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Double-entry bookkeeping, also known as, double-entry accounting, is a method of
bookkeeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variabl ...
that relies on a two-sided
accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
entry to maintain financial information. Every entry to an account requires a corresponding and opposite entry to a different account. The double-entry system has two equal and corresponding sides known as
debit and credit ''Debit and Credit'' (german: Soll und Haben, 1855) is a novel in six volumes by Gustav Freytag. It was one of the most popular and widely read German novels of the 19th century. It was translated into English as ''Debit and Credit'' by Georgian ...
. A transaction in double-entry bookkeeping always affects at least two accounts, always includes at least one debit and one credit, and always has total debits and total credits that are equal. For example, if a business takes out a bank loan for $10,000, recording the transaction would require a debit of $10,000 to an asset account called "Cash", as well as a credit of $10,000 to a liability account called "Notes Payable". Double-entry bookkeeping is based on balancing the
accounting equation The fundamental accounting equation, also called the balance sheet equation, represents the relationship between the assets, liability (accounting), liabilities, and Equity (finance), owner's equity of a person or business. It is the foundation for ...
. The accounting equation serves as 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 a lack of errors; the ledger may still "balance" even if the wrong
ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance Balance may refer to: Common meanings * Balance (ability) in biomechanics * Balance (accounting) * Bal ...

ledger
accounts have been debited or credited.


History

The earliest extant accounting records that follow the modern double-entry system in Europe come from
Amatino Manucci Amatino Manucci gave us the earliest extant accounting of double-entry bookkeeping.G. A. Lee (1977), "The Coming of Age of Double Entry: The Giovanni Farolfi Ledger of 1299-1300", ''Accounting Historians Journal'', 4(2): 79-95 Manucci kept the acco ...
, a
Florentine Florentine most commonly refers to: * a person or thing from Florence, a city in Italy * the Florentine dialect Florentine may also refer to: Places * Florentin, Tel Aviv, a neighborhood in the southern part of Tel Aviv, Israel * Leone, Floren ...

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 Florentine most commonly refers to: * a person or thing from Florence, a city in Italy * the Florentine dialect Florentine may also refer to: Places * Florentin, Tel Aviv, a neighborhood in the southern part of Tel Aviv, Israel * Leone, Floren ...

Florentine
merchants headquartered in
Nîmes Nîmes ( , ; oc, Nimes ; Latin Latin (, or , ) is a classical language A classical language is a language A language is a structured system of communication Communication (from Latin ''communicare'', meaning "to share" or ...
, acted as
moneylender In finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, ...
s to the
Archbishop of Arles The former French Catholic The Catholic Church, also known as the Roman Catholic Church, is the List of Christian denominations by number of members, largest Christian church, with 1.3 billion baptised Catholics Catholic Church by ...
, their most important customer. Some sources suggest that
Giovanni di Bicci de' Medici Giovanni di Bicci de' Medici (c. 1360 – February 1429) was an Italian banker and founder of the Medici Bank. While other members of the Medici family, such as Chiarissimo di Giambuono de' Medici, who served in the Signoria of Florence in 1 ...

Giovanni di Bicci de' Medici
introduced this method for the
Medici bank #REDIRECT Medici Bank#REDIRECT Medici Bank The Medici Bank (Italian: ''Banco dei Medici'' ) was a financial institution created by the Medici family in Italy during the 15th century (1397–1494). It was the largest and most respected bank in Euro ...
in the 14th century. The double entry system began to propagate for practice in Italian merchant cities during the 14th century. Before this there may have been systems of accounting records on multiple books which, however, do not yet have the formal and methodical rigor necessary to control the business economy. In the course of the 16th century, Venice produced the theoretical accounting science by the writings of
Luca Pacioli Fra Luca Bartolomeo de Pacioli (sometimes ''Paccioli'' or ''Paciolo''; 1447 – 19 June 1517) was an Italian mathematician A mathematician is someone who uses an extensive knowledge of mathematics Mathematics (from Ancient Greek, G ...

