itisstillnecessarytocheck,withineachdaybook,thatthepostingsfromthedaybookbalance. Thedoubleentrysystemusesnominalledgeraccounts.Fromthesenominalledgeraccounts,atrialbalancecanbecreated.Thetrialbalancelistsallthenominalledgeraccountbalances.Thelistissplitintotwocolumns,withdebitbalancesplacedinthelefthandcolumnandcreditbalancesplacedintherighthandcolumn.Anothercolumnwillcontainthenameofthenominalledgeraccountdescribingwhateachvalueisfor.Thetotalofthedebitcolumnmustequalthetotalofthecreditcolumn. Debitsandcredits[edit] Mainarticle:Debitsandcredits Thissectiondoesnotciteanysources.Pleasehelpimprovethissectionbyaddingcitationstoreliablesources.Unsourcedmaterialmaybechallengedandremoved.(October2014)(Learnhowandwhentoremovethistemplatemessage) Double-entrybookkeepingisgovernedbytheaccountingequation.Ifrevenueequalsexpenses,thefollowing(basic)equationmustbetrue: assets=liabilities+equity Fortheaccountstoremaininbalance,achangeinoneaccountmustbematchedwithachangeinanotheraccount.Thesechangesaremadebydebitsandcreditstotheaccounts.Notethattheusageofthesetermsinaccountingisnotidenticaltotheireverydayusage.Whetheroneusesadebitorcredittoincreaseordecreaseanaccountdependsonthenormalbalanceoftheaccount.Assets,Expenses,andDrawingsaccounts(ontheleftsideoftheequation)haveanormalbalanceofdebit.Liability,Revenue,andCapitalaccounts(ontherightsideoftheequation)haveanormalbalanceofcredit.Onageneralledger,debitsarerecordedontheleftsideandcreditsontherightsideforeachaccount.Sincetheaccountsmustalwaysbalance,foreachtransactiontherewillbeadebitmadetooneorseveralaccountsandacreditmadetooneorseveralaccounts.Thesumofalldebitsmadeineachday'stransactionsmustequalthesumofallcreditsinthosetransactions.Afteraseriesoftransactions,therefore,thesumofalltheaccountswithadebitbalancewillequalthesumofalltheaccountswithacreditbalance. Debitsandcreditsarenumbersrecordedasfollows: Debitsarerecordedontheleftsideofaledgeraccount,a.k.a.Taccount.Debitsincreasebalancesinassetaccountsandexpenseaccountsanddecreasebalancesinliabilityaccounts,revenueaccounts,andcapitalaccounts. CreditsarerecordedontherightsideofaTaccountinaledger.Creditsincreasebalancesinliabilityaccounts,revenueaccounts,andcapitalaccounts,anddecreasebalancesinassetaccountsandexpenseaccounts. Debitaccountsareassetandexpenseaccountsthatusuallyhavedebitbalances,i.e.thetotaldebitsusuallyexceedthetotalcreditsineachdebitaccount. Creditaccountsarerevenue(income,gains)accountsandliabilityaccountsthatusuallyhavecreditbalances.   Debit Credit Asset Increase Decrease Liability Decrease Increase Income(revenue) Decrease Increase Expense Increase Decrease Capital Decrease Increase ThemnemonicDEADCLICisusedtohelpremembertheeffectofdebitorcredittransactionsontherelevantaccounts.DEAD:DebittoincreaseExpense,AssetandDrawingaccountsandCLIC:CredittoincreaseLiability,IncomeandCapitalaccounts. AsecondpopularmnemonicisDEA-LER,whereDEArepresentsDividend,Expenses,AssetsforDebitincreases,andLiabilities,Equity,RevenueforCreditincreases. Theaccounttypesarerelatedasfollows: currentequity=sumofequitychangesacrosstime(increasesontheleftsidearedebits,andincreasesontherightsidearecredits,andviceversafordecreases) currentequity=Assets–Liabilities sumofequitychangesacrosstime=owner'sinvestment(Capitalabove)+Revenues–Expenses Seealso[edit] Debitsandcredits DesiNamu Momentumaccountingandtriple-entrybookkeeping Merdiban Nostroandvostroaccounts Single-entrybookkeeping Notesandreferences[edit] ^Lee,GeoffreyA.