Learn - A Better Bookkeeping Service Part - 1

Introduction to double-entry bookkeeping

The first thing to appreciate is that many people first encounter 'debits' and 'credits' by having a bank account; but these terms are used from the bank's perspective and not from that of the account holder. So, when you pay money into your account, you are in fact lending your money to the bank and they say 'you are in credit'.  The bank has a creditor - you - to whom they owe some money.  But from your perspective, you have a debtor - the bank - who owes you money. The bank has a liability (a creditor, a debt)

and therefore you, the account holder, have an asset (a debtor). In other words, to say

 'I am in credit' when you have some money in your account, is technically incorrect in bookkeeping terms.

This is because the language of double-entry bookkeeping is spoken in the 'first person' for whom the records are being maintained, and not the bank's.  So, if a business has some money in its bank account, it is not 'in credit'; rather, as we have seen, it has an asset which is a debit balance.  So the business is in fact 'in debit' with the bank.

 The double-entry bookkeeping system in universally credited to Luca Pacioli (http://en.wikipedia.org/wiki/Luca_Pacioli) 

who in 1494 published the book "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" containing a 27-page treatise on bookkeeping.  However, perhaps the earliest evidence of Double-entry bookkeeping is found in the "Farolfi ledger" of 1299-1300. 

Business transactions were recorded using this method by early traders because it was a reliable means of easuring profits and recording cash owed from customers and to suppliers.  The 'books of ccount' (books) of a trader consisted of separate pages for each account, bound together in 'ledgers'.  Typically, there was a 'sales ledger'; recording sales to and monies received from customers (and therefore a means of establishing balances owed from them), and a 'purchase ledger'; recording purchases and monies paid to suppliers (and therefore a means of establishing balances owing to them). All the other pages required to record expenses and balances for bank, stock and assets used in the business were grouped into a third book, called the 'general ledger' (or 'nominal ledger').  Each of the pages in these 3 ledgers would have a separate debit and credit column to record the

transactions, as each occurred. The mantra of 'every debit has an opposing credit' is

central to double-entry bookkeeping. 

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