Leonardo Da Vinci’s mathematics teacher, Luca Pacioli who was also a Franciscan monk, is usually credited with creating the ‘double entry’ method of book-keeping. Whether that is correct, or whether it was Benedikt Kotruljevic who wrote about the subject in 1458 can be debated. But the approach used by today’s accounting organizations in this day and age was developed in the 15th century.
However, most small business owners struggle with the double entry concept. It might be easy for accountants who have undertaken a lot of education, but folks who just want to get on and run a business do not have that opportunity.
For many years, both before and after the invention of double entry accounting, small businesses have generally maintained a ledger that records the cash in and the cash-out, along with other ledger records of money owed to (account receivable) and money owed by (accounts payable) the company.
The double entry accounting method divides up transactions into 5 types – revenue, expenses, liabilities, assets and equity.
But with this method, an increase in expenses and an increase in assets are both treated as ‘debits’. And an increase in revenue and an increase in liabilities are both treated as ‘credits’. Added to the confusion this causes is the bank statement that displays an increase in the balance as a credit while in the double entry chart of accounts it is a debit balance.
No wonder they get confused.
In the late 20th century, computers and associated software have given small businesses the chance to do their own bookkeeping using the double-entry method. Regrettably though, the standard of small business bookkeeping has not greatly improved because double entry accounting is perplexing and small business owners do not have the time to develop the requisite skill levels.
The result is that when many small business owners attempt to do their own bookkeeping using the double-entry method, they are not saving money as they might think. Rather they cause significant extra work for their accountants who often have to devote a significant amount of time discovering and correcting the errors in order to prepare factual financial statements.
And accountants generally charge by time, so there is a significant extra cost as well.
Most small business owners would be better off with a simple system that they can understand. It might not do the full ‘double entry’, but most small businesses don’t need that anyway. When they do, they have the benefit of giving their accountants good records that make their job easier and keep the cost down.
Here is a video that explains why the right accounting software is important for your business.