|>>Double Entry Accounting Basics|
The Accounting System we use today, The Double Entry System, was first published in Venice, Italy in 1494 by a mathematician named Luca Pacioli but it has been traced back at least as far as the 12th century and there is a good reason why it has endured. It is based on the idea of a balanced financial picture. That is, we should not only know how money has been spent, we should also know where it came from.
The basic rules and structure of the system are standard and simple, they do not attempt to predict the details of any given set of books, instead they provide the structure and functionality around which any set of books can be constructed. Because of that, the double entry accounting system is universally relevant and successful as a Financial Accounting System.
Accounting is a valuable resource that is relevant to individuals as well as to business. It provides the feedback that can make all the difference in securing and managing your own finances and investments as well as those of businesses.
The One reason to use the Accounting System is for the Feedback in the form of Financial Reports and the One reason to learn the Accounting System is to learn how to put those Financial Reports to work for You and your Business. Having said that, let’s start with the basics of the system.
Two Functions of the Accounting System are:
- To Collect Financial Transaction Data
- Financial transactions are exchanges of things of value. Transaction data is collected using the Double Entry principle of describing and recording both the use and source of money.
- To Organize and Summarize Financial Transaction Data
- Financial data is organized and summarized using The Chart of Accounts which is essentially a list of the descriptions used in recording transactions and is organized around the principles of Double Entry Accounting.
Once you understand the basic structure and principles of accounting, you will have a good, functional knowledge and be able to understand financial statements and reports. Basic Accounting concepts and principles are universal. Specific industries have their own unique differences and rules but with a basic understanding, the differences are easier to navigate.
Note: There are two different aspects of the Accounting System, the two aspects are Structural and Content. The aspect of the Accounting System that I address in the blog is Structural. I will add Content for demonstration but the purpose of the information in the blog is related to Structure, not Content.
****My posts are written for the Accrual Method of Accounting.
Accrual accounting is the most common system used in business and the greatest difference between Accrual Based Accounting and its alternative, Cash Based Accounting relates to time. At this point, I will not be presenting Cash Based Accounting alternatives in my posts except to say that in Cash accounting, accounts such as Accounts Receivable and Accounts Payable are not used because the related Sales and Expense transactions are not posted until Cash changes hands.
In accrual accounting, transactions are posted when goods have been received (or ownership of the goods has transferred) or services have been performed. That concept works in both cases of being the recipient or the provider of goods and services. If cash is neither disbursed nor received at the time of the exchange, a substitute such as an invoice or note (payable or receivable) is posted in place of cash.
The first post in my series explains the Double Entry Transaction system.
**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.
© 2008 – 2010 Erin Lawlor