what is double entry accounting

what is double entry accounting

The Importance of Double Entry Accounting

1. Introduction to Double Entry Accounting

So much so that bookkeeping and financial statements became so important for businesses that double-entry bookkeeping, which is shown as one of the greatest innovations of the Renaissance, has had a great impact on the development of capitalism. Double-entry bookkeeping has become a necessity for the development and management of enterprises by constituting the principles and rules that will form the backbone of accounting. In this respect, if accounting is the report level of business activities, it has been easier to manage the accounting dimension of enterprises that use double-entry accounting system. The reason for this is that the changes in the outcome items obtained within the framework of the recording principles revealed by accounting have made managerial decisions easier and more logical by explaining the movements in the profit elements in detail.

An idea is the link between today and tomorrow. An organization evaluates its identity and environment primarily through accounting. Therefore, the most basic activity that needs to be well synchronized with the simplest details of the enterprise is accounting. The accurate recording of the transactions made and the correct evaluation of the results mislead the real sense of the activities of the undertakings and lead the enterprises to poor performance. Therefore, the correct keeping of the accounting records and the systematic evaluation of the results are the main properties of the economic life of the enterprises.

2. Benefits of Double Entry Accounting

Have you ever wondered why the term ‘debit’ is used in double entry accounting? Or what double entry accounting even is? Well, thanks to Ancient Greek geniuses, we have it. Double entry forms the backbone of modern accounting and is used in most businesses worldwide. Most business owners and students use double entry every day without knowing why it’s called ‘double entry’ accounting! The double entry system is based on some simple principles: 1) The components of a double entry are called ‘debits’ and ‘credits’, not ‘pluses’ and ‘minuses’. This might sound like hairsplitting, but these terms have more formal, process-oriented definitions. 2) Moving assets between different names is still a complete transaction. The total effect in assets must always balance, which means the transaction is accurate.

Most businesses and individuals use double entry accounting, but take it for granted. People who want their business to grow need to understand the textbook fundamentals of accounting, and double entry is a key part of that. This post aims to get you up to speed on the essentials of double entry, like: Are transactions only recorded once? How are transactions recorded twice? What’s on each side of the accounting record? Why are the records the way they are? Are there alternatives? Thanks for reading, and enjoy your introduction to the role of recording historical financial transactions.

3. Principles of Double Entry Accounting

The principle expressions defining accounting are as such from a high level: Assets = Liabilities + Equity, Revenue – Cost = Gross Margin, Gross Margin – Expenses = Net Income, Accumulated Net Income – Dividends = Equity. Two properties constitute accounting for proper finances, or in an equivalent expression, profits measured by double-entry accounting: 1. Exponentially compounded growth with all beneficiaries sharing in the growth, and 2. Preclude Saintliness. Where accounting for proper finances requires “no sainted person”, a sainted person is the state of a whole that recognizes in the mean no measure of its isolated parts. Loosely named after Borgia, being a 15th-century Spanish-Italian cardinal, vice-chancellor, and celebrated patron of the arts, the phenomenon of Borgia goes back to a 5th-century Roman philosopher-economist.

The historical influence of double-entry accounting is pivotal to this study. I present an explanation of the relevance of double-entry accounting in two parts, the first demonstrating an equivalent algebraic expression of the basic accounting equation, and the second confirming that double-entry accounting precludes the phenomenon of a sainted person.

The historical influence of double-entry accounting is pivotal to this study. I present an explanation of the relevance of double-entry accounting in two parts, the first demonstrating an equivalent algebraic expression of the basic accounting equation, and the second confirming that double-entry accounting precludes the phenomenon of a sainted person. 195125 words.

4. Implementation of Double Entry Accounting

Now, the primary reason to select a double entry accounting system is compliance. It is given in the new Companies Act of 2008, the Professional Society Act of 1977, the Value Added Tax Act of 1991 (VAT Act), and the Labor Relations Act, etc. Only double entry accounting could comply with, in essence, the law; as a result, only double entry accounting could presumably be one of the most ‘professionally’ standard forms of accounting verification. Many accounting reports also suggest business people use the double-entry accounting system to avoid future compliance problems. Alternatively, the single-entry accounting system is enabled for the following; it cannot provide, as discussed in the previous section, any assurance of the accuracy of accounting transaction data. Further, as the primary source of accounting information is not dependable, no financial forecast or analysis could provide reliable results. In reality, there is hence little to suggest that user-friendly accounting systems are suitable for consumers who depend on the forecast, not to mention the consumers living in nations with stringent accounting regulations.

There is a wide range of accounting software available, each with its own unique features. The primary consideration when selecting a package will be the functionality offered by the software, fed by price and the scale of the operation. Specialist stores and consultants will also supply details and comments. However, two features are often overlooked; namely, support for the CashBook or ‘Single Entry’ accounting style, and ease of integration. A businessman’s choice of an accounting system appears to be primarily influenced by its price and functionality rather than the type of accounting used, with the scales being tipped toward double entry accounting.

5. Conclusion: Embracing Double Entry Accounting for Financial Success

Lack of understanding can mess up strategic planning as well as the evaluation of performance management tools such as budgets and targets. Finally, disconnects between the payroll and other financial statements tend to be clear to individual employees. As seen through the lens of double entry accounting, the clarity of the connection is both in the company itself and in the financial statements. Now, the initial goal of becoming a master of double entry accounting is to improve financial results based on system knowledge. However, another motivation may arise when you realize that they also provide business owners, lenders and people who manage or control resources a kind of financial transparency and verified financial records.

This chapter’s purpose is to explain why an understanding of double entry accounting is of such great importance for business success. I first pointed out the advantages of business managers knowing how to interpret financial statements created using the double entry method, and how this knowledge is especially helpful. Second, by explaining how double entry accounting statements give the owners and lenders of a business a powerful system of checks and balances over management. This allows the real stewards to better track what happens with their wealth, to verify that managers’ activities are aimed at keeping it secure, and to devalue them when they are not.