Luca Pacioli
, Domenico Manzoni, Bartolomeo Fontana, the accountant Alvise Casanova and the erudite
Giovanni Antonio Tagliente Giovanni Antonio Tagliente (sometimes written ''Giovannantonio'') (c. 1460s – c. 1528) was a calligrapher Calligraphy (from Greek language, Greek: καλλιγραφία) is a Visual arts, visual art related to writing. It is the design and exe ...
.
Ragusan
Ragusan
precursor
Benedetto Cotrugli Benedetto Cotrugli ( hr, Benedikt "Beno" Kotruljević; 1416–1469) was a Republic of Ragusa, Ragusan merchant, economist, scientist, diplomat and Renaissance humanism, humanist. Life Cotrugli was born in the city of Ragusa (modern Dubrovnik), ...
's 1458 treatise '' Della mercatura e del mercante perfetto'' contained the earliest known description of a double-entry system, published in print in Venice in 1573.
Luca Pacioli Fra Luca Bartolomeo de Pacioli (sometimes ''Paccioli'' or ''Paciolo''; 1447 – 19 June 1517) was an Italian mathematician A mathematician is someone who uses an extensive knowledge of mathematics Mathematics (from Ancient Greek, G ...

Luca Pacioli
, a
Franciscan friar The Franciscans are a group of related Mendicant orders, mendicant Christianity, Christian Catholic religious order, religious orders, primarily within the Catholic Church. Founded in 1209 by Saint Francis of Assisi, these orders include the Ord ...

Franciscan friar
and collaborator of
Leonardo da Vinci Leonardo di ser Piero da Vinci (15 April 14522 May 1519) was an Italian of the who was active as a painter, , engineer, scientist, theorist, sculptor and architect. While his fame initially rested on his achievements as a painter, he als ...

Leonardo da Vinci
, first codified the system in his
mathematics Mathematics (from Greek: ) includes the study of such topics as numbers (arithmetic and number theory), formulas and related structures (algebra), shapes and spaces in which they are contained (geometry), and quantities and their changes (cal ...
textbook A textbook is a book A book is a medium for recording information Information is processed, organised and structured data. It provides context for data and enables decision making process. For example, a single customer’s sale at ...
'' Summa de arithmetica, geometria, proportioni et proportionalità'' published in
Venice Venice ( ; it, Venezia ; vec, Venesia or ) is a city in northeastern Italy Italy ( it, Italia ), officially the Italian Republic ( it, Repubblica Italiana, links=no ), is a country consisting of delimited by the and surrounding ...

Venice
in 1494.
Pacioli Fra Luca Bartolomeo de Pacioli (sometimes ''Paccioli'' or ''Paciolo''; 1447 – 19 June 1517) was an Italian mathematician A mathematician is someone who uses an extensive knowledge of mathematics Mathematics (from Ancient Greek, G ...

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. Bartolomeo Fontana, published ''Ammaestramento novo che insegna a tener libro ordinariamente ad uso di questa inclita città di Venezia, come etiam in tutta Italia. Da componer e metter le partite in Libro del dare et havere ... ecc'', Venice, 1551.
Benvenuto Stracca The Republic of Ancona was a medieval commune and maritime republic notable for its economic development and maritime trade, particularly with the Byzantine Empire and Eastern Mediterranean, although somewhat confined by Venetian supremacy on the se ...
, published "Tractatus de Mercatura", in Venice, 1551. Domenico Manzoni, published ''Quaderno doppio col suo giornale, novamente composto, & diligentissimamente ordinato, secondo il costume di Venezia'', in Venice, ed. Comin da Trino, 1554. Alvise Casanova, published ''Specchio lucidissimo nel quale si vedeno essere definito tutti i modi e gli ordini della scrittura, che si deve menare nelli negoziamenti della mercantia, Cambi e Recambi con li loro corrispondentie; disgarbugliando et illuminando l'intelletto ai negotianti'', Venice 1558. Giorno Giovanni, published ''Dell'universal trattato dei libri doppi'', Venice, 1610. In
pre-modern Human history, or world history, is the narrative of humanity Humanity most commonly refers to: * Human Humans (''Homo sapiens'') are the most populous and widespread species of primates, characterized by bipedality, opposable thumbs, ...
Europe, double-entry bookkeeping had theological and cosmological connotations, recalling "both
the scales of justice
the scales of justice
and the symmetry of God's world".


