Accounting - How To Succeed 2

Accounting Double Entry

Accounting involves the classification, analysis and dissemination of financial information to those parties who require such information in order to make informed judgments and decisions based on the material.

It is the measurement and control of financial transactions which are, in essence, the transfer of legal property rights, between one party and another, made under binding arrangements. However, transactions that are not financial in nature are specifically excluded since they are regarded as not material.

The double-entry bookkeeping system used in accountancy is the linchpin used by businesses and organisations to record all of their financial transactions. The concept was first introduced in 1494 by the Italian mathematician Luca Pacioli.

It is based on the proposition that a measure of a business's financial well being and a record of the results of its operations are best recorded by the use of accounts.

Accordingly, each account records an historical log of the changes in the monetary values relating to different aspects of the business. The method originally enunciated by Pacioli is now called double-entry bookkeeping.

The basis for this system is, quite simply, that each transaction is recorded in at least two accounts. It is established upon the supposition that for each financial transaction, there is at least one account being debited whilst, at the same time, at least one other account is being credited. The result of this process is that the total debits of the transaction are equal to the total credits so that the overall net value is zero.

Consider the following scenario. Suppose Mr A sells an article to Mr B, who then pays Mr A by means of a cheque. The bookkeeper working on behalf of Mr A would credit the account called "Sales" and debit the account called "Bank" (this would result in money flowing into the bank account). On the other hand, the bookkeeper working on behalf of Mr B would debit the account called "Purchases" and credit the account called "Bank"(this would result in money flowing out of the bank account).

It is the accepted principle that debit entries are added to the left hand side and credit entries to the right hand side of the general ledger account.

The general ledger, also known as the nominal ledger, is the main source for the recording of the accounting records of a business that makes use of the double entry process, bearing in mind that there is also a single entry process, which is a much more restrictive version.

It holds numerous accounts for such items as current assets, fixed assets, liabilities, revenue, expenses, gains and losses. The ledger accounts themselves are set up as T accounts, since they resemble the letter T when the account is empty.

It has been suggested that the double entry system dates back even further to the period of ancient Rome or Greece. Some critics of current accounting methods have suggested that the methodology has changed very little since this time, which must surely indicate that the principles set out hundreds of years ago were based on solid foundations.

Particularly pertinent in this respect is the approach engendered in social accounting which argues that business entities should pay more than lip service to the social and environmental impacts brought about by their activities.

It has been argued that accounting should not solely be concerned with the financial evaluation of economic events, but should embrace a wider audience, such as shareholders, and broaden its appeal beyond reporting simply financial profit and loss.

Accounting – How To Succeed