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Double EntryBook-keepingBy
K. V. Ramana, Lecturer,
MBA Department, IACR.
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A business transaction involves anexchange between two accounts. For
example, for every asset there exists aclaim on that asset, either by those whoown the business or those who loanmoney to the business. Similarly, the sale
of a product affects both the amount ofcash (or cash receivable) held by thebusiness and the inventory held.
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Recognizing this fundamental dual nature oftransactions, merchants in medieval Venice began usinga double-entry bookkeeping system that records
each transaction in the two accounts affected by theexchange. In the late 1400's, Franciscan monk andmathematician Luca Pacioli documented the procedurefor double-entry bookkeeping as part of hisfamous Summawork, which described a significant
portion of the accounting cycle. Double-entrybookkeeping spread throughout Europe and became thefoundation of modern accounting.
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Two notable characteristics of double-entrysystems are that 1) each transaction is recordedin two accounts, and 2) each account has twocolumns.
In a double-entry system, two entries are madefor each transaction - one entry as a debit inone account and the other entry as a credit inanother account. The two entries keepthe accounting equation in balance so that:
Assets = Liabilities + Owners' Equity
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To illustrate, consider a repair shop with atransaction involving repair service performed onJan 4 for a cash payment of $275.00. Ina single-entry bookkeeping system, thetransaction would be recorded as follows:
Single Entry Example Date Description Revenues Expenses
Jan 4 Performed 275.00
repair service
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In a double-entry system, the transactionwould be recorded as follows:
Double Entry Example
Date Accounts Debit Credit
Jan 4 Cash 275.00
Revenue 275.00
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A notation may be added to this journal entry toindicate that the revenue was from repair
services. Note that two accounts (revenue and cash) are
affected by the transaction. If the customer didnot pay cash but instead was extended credit,
then "accounts receivable" would have beenused instead of "cash."
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In this system, the double entries take theform ofdebits and credits, with debits in
the left column and credits in the right.For each debit there is an equal andopposite credit and the sum of all debitstherefore must equal the sum of all
credits. This principle is useful foridentifying errors in the transactionrecording process.
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Double-entry accounting has the followingadvantages over single-entry:
Accurate calculation of profit and loss in complexorganizations
Inclusion of assets and liabilities in thebookkeeping accounts.
Preparation of financial statements directly fromthe accounts
Easier detection of errors and fraud
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To appreciate the importance of double-entrybookkeeping, it is interesting to note that the industrialrevolution might not have been possible without it. At
that time, businesses increased in size and complexity.Accurate bookkeeping was required for managers tounderstand the financial status of their businesses inorder to keep them solvent and offer a degree oftransparency to investors. While a single-entry system
can be adapted by a skilled bookkeeper to meet some ofthese needs, only a double-entry system provides therequired detail systematically and by design.