(1977)."TheComingofAgeofDoubleEntry:TheGiovanniFarolfiLedgerof1299–1300".AccountingHistoriansJournal.4(2):79–95.doi:10.2308/0148-4184.4.2.79.JSTOR 40697544.Archivedfromtheoriginalon27June2017. ^Lee(1977),p.80. ^deRoover,Raymond(1963).TheRiseandDeclineoftheMediciBank,1397-1494.BeardBooks.p. 97.ISBN 9781893122321. ^VittorioAlfieri,Lapartitadoppiaapplicataallescritturedelleanticheaziendemercantiliveneziane,Torino,DittaG.B.Paraviaecomp.,1891,pp.103-148,NabuPublicDomainReprints. ^Zubrinic,Darko."HistoryofCroatian".Retrieved26December2016. ^"SIESCCroatia2".Retrieved26December2016. ^LucaPacioli:TheFatherofAccountingArchived18August2011attheWaybackMachine ^"LaRiegoladeLibro,Bookkeepinginstructionsfromthemid-fifteenthcentury".Archivedfromtheoriginalon29December2017.Retrieved26December2016. ^Livio,Mario(2002).TheGoldenRatio.NewYork:BroadwayBooks.pp. 130–131.ISBN 0-7679-0816-3. ^"Isthisthemostinfluentialworkinthehistoryofcapitalism?".bbc.com.23October2017.Retrieved23October2017. ^ Poovey,Mary(1998).AHistoryoftheModernFact:ProblemsofKnowledgeintheSciencesofWealthandSociety.UniversityofChicagoPress.p. 54.ISBN 9780226675268.Inthelatesixteenth-century[...]numberstillcarriedthepejorativeconnotationsassociatedwithnecromancy[...].[...][D]ouble-entrybookkeepinghelpedconferculturalauthorityonnumbers.Itdidsobymeansofthebalance[...].Forlatesixteenth-centuryreaders,thebalanceconjuredupboththescalesofjusticeandthesymmetryofGod'sworld. ^Parker,LarryM.(1989)."MedievalTradersasInternationalChangeAgents:AComparisonwithTwentiethCenturyInternationalAccountingFirms".AccountingHistoriansJournal.16(2):107–118.doi:10.2308/0148-4184.16.2.107.JSTOR 40697986. ^JaneGleeson-White(2012).DoubleEntry.W.W.Norton.p. 294.ISBN 9780393088960. ^Gil,Moshe(1976).DocumentsoftheJewishPiousFoundationsfromtheCairoGeniza.Brill.p. 56.ISBN 9789004044807. ^J.R.Edwards(4December2013).AHistoryofFinancialAccounting(RLEAccounting).Routledge.p. 46.ISBN 978-1-134-67881-5. ^Lauwers,Luc;Willekens,Marleen(1994)."FiveHundredYearsofBookkeeping:APortraitofLucaPacioli"(PDF).TijdschriftvoorEconomieenManagement.KatholiekeUniversiteitLeuven.39(3):289–304[p.300].ISSN 0772-7674. ^Miller,Owen(2007)."TheMyŏnjujŏnDocuments:AccountingMethodsandMerchants'OrganisationsinNineteenthCenturyKorea"(PDF).SungkyunJournalofEastAsianStudies.7(1):87–114.ISSN 1598-2661.Archivedfromtheoriginal(PDF)on22August2019.Retrieved6September2016. ^FinancialReportinginthePacificAsiaRegioneditedbyRonaldMa ^AGlobalHistoryofAccounting,FinancialReportingandPublicPolicy:Asia...ByGaryJohnPrevits,PeterWolnizer ^abRajasekaranV.(1September2011).FinancialAccounting.PearsonEducationIndia.p. 54.ISBN 978-81-317-3180-2. ^Accountancy:HigherSecondaryFirstYear(PDF)(First ed.).TamilNaduTextbooksCorporation.2004.pp. 28–34.Archivedfromtheoriginal(PDF)on4September2011.Retrieved12July2011. ^EdwardM.Hyans(1916).Theoryofaccountsforaccountantstudents.UniversalBusinessInstitute,Inc.p. 17. Furtherreading[edit] Gleeson-White,Jane(November2011).DoubleEntry.Allen&Unwin.ISBN 978-1-74175-755-2. Soll,Jacob(April2014).TheReckoning:FinancialAccountabilityandtheRiseandFallofNations.BasicBooks.ISBN 978-0-46503-152-8. 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