Adrian JohnsonTLDR:
- Double-entry accounting has been around for over five centuries and was developed by Luca Pacioli.
- The fundamental accounting equation states that assets must equal liabilities plus equity.
- Debits and credits are used to track increases and decreases in accounts.
- Journal entries are recorded to maintain a balance and accuracy of transactions.
- A trial balance is prepared to confirm that debits equal credits.
- Financial statements, such as the balance sheet, income statement, and statement of cash flows, are prepared based on the recorded transactions.
- The double-entry accounting process is considered reliable and has withstood attempts to replace or modify it.
Double-entry accounting, developed by Luca Pacioli in the late 15th century, is a system that ensures the accuracy and balance of financial transactions. The fundamental accounting equation, which states that assets must equal liabilities plus equity, serves as the basis for this system. The equation can be shortened to A=L+E and is used to maintain balance between the three principal accounts: assets, liabilities, and equity.
Debits and credits are used to track increases and decreases in different accounts. Asset accounts are increased with a debit and decreased with a credit, liability accounts are decreased with a debit and increased with a credit, and equity accounts are decreased with a debit and increased with a credit. The use of debits and credits helps in maintaining a perfect balance of transactions.
Journal entries are recorded to keep track of transactions and ensure their validity and accuracy. These entries are recorded in a journal, which includes the name of the account, its associated debit and credit entries, and the date of the transaction. The journal entries are then used to create a general ledger, which compiles all the financial transactions of a company.
The general ledger is used to prepare a trial balance, which confirms that the debits equal the credits. Any discrepancies can be corrected before the company’s financial statements are prepared. The trial balance is a culmination of all the debits and credits for a business and confirms that the bookkeeping entries are correct and balanced.
Once the trial balance is complete, the financial statements can be prepared. The balance sheet organizes the accounts in a vertical manner, listing assets first, followed by liabilities and equity accounts. The income statement lists the revenues and expenses for the business. The statement of cash flows reveals where cash is maintained in the company’s operating, investing, and financing activities.
The double-entry accounting process is considered reliable and accurate, and attempts to replace or modify it have failed. It is a system that has stood the test of time and is still used in modern-day businesses to maintain balance and accuracy in financial transactions.
