Take any popular
accounting software today, be it a SAAS player like us or our desktop counterparts or even the entreprisey ERP solutions, and I bet they all are based on double-entry accounting. For the uninitiated, double-entry accounting is a system of bookkeeping that enforces recording two aspects of a financial transaction – one that indicates the source of amount involved and another to indicate how it is put to use. It is said that this method was first codified by Luca Pacioli, an Italian monk in the fifteenth century (and I’ll leave it to The Almighty
Wikipedia to explain the rest).
It is fascinating to see that a system devised to catch financial inaccuracies six centuries back still finds its place in the world of accounting software and remains largely untouched. This when accounting software by itself is undergoing a transformation of sorts from desktop to the web.
To explain this phenomenon, let me first enunciate the benefits of manual double-entry accounting. Double-entry accounting is advantageous because it:
- Is self-balancing in nature, enforcing arithmetical accuracy.
- Makes it to easy to understand the source and uses of funds.
- Ensures all aspects of all financial transactions available in a single place, so preparation of financial statements is easy.
- Helps in fraud detection.
All of these are extremely helpful in producing accurate financial statements. And when human beings step aside and software takes over, much of these benefits still hold true. The reason for this is that double-entry accounting enforces some sort of a relational structure on the way transactions are recorded. For example, an accounting software would still record the two sides of a financial transaction and moreover, all of these are typically recorded in a single place (table in Relational database parlance), which makes it easier to summarize financial information.
Alternative accounting models like
REA (Resources, Events and Agents) that did away completely with double-entry and models that retained the double-entry flavor but tweaked other aspects failed to take off. My reasoning for this: the traditional double-entry model was deeply ingrained in the business person’s and accountant’s psyches, and it was never going to be easily changed. Also, amongst the more complex accounting alternatives, double-entry has remained one of the easiest and most effective solutions.
The accounting software industry will definitely undergo some changes in the times to come, but double-entry accounting will be as relevant as ever. And I bet somewhere up there Luca Pacioli must be smiling.
5 Replies to Is Double-Entry Accounting here for eternity?
@darlagtsI entirely agree. The alternate models substitute the entities in traditional accounting (Assets, Liabilities, Equity, Income & Expense. For example - Items, Cash, Agent(in the IAC model).Imagine explaining the two sets of entities to an accounting novice. I am sure he can relate to the traditional entities ( Assets - how much you own, liabilities - how much you owe etc.) much better. This could be the reason why alternate models did not find usage outside academic circles.
The reason why the doubl-entry accounting is still in use and nowhere to dissapear is easy, it's based on an algebraic equation (Assets = Liabilities + capital). Being this the foundation of the whole system, to change the double-entry will mean to change the foundation and that's not easy to do, is it?
@Alexander Kohl,Thanks for your comment. I seriously doubt the other systems have anything to do with triple bottom line accounting - they were introduced when accounting for ecological impact of a business was not in vogue.
This is the best way to keep accounting and also get the best result for accounting. For this method there are many accounting software are also available and your software is also good.
While reading your article, I kept thinking: "Interesting, but how could you understand your business without a balance sheet and profit & loss? And how would you do your tax return?"
Maybe this other system would allow to account for other indicators related to triple bottom line accounting (e.g. environmental impacts and impact on stakeholders lives) to be captured better.