Double-entry bookkeeping system

Double-entry bookkeeping, in accounting, is a system of bookkeeping so named because every entry to an account requires a corresponding and opposite entry to a different account. The double entry has two equal and corresponding sides known as debit and credit. The left-hand side is debit and right-hand side is credit. For instance, recording a sale of $100 might require two entries: a debit of $100 to an account named “Cash” and a credit of $100 to an account named “Revenue.”

The accounting equation

{\displaystyle {\text{Assets}}={\text{Equity}}+{\text{Liabilities}}}

is an error detection tool; if at any point the sum of debits for all accounts does not equal the corresponding sum of credits for all accounts, an error has occurred. However, satisfying the equation does not guarantee that there are no errors; the ledger may still “balance” even if the wrong ledger accounts have been debited or credited.

Double-entry bookkeeping was pioneered in the Jewish community of the early-medieval Middle East. Jewish bankers in Old Cairo, for example, used a double-entry bookkeeping system which predated the known usage of such a form in Italy, and whose records remain from the 11th century AD. It has been hypothesized that Italian merchants likely learned the method from their interaction with medieval Jewish merchants from the Middle East, but this question remains an area for further research. The oldest European record of a complete double-entry system is the Messari (Italian: Treasurer’s) accounts of the Republic of Genoa in 1340. The Messari accounts contain debits and credits journalised in a bilateral form, and include balances carried forward from the preceding year, and therefore enjoy general recognition as a double-entry system. By the end of the 15th century, the bankers and merchants of Florence, Genoa, Venice and Lübeck used this system widely.

However, the double-entry accounting method was said to be developed independently earlier in Korea during the Goryeo dynasty (918–1392) when Kaesong was a center of trade and industry at that time. The Four-element bookkeeping system was said to be originated in the 11th or 12th century.

The earliest extant accounting records that follow the modern double-entry system in Europe come from Amatino Manucci, a Florentine merchant at the end of the 13th century. Manucci was employed by the Farolfi firm and the firm’s ledger of 1299-1300 evidences full double-entry bookkeeping. Giovannino Farolfi & Company, a firm of Florentine merchants headquartered in Nîmes, acted as moneylenders to the Archbishop of Arles, their most important customer. Some sources suggest that Giovanni di Bicci de’ Medici introduced this method for the Medici bank in the 14th century.

Ragusan economist Benedetto Cotrugli’s 1458 treatise Della mercatura e del mercante perfetto contained the earliest known description of a double-entry bookkeeping system, but his manuscript was not officially published until 1573.

Luca Pacioli, a Franciscan friar and collaborator of Leonardo da Vinci, first codified the system in his mathematics textbook Summa de arithmetica, geometria, proportioni et proportionalitàpublished in Venice in 1494. Pacioli is often called the “father of accounting” because he was the first to publish a detailed description of the double-entry system, thus enabling others to study and use it.

In pre-modern Europe, double-entry bookkeeping had theological and cosmological connotations, recalling “both the scales of justice and the symmetry of God’s world”.

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