Double Entry bookkeeping
Venetian double entry bookkeeping as described by Luca Paciolo
Paciolo describes bookeeping in a system of 4 sets of books. They may all have the same mark on them eg A (BC…) to identify them as all belonging together.
- An inventory
- A scrap book
- a journal
- a Ledger
Inventory
The start of the process is to create an inventory of all you valuables and your debts.
Day book
Pacioli describes this as a memorandum (memoriale), scrap book (squarto loglio) or blotter (vachetta). This could also be described as a diary or waste book. This would be where all records would be written contemporaneously.
Paciolo also describes that anyone in your family (business) can make entries in the scrap book with full details of what, with whom and where it was bought or sold.
A journal
Then the day book would be transcribed neatly into the journal. This would be a list of transactions in date order. The amount would written and the account from (per) and to (a) would be entered separated by //.
Per indicates the debtor and a the creditor.
When the entries would be transcribed into the ledger they would be struck out and the page references of the ledger items would be added. Once this is done the ledger can accurately be recreated if it was lost due to say fire.
Cash and capital
In order to account from the amount of cash you have on hand two accounts are created. A cash
account and a capital account. Capital must always be placed as creditor
So the opening transaction is to debit cash and credit the capital account. Note as the cash denotes coins that you have it can never be negative unlike a modern business which only uses a bank account.
Ledger
The ledger would be the last book of record in which would consist of an index page, followed by a pages of entries organised by account. The entries are meant to be brief with a fuller description in the journal or memorandum as required.
The index page would be a list of A-Z and then each account would be listed so that it can easily be found. This is helpful for larger numbers of client and supplier accounts.
It was this document which would make it easy to reconcile your cash. The ledger would have an opening and closing entries. There would be a ledger each year.
At the year end there would be a reporting exercise.
Redundancy
The ledger has triple redundancy from itself, the journal and the original day book. Note that there is more information in the day book than in the journal. Likewise the ledger simplifies the entries from the journal. However the figures exist in all three places.
Reporting
A number of reports would be created:
- year end trial balance (first the accounts would be corrected to get it to balance)
Gleeson-White, Jane. Double Entry: How the merchants of Venice shaped the modern world - and how their invention could make or break the planet (p. 99). Allen and Unwin. Kindle Edition.
What are the essential features of the double entry bookkeeping?
The book Double Entry Bookkeeping has a great history of double entry booking and also lists the following six features of the method (pp. 20-21):
The Farolfi ledger displays the six essential features of double-entry bookkeeping as outlined by accounting historian G.A. Lee:
first, the idea of a proprietor or business partnership as an accounting entity whose books record its financial relationships with others.
Second, its entries are made in a single monetary unit so they can be added together.
Third, it relates the following oppositions: increases and decreases in physical holdings of cash or goods; increases and decreases in debts by or to other individuals or entities; and increases and decreases in the business’s own assets and liabilities.
Fourth, owner’s equity is shown as the sum of assets and liabilities.
Fifth, profit is understood to be the net increase in the owner’s equity (and loss the net decrease).
Sixth, the profit or loss is measured over a clearly defined accounting period.```
The movement from single entry booking to double entry keeping exemplified by Datini from 1370 to 1390 correlates with computer software migrating from single entry to double entry systems.