Why Double-Entry Changed the Face of Business
There is an ongoing debate as to who invented double-entry bookkeeping. Most historians will give credit to a monk called Luca Pacioli who recorded detailed information on double-entry in 1494. Other experts give the credit to Benedikt Kotruljević who first wrote about double-entry in his work Book On the Art of Trade in 1458. We believe both gentlemen deserve the credit because between them, they changed the world of business through – modern accounting.
Double-entry, for the first time, allowed businesses to formulate the masses of numerical information into books, journals and eventually final accounts namely the Profit and Loss account (Income Statement) and the Balance Sheet (Statement of Financial Position). Businesses could now truly measure their own performances accurately to both increase profit and reduce any financial inefficiencies. They could also compare their performance against other businesses. Most importantly, other interested parties such as banks and external investors could gauge whether a business was viable for investment.
Prior to double-entry, bookkeepers recorded money in and money out or single entry accounting. This was suffice for reconciling income and expenditure to the amount of cash held, but it did nothing to enlighten the owner on business performance, profits or financial overspends.
The invention of double-entry changed this overnight by recognising that single entry accounting only part recorded the effect that every transaction had on a business. The reality or full accounting record should show that every transaction had a dual effect or each transaction created an equal and opposite effect. Likewise, it recognised the separate entity principle that the owner, for accounting purposes, was completely separate to the business. Finally and most importantly, the dual effect of double-entry was simply an equation that demonstrated the opposite effects of every transaction would always be equal. If they weren’t an error had been made in the books.