Luca Pacioli and Double Entry Bookkeeping

For the better part of the last 800 years accounts have relied on one particular tool. This tool is the double entry bookkeeping methods that Pacioli first wrote about, sometimes he is credited with its discovery but some speculate double entry bookkeeping existed for many years before he wrote about it. Either way Pacioli was the first to document this important system.

If you haven’t please read my discussion of the accounting equation as an understanding will be necessary to grasp the concept of double entry bookkeeping.

So what is double entry bookkeeping (Double Entry)? It’s the method by which we accountants record economic transactions into the company’s general journal.

I’ll go into Journal’s and ledgers and the accounting process in a future post, for now, please accept that a Journal is where double entry bookkeeping entries are made.

Every event recorded in this system has at least 2 entries a Debit (Dr) and a Credit (Cr). I know what you’re thinking; I have a credit card and a debit card! Well you do, but in this context, Debit and Credit only mean Left and Right. As a good friend of mine once told me, when discovering I was becoming an accountant, “Just remember, Debit on the Left, Credit on the Right!” This is a very simple concept, and please don’t try to overcomplicate it, I think many people do, but honestly Debit = Left Credit = Right, that’s all you need to know about them.

Before we can start using this, you need to understand its relationship to the accounting equation.  Accounts are going to have something we call Normal Balance. Normal Balance refers to which side of the journal entry increases the value of the account. Recall the equation Assets = Liabilities +Owners Equity. Assets have a normal balance of Debt, Liabilities have a normal balance of Credit, Owners Equity consists of different types of accounts some with normal debit balance some with normal credit balance, and we will handle those on a case by case basis, but its generally considered to have a normal credit balance.

For now, I’m going to come up with some economic events, which we commonly call transactions, and I’ll show you their effect on the accounting equation, with an emphasis on the debits and credits of it all.  Cash is an asset account with a normal debit balance, and expenses (such as telephone bills) are an owners equity account also with a normal debit balance. Let’s assume Li pays 100 to Spint for his cell phone bill.

Think of the transaction, we’d have to decrease cash by 100, and increase the expense by 100. Cash having a normal balance of debit is decreased through credits, and expense(s) having a normal debit balance are increased through debits! So the entry would be to debit Telephone expense 100, credit Cash by 100. In a Journal it would look like this:


Account                         Dr          Cr
Telephone Expense        100
         Cash                                   100

In a journal Debits typically come first. There are other ways of writing the entry, but in general you need to identify the Debit and the Credit and the affected accounts.

Let’s look at Silda’s paycheck again, She received a paycheck for $5,000. In this case we increase cash by 5,000 and we have to increase revenue (an owners’ equity account) by 5,000. Cash has a normal debit balance and Revenue(it means income) has a normal credit balance. So it would look like this:

Account            Dr            Cr
Cash                5,000
       Revenue                  5,000


Simply huh?! I’ll give you one, and put the answer below. Mike buys a Car for $10,000. Think about it, the car is going to be an asset, and cash is an asset. I’ll give you the entry after the jump