Other claimants

Double-entry bookkeeping was firstly allegedly pioneered by the Romans and in the Jewish community of the early-medieval Middle East. But this would have been difficult without the use of the
0
0
. In AD 70
Pliny the Elder #REDIRECT Pliny the Elder #REDIRECT Pliny the Elder#REDIRECT Pliny the Elder Gaius Plinius Secundus (AD 23/2479), called Pliny the Elder (), was a Roman author, a naturalist Natural history is a domain of inquiry involving organisms, includi ...

Pliny the Elder
described the structure of the "Tabulae Rationum" as "On one page all the disbursements are entered, on the other page all the receipts; both pages constitute a whole for each operation of every man". Jewish bankers in
Cairo Cairo ( ; ar, القاهرة, al-Qāhirah, , Coptic Coptic may refer to: Afro-Asia * Copts, an ethnoreligious group mainly in the area of modern Egypt but also in Sudan and Libya * Coptic language, a Northern Afro-Asiatic language spoken in E ...

Cairo
used a double-entry system which predated the known usage of such a form in Italy, and whose records remain from the 11th century AD. The Italian system has similarities with the older Indian "Jama–Nama" system which had debits and credits in a reverse order. It is B. M. Lall Nigam's opinion that the Italian merchants likely learned the method from their interaction with ancient Indian merchants during the Greek and Roman sea trade relations. The oldest European record of a complete double-entry system is the ''Messari'' (
Italian Italian may refer to: * Anything of, from, or related to the country and nation of Italy ** Italians, an ethnic group or simply a citizen of the Italian Republic ** Italian language, a Romance language *** Regional Italian, regional variants of the ...

Italian
:
Treasurer A treasurer is the person responsible for running the treasury A treasury is either *A government department Ministry or department, also less commonly used secretariat, office, or directorate are designations used by a first-level executi ...

Treasurer
's) accounts of the
Republic of Genoa The Republic of Genoa ( lij, Repúbrica de Zêna ; it, Repubblica di Genova; la, Res Publica Ianuensis) was a medieval and early modern maritime republic The maritime republics ( it, repubbliche marinare), also called merchant republics ( it ...
in 1340. The ''Messari'' accounts contain debits and credits journalised in a
bilateral Bilateral may refer to any concept including two sides, in particular: *Bilateria The Bilateria or bilaterians are animal Animals (also called Metazoa) are multicellular eukaryotic organisms that form the Kingdom (biology), biological ...
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 Florence ( ; it, Firenze ) is a city in Central-Northern Italy Italy ( it, Italia ), officially the Italian Republic ( it, Repubblica Italiana, links=no ), is a country consisting of Italian Peninsula, a peninsula delimited by the Al ...

Florence
,
Genoa Genoa ( ; it, Genova ; locally ; lij, Zêna ; English, historically, and la, Genua) is the capital of the Regions of Italy, Italian region of Liguria and the List of cities in Italy, sixth-largest city in Italy. In 2015, 594,733 people lived ...

Genoa
,
Venice Venice ( ; it, Venezia ; vec, Venesia or ) is a city in northeastern Italy Italy ( it, Italia ), officially the Italian Republic ( it, Repubblica Italiana, links=no ), is a country consisting of delimited by the and surrounding ...

Venice
and
Lübeck Lübeck (; Low German Low German or Low Saxon (in the language itself: , and other names; german: Plattdeutsch, ) is a West Germanic languages, West Germanic language variety spoken mainly in Northern Germany and the northeastern part of the ...

Lübeck
used this system widely. However, the double-entry accounting method was said to be developed independently earlier in Korea during the
Goryeo dynasty Goryeo (; ) was a Korea Korea (officially the "Korean Peninsula") is a region in East Asia. Since 1945 it has been Division of Korea, divided into the two parts which soon became the two sovereign states: North Korea (officially the "Dem ...
(918–1392) when
Kaesong Kaesong ( , , ) is a special city in the southern part of North Korea North Korea (Korean language, Korean: /, McCune–Reischauer, MR: ''Chosŏn''; literally /, McCune–Reischauer, MR: ''Pukchosŏn'', or /, Revised Romanization of ...

