Modern accounting is built on the idea of double entry accounting, which is utilised in practically all accounting systems today. The idea is straightforward: there must be two entries for every transaction, one to record the amount received and one to record the amount given out. This guarantees that the books are in balance and that every transaction is recorded. The basic accounting equation, which specifies that assets must equal liabilities plus equity, forms the foundation for this idea. In other words, there must be a liability or equity account for each asset.
History
The double entry accounting concept has its origins in the Italian city of Venice in the 14th century. At that time, the city was a major center of trade and commerce, and merchants needed a way to keep track of their transactions. They came up with the idea of recording each transaction in two separate ledger books – one to record the amount received, and one to record the amount paid out. This system became known as double entry accounting.
Both management accounting and financial accounting employ the double entry accounting principle. The double entry system is employed in financial accounting to create financial statements including the income statement and balance sheet. The double entry method is employed in management accounting to create internal reports like the statement of cash flows.
The foundation of contemporary accounting is the double entry accounting principle, which is still in use today. Each transaction is recorded in two distinct ledger accounts in a double entry system.
Examples of double entry accounting include the recording of a sale, the purchase of inventory, and the payment of salaries. In each of these transactions, there are two accounts that are affected.
Example
For instance, a sale results in a credit to the Sales account and a debit to the Accounts Receivable account. When inventory is bought, the Inventory account is credited and the Accounts Payable account is debited. The Cash account is debited and the Salaries Expense account is credited when salaries are paid.
If a company sells a product for $100, they would record a $100 debit in their sales ledger and a $100 credit in their cash ledger. This ensures that the books are balanced and that all transactions are accounted for.
The double entry accounting concept is a simple but powerful tool that is used in almost all accounting systems today. It is the basis for modern accounting, and it ensures that the books are balanced and that all transactions are accounted for.