The history of the double entry bookkeeping system cannot be completed without mentioning an Italian mathematician named Fra Luca Pacioli, who is widely regarded as the father of accounting.
Fra Luca Pacioli wrote the first book on the double entry system alongside his close friend Leonardo da Vinci. The title of the book was “Summa de arithmetica, geometria, proportioni et proportionalita” and was first published in Venice in 1494.
Pacioli and da Vinci did not claim to be the creators of the double entry system, but they did research into how the concepts may be applied in a more efficient and structured manner.
Pacioli composed the book's text, while da Vinci created the practical pictures that accompanied and explained it. The book was divided into several sections, one of which was titled "Particularis de computis et scripturis" and discussed the double entry system. It was further separated into numerous minor chapters that covered double entry, journals, trial balance, balance sheet, income statement, and a variety of other tools and practices that many accountants and traders have since adopted.
Some type of double entry system was already in use before Pacioli's book. No one knows for sure when or how it was created. Pacioli's book, on the other hand, was responsible for popularizing the system in Europe and other trading nations throughout the world. Modern accounting professionals refer to Pacioli as the "father of accounting" in recognition of his contributions.
Definition And Explanation
The double entry accounting system is based on the concept that each business transaction results in two financial changes in the company. These changes are recorded as debits or credits in two or more separate accounts, using the 'rules of debit and credit.'
Rules Of Double Entry System
The rules of the double entry system of bookkeeping state that for every debit entry, there must be a corresponding credit entry and for every credit entry, there must be a corresponding debit entry.
Double entry example: For instance, if a company based in Chicago buys a plant and machinery for $5000 cash, the overall worth of the plant and machinery increases by $5000 while the cash amount decreases by $5000. If the company uses a double entry accounting system, it must debit the plant and machinery account by $5000 and credit the cash account by $5000. See the rules of debit and credit to understand why the firm would debit plant and machinery and credit cash.
Types Of Double Entry System
The three stages of the double entry system of bookkeeping can be summarized as follows:
- Original records (journal or subdivision of journal)
- Classification (ledger accounts)
- Summary (final accounts)
1. Original records (journal and subdivision of journal)
The business transactions are initially entered in a book known as a journal. A journal is separated into sub-books such as a general journal, a cash receipts journal, a cash payments journal, a purchases journal, a purchases returns and allowances journal, a sales journal, and so on. The number of subsidiary books that a company must keep is determined by the nature and size of the company.
2. Classification (ledger accounts)
In the second stage, all transactions involving the same person or entity are gathered and kept in a single account statement. The ledger is the book in which these grouped accounts are stored. A ledger account can be viewed at any moment to see the additions and subtractions of a specific item to which the account is linked. For example, the cash account would show the inflows (additions) and outflows (reductions) of cash during a given period of time.
3. Summary (income statement and balance sheet)
The ledger accounts are balanced after certain periods, and a statement called a trial balance is generated, which is then used to calculate profit or loss and determine the financial situation of the company. The profit or loss (income statement) of a firm is determined by either preparing a profit and loss account. The financial status of a company is determined by listing assets and liabilities on a balance sheet at a specific date.
Advantages Of Double Entry System
The following are the importance of the double entry system of accounting for your business:
- The two aspects of each transaction are recorded in the double entry system of bookkeeping. It maintains a balance within the records, which aids in the detection of errors, omissions, and frauds.
- A trial balance can be generated using this system to check the arithmetical accuracy of all accounting entries of a business in a given period. The trial balance can also be used to determine the financial status of a business by generating a balance sheet and determining operating performance by preparing an income statement.
- The double entry system is the most advanced and practical method of keeping accounting records, and it is widely utilized by businesses all over the world. A business organization would not be able to compare its financial accounts to those of other companies without this method.
- The double entry method is very systematic and follows certain rules and principles. Hence, owners, management, accountants, and other staff can easily discover information about a certain transaction or account when they need it.
- The usage of this system of bookkeeping is required by almost all accounting standards and laws around the world. The auditors will not accept a company's financial accounts if it fails to comply with this criteria.
- The financial reports created by a double entry system are extremely dependable for making decisions.
Disadvantages Of Double Entry System
The following are the major drawbacks of using the double entry system of accounting:
This system is complicated enough that it necessitates the use of professional and qualified employees to oversee the entire record-keeping process. For sole proprietors and other small business owners, its employment may be costly, time-consuming, and inconvenient.
Conclusion: History of double entry accounting system
The benefits of a double entry system clearly exceed the drawbacks. As a result, it has become the industry standard and, in many circumstances, a requirement for keeping accounting records in medium and large organizations. It is the foundation of the majority of manual and computerized accounting systems.