Kaesong
was a center of trade and industry at that time. The ''Four-element bookkeeping system'' was said to originate in the 11th or 12th century.A Global History of Accounting, Financial Reporting and Public Policy: Asia ... By Gary John Previts, Peter Wolnizer


Accounting entries

In the double-entry accounting system, at least two accounting entries are required to record each financial transaction. These entries may occur in asset, liability, equity, expense, or revenue accounts. Recording of a debit amount to one or more accounts and an equal credit amount to one or more accounts results in total debits being equal to total credits when considering all accounts in the general ledger. If the accounting entries are recorded without error, the aggregate balance of all accounts having ''Debit'' balances will be equal to the aggregate balance of all accounts having ''Credit'' balances. Accounting entries that debit and credit related accounts typically include the same date and identifying code in both accounts, so that in case of error, each debit and credit can be traced back to a journal and transaction source document, thus preserving an
audit trail An audit trail (also called audit log) is a security-relevant chronological record, set of records, and/or destination and source of records that provide documentary evidence of the sequence of activities that have affected at any time a specific ...
. The accounting entries are recorded in the "Books of Accounts". Regardless of which accounts and how many are involved by a given transaction, the fundamental accounting equation of ''assets equal liabilities plus equity'' will hold.


Approaches

There are two different ways to record the effects of debits and credits on accounts in the double-entry system of bookkeeping. They are the Traditional Approach and the Accounting Equation Approach. Irrespective of the approach used, the effect on the books of accounts remains the same, with two aspects (debit and credit) in each of the transactions.


Traditional approach

Following the Traditional Approach (also called the British Approach) accounts are classified as real, personal, and nominal accounts. Real accounts are accounts relating to assets both tangible and intangible in nature. Personal accounts are accounts relating to persons or organisations with whom the business has transactions and will mainly consist of accounts of debtors and creditors. Nominal accounts are accounts relating to revenue, expenses, gains, and losses. Transactions are entered in the books of accounts by applying the following golden rules of accounting: # Real account: Debit what comes in and credit what goes out. # Personal account: Debit the receiver and credit the giver. # Nominal account: Debit all expenses & losses and credit all incomes & gains


Accounting equation approach

This approach is also called the American approach. Under this approach transactions are recorded based on the accounting equation, i.e., Assets = Liabilities + Capital. The accounting equation is a statement of equality between the debits and the credits. The rules of debit and credit depend on the nature of an account. For the purpose of the accounting equation approach, all the accounts are classified into the following five types: assets, capital, liabilities, revenues/incomes, or expenses/losses. If there is an increase or decrease in a set of accounts, there will be equal decrease or increase in another set of accounts. Accordingly, the following rules of debit and credit hold for the various categories of accounts: # Assets Accounts: debit entry represents an increase in assets and a credit entry represents a decrease in assets. # Capital Account: credit entry represents an increase in capital and a debit entry represents a decrease in capital. # Liabilities Accounts: credit entry represents an increase in liabilities and a debit entry represents a decrease in liabilities. # Revenues or Incomes Accounts: credit entry represents an increase in incomes and gains, and debit entry represents a decrease in incomes and gains. # Expenses or Losses Accounts: debit entry represents an increase in expenses and losses, and credit entry represents a decrease in expenses and losses. These five rules help learning about accounting entries and also are comparable with traditional (British) accounting rules.


Books of accounts

Each
financial transaction A financial transaction is an agreement Agreement may refer to: Agreements between people and organizations * Gentlemen's agreement, not enforceable by law * Trade agreement, between countries * Consensus, a decision-making process * Contract, ...
is recorded in at least two different nominal ledger accounts within the financial accounting system, so that the total debits equals the total credits in the general ledger, i.e. the accounts balance. This is a partial check that each and every transaction has been correctly recorded. The transaction is recorded as a "debit entry" (Dr) in one account, and a "credit entry" (Cr) in a second account. The debit entry will be recorded on the debit side (left-hand side) of a general ledger account, and the credit entry will be recorded on the credit side (right-hand side) of a general ledger account. If the total of the entries on the debit side of one account is greater than the total on the credit side of the same nominal account, that account is said to have a debit balance. Double entry is used only in nominal ledgers. It is not used in
daybooks Bookkeeping is the recording of financial transactions, and is part of the process of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic enti ...
(journals), which normally do not form part of the nominal ledger system. The information from the daybooks will be used in the nominal ledger and it is the nominal ledgers that will ensure the integrity of the resulting financial information created from the daybooks (provided that the information recorded in the daybooks is correct). The reason for this is to limit the number of entries in the nominal ledger: entries in the daybooks can be totalled before they are entered in the nominal ledger. If there are only a relatively small number of transactions it may be simpler instead to treat the daybooks as an integral part of the nominal ledger and thus of the double-entry system. However, as can be seen from the examples of daybooks shown below, it is still necessary to check, within each daybook, that the postings from the daybook balance. The double entry system uses nominal ledger accounts. From these nominal ledger accounts, a
trial balance A trial balance is a list of all the general ledger In bookkeeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organisations. It involves preparing source documents ...
can be created. The trial balance lists all the nominal ledger account balances. The list is split into two columns, with debit balances placed in the left hand column and credit balances placed in the right hand column. Another column will contain the name of the nominal ledger account describing what each value is for. The total of the debit column must equal the total of the credit column.


