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.
