Why Complicate accounting with double-entries?

Many of us followed happily or not accounting courses and almost invariably, most of the class wondered why the first lessons started with the T concept and the necessity to balance each accounting entries by having its total Debit equals to its total Credit ?

God, who invented these principles and why ? In fact, they go back to the end of 15th century when they were spelled out formally by an Italian Mathematician called Fra Luca Pacioli working for rich Italian traders. If you want to know more about this man who gave you so much trouble in your school years, you might read this excellent short summary.

Now, let's go back to the core question: Why it is better to maintain your accounts using such an outdated technique in our 21st century !? To prove the point, I will pick two examples:

1. Let's imagine that one day, you need urgently some office supplies and rather than paying by credit card or check, you hand over cash. You will post at some point in time these $25 as an "Office Supplies expense" in your books, but a few weeks after this purchase, you might not remember how you paid them. First of all, write immediately on the receipt, "Paid in Cash". Now, provided that you created an account called "Repayable to Owner" (a liability account, more about account classification in a future blog), your accounting entry will be:

Debit "Office Supplies" for $25
Credit "Repayable to Owner" for $25

Now, you can be sure that your business will "repay" you (via the individual entry made in the account "Repayable to Owner") for this legitimate and non-taxable business expense.

2. Another example, a bit more complex. You have a client "A" (usually maintained in a separate ledger, so-called "Accounts Receivable Ledger") that has 30 days net credit terms. When you ship, say $1,000 of goods, your double-entry will be (forget for the time being an almost mandatory tax entry that you most probably have to make):

Debit "Accounts Receivable Client A" for $1,000
Credit "Sales of Product Line B" for $1,000

Here again, you record properly the Sales and that Client "A" still owes you $1,000 that you should collect 30 days after shipment - an important Receivable indeed.

NO single-entry accounting entry system will ever give you the assurance both to trace all accounting/financial events and record them for better management and visibility into your business current status. Don't settle down for single-entry accounting, make the extra effort to learn a few accounting principles and buy at least a single-user good accounting software package (it costs around $200 to $300 and the pay-back of such expense is almost immediate).

If you want to know a bit more about the advantages of double-entry accounting, you can visit this short Web page giving you a good overview on the double-entry accounting technique.

Don't worry, we will revisit again and again this powerful double-entry technique and very soon, you shall become addicted to it for its powerful features and the clear benefits it brings to your business.