Debits and credits

Double-entry bookkeeping is governed by the
accounting equation The fundamental accounting equation, also called the balance sheet equation, represents the relationship between the assets, liability (accounting), liabilities, and Equity (finance), owner's equity of a person or business. It is the foundation for ...
. If revenue equals expenses, the following (basic) equation must be true: :''assets = liabilities + equity'' For the accounts to remain in balance, a change in one account must be matched with a change in another account. These changes are made by debits and credits to the accounts. Note that the usage of these terms in accounting is not identical to their everyday usage. Whether one uses a debit or credit to increase or decrease an account depends on the normal balance of the account. Assets, Expenses, and
Drawings Drawing is a form of visual art The visual arts are art forms such as painting Painting is the practice of applying paint Paint is any pigmented liquid, liquefiable, or solid mastic composition that, after application to a su ...
accounts (on the left side of the equation) have a normal balance of ''debit''. Liability, Revenue, and Capital accounts (on the right side of the equation) have a normal balance of ''credit''. On a
general ledger In bookkeeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantificat ...

general ledger
, debits are recorded on the left side and credits on the right side for each account. Since the accounts must always balance, for each transaction there will be a debit made to one or several accounts and a credit made to one or several accounts. The sum of all debits made in each day's transactions must equal the sum of all credits in those transactions. After a series of transactions, therefore, the sum of all the accounts with a debit balance will equal the sum of all the accounts with a credit balance. Debits and credits are numbers recorded as follows: * ''Debits'' are recorded on the left side of a ledger account, a.k.a. T account. Debits increase balances in asset accounts and expense accounts and decrease balances in liability accounts, revenue accounts, and capital accounts. * ''Credits'' are recorded on the right side of a T account in a ledger. Credits increase balances in liability accounts, revenue accounts, and capital accounts, and decrease balances in asset accounts and expense accounts. * ''Debit accounts'' are asset and expense accounts that usually have debit balances, i.e. the total debits usually exceed the total credits in each debit account. * ''Credit accounts'' are revenue (income, gains) accounts and liability accounts that usually have credit balances. The mnemonic DEADCLIC is used to help remember the effect of debit or credit transactions on the relevant accounts. DEAD: Debit to increase Expense, Asset and Drawing accounts and CLIC: Credit to increase Liability, Income and Capital accounts. A second popular mnemonic is DEA-LER, where DEA represents Dividend,Expenses,Assets for Debit increases, and Liabilities,Equity,Revenue for Credit increases. The account types are related as follows:
current equity = sum of equity changes across time (increases on the left side are debits, and increases on the right side are credits, and vice versa for decreases)
current equity = Assets – Liabilities
sum of equity changes across time = owner's investment (Capital above) + Revenues – Expenses


See also

*
Debits and credits Debits and credits in double entry bookkeeping are entries made in account ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance Balance may refer ...
* Momentum accounting and triple-entry bookkeeping * Nostro and vostro accounts * Single-entry bookkeeping


Notes and references


Further reading

* *


External links


A Concise Explanation of the Accounting Equation

Bean Counter's bookkeeping tutorial

GnuCash data entry concepts
GnuCash GnuCash is an accounting software, accounting program that implements a double-entry bookkeeping system. It was initially aimed at developing capabilities similar to Intuit, Inc.'s Quicken application, but also has features for small business acco ...
website {{DEFAULTSORT:Double-entry bookkeeping Accounting systems Italian inventions Accounting terminology History of accounting Economic history of Italy