Double-Entry Bookkeeping

We will talk a lot in the upcoming sessions about double-entry bookkeeping. It is the basis for modem record keeping. The basic tenant of double-entry is that for every transaction, at least two accounting events are triggered. For example, when goods are purchased for cash, there is both a decrease in cash and an increase in the purchase account. These entries "balance" each other; in other words, they are equal and offsetting.

Double-entry bookkeeping has its natural origins in the 13th­century sea voyages originating in Europe. Wealthy merchants would partner together and commission a voyage to the East, to exchange their wares for silk, spices, and other exotic merchandise.

The captain of the ship would have control and responsibility over the goods, from the time the ship left port until it returned to Europe. When the ship returned, the captain would be required by the merchants to account for the trip: to "balance" the goods unsold with the sales proceeds, which were either cash or other goods. In other words, if the ship left with a cargo valued at 10,000 lira, it would be expected to return with that value, split between unsold goods, new goods, and money.

Along came Friar Luca Pacioli in 1494. He wanted to capture the accounting practices of the time and he wrote an extensive treatise on the subject. This document was the first "how-to" book for double-entry bookkeeping and it was considered the standard for accounting practices for almost 200 years.

How does this history relate to you and your small business? Record keeping is as important as ever. You need to report your business transactions to shareholders, lenders, and taxation authorities. Accurate accounting is even more relevant in today's electronic age, when money is "transferred" in a nanosecond over modem lines.

The next session deals with what you need to track and how to set up your bookkeeping system for your small business.