Corporate Financial Accounting: Double-Entry

Fundamental to accounting is double checking to ensure all entries represent reality.

Double checking alignment to the double-entry bookkeeping is a starting point when reviewing accounts.

Double-entry bookkeeping is a convention that dictates we record a transaction in a minimum of two accounts, resulting in a debit to one or more accounts and a credit to one or more accounts.

The posting of each transaction must be a balance between total credits with total debits, ensuring that all value is accounted for. 

It almost mimics the law of conservation of mass, where in a closed system, matter is neither created nor destroyed, but transformed from one form to another.

Luca Pacioli offered this convention in his seminal book – The Rules of Double-entry Bookkeeping: Particularis De Computis Et Scripturis –

“All the creditors must appear in the ledger at the right hand side, and all the debtors at the left. All entries made in the ledger have to be double entries – that is, if you make one creditor, you must make someone debtor.”

In double-entry bookkeeping, capital is neither created nor destroyed but balanced across accounts, using relevant debit and credit postings.

The first sign of mismanagement and fraud is credits or debits with no counter posting.

As I close conversations around Corporate Financial Accounting with this post, I leave you with a story from Wilhelm Meister’s Apprenticeship by J.W. von Goethe on double-entry bookkeeping.

“At that time, you had no true idea at all of trade; whilst I could not think of any man whose spirit was, or needed to be, more enlarged than the spirit of a genuine merchant. What a thing it is to see the order which prevails throughout his business! By means of this he can at any time survey the general whole, without needing to perplex himself in the details. What advantages does he derive from the system of book-keeping by double entry! It is among the finest inventions of the human mind; every prudent master of a house should introduce it into his economy.”

And one from Charlie Munger –

“You have to know accounting. It’s the language of practical business life. It was a very useful thing to deliver to civilization. I’ve heard it came to civilization through Venice which of course was once the great commercial power in the Mediterranean. However, double entry bookkeeping was a hell of an invention.”

#MEMBA11 #CFA #Zazparelli