Double entry bookkeeping is often said to have been invented by a Franciscan monk Luca Pacioli in Milan. In 1494 he wrote the ‘Summa de Arithmetica, Geometria, Proportioni et Proportionalita’. He is also said to have been Leonardo Da Vinci’s math teacher.
However, in 1458 Benedikt Kotruljević wrote about double entry bookkeeping in: Book on the Art of Trade.
So the method used by modern accounting firms to this day was invented in the 15th century.
However, one of the biggest things that small business owners struggle with is this area of bookkeeping and accounting.
This is not surprising when they have little education in the area and it can be quite complex.
For example, double entry accounting divides transactions up into 5 types – assets, liabilities, equity, revenue and expenses. And then the ‘double entry’ is done by ‘debits’ and ‘credits’ such that for the accounts to be in balance, the debits must equal the credits.
So it can be confusing for people who are untrained in accounting to understand that an increase in assets and an increase in expenses are both debits. And likewise, an increase in liabilities and an increase in revenue are both credits.
For many years, small business owners have kept a ledger that records the cash in and the cash out, together with other ledger records of money owed to (accounts receivable) and money owed by the business (accounts payable.)
Find out more about double entry bookkeeping at http://en.wikipedia.org/wiki/Double-entry_bookkeeping_system
The introduction of computers and software has brought the technology advances to give small business owners the opportunity to keep their own double entry accounting records. Unfortunately it has not brought with it the required skill levels because, as we said earlier, double entry accounting is confusing.
When small business owners try to do their own accounting, or when they engage bookkeepers who don’t really know what they are doing either (not all of them of course), they cause a massive problems for their accountants who often have to spend hours of time finding the errors and correcting them in order to prepare correct financial statements.
What conceptually could have been a benefit to both small business owners and their accountants can cause accountants a lot of headaches and the small business owners a lot of additional cost.
So the reason for this blog is to explore the concepts of small business accounting and bookkeeping, what is changing, what is new and what is effective for small business owners to keep great records that reduce their costs and make life easy for their accountants and tax advisers.
We trust you enjoy the content we have to share.
The J3 Team