Accounting: Double-Entry Bookkeeping

was kind of perpetual balance and cross checking which well

perpetuated accuracy as companies grew bigger and more complex As

you'd imagine when one of eighty seven basketballs is pulled

from the shelves inventory needs to be adjusted or deducted

in value then by one basketball But a sale happened

as well so revenue comes in at the same time

And yeah that revenue might come in the form of

an IOU also known as a credit card payment or

other kind of credit payment or other delayed payment system

The double entry bookkeeping system allows for error checking and

granularity to exist in the management of financial records Computers

today automatically double enter as records are kept The reality

is that accounting offers no room for error and a

lost penny causes the same havoc as one lost in

your car door jam You know it's a pain isn't

it So with double entry bookkeeping the theory remains that

errors are minimized and that there exists an intrinsic fact

checking system For example take a company that pays twenty

thousand dollars to buy raw plastic for its lot of

Goo Dahl When the purchase first happens it books twenty

thousand dollars as an account payable and it books twenty

thousand dollars of raw plastic as an account receivable Then

the plastic is shipped to the company and instead of

being an account receivable the twenty thousand dollars is booked

as an asset Yeah it might be labeled something like

raw materials assets and since company already probably had say

a million dollars worth of raw materials just sitting around

on the shelves the new number then would be presented

on the balance sheet as a million twenty thousand Note

The company's still owes twenty thousand dollars in cash to

the people who sold them the plastics and that would

still exist on the balance sheet as an accountant payable

So now a new transaction happens and the company wires

twenty thousand dollars to the plastics provider The cash account

in their existing say Bank of America account declines by

twenty thousand and goes from exactly five hundred thousand dollars

to exactly four hundred eighty thousand dollars And note that

in all these example of accounting practice each time we

made an entry it was essentially entered twice Paying for

the plastics took twenty thousand dollars out of our bank

account in cash but it also got rid of twenty

thousand dollars of accounts Abel Liability There is a lot

of action and grief to write everything down twice But

generally speaking this system takes care of the risk of

errors from at least being very high to being a

pretty minimal In essence you can think about every entry

in a balance sheet as being Newtonian not like the

FIG For every action there is an equal and opposite

reaction Yeah the more common pilots in describing double entry

bookkeeping names the process in the form of credits and

debits Well a debit is usually put on the left

side of a T account there which increases the value

of an asset And it's generally a good asset he

kind of thing And a good asset either Increases in

cash increases in accounts receivable increases the value of some

intellectual or really property or decreases a liability and expands

or some other bad thing on a credit film just

does the opposite A T account credit increases liability and

or expense or it decreases the value of an asset

or some other thing of value Let's take as the

first event purchase of twenty thousand dollars of plastic Raw

material from plastics are us by the lot of Goo

Doll company All right first thing that happens is that

a document is signed A lot of goose signs a

binding contract where they agreed no matter what to purchase

Twenty thousand dollars worth of raw plastic material from plastics

are us Had there been some thirty day money back

guarantee or some other price discounting wealth then that would

change the way the dollars get accounted for But at

this point those air corner case events and they just

add confusion So we're going to ignore me When the

contract is signed There are two balance sheet items Then

that happened First a debit of twenty thousand dollars is

made to the duck accounts receivable line on the balance

sheet At the same time a twenty thousand dollar credit

is made to the accounts payable line Then magically on

March one the plastic shows up on the loading dock

and the new book looks like this Why is there

an asterisk on the million twenty thousand dollars worth of

raw materials Well because the previous day lot of Gu

Corporation already had a million dollars worth of raw materials

The fact that the material showed up and were put

in the bin with all the other raw materials now

changes the state of being that asset So then a

lot of go writes a check for twenty thousand dollars

to the plastics are US corporation and the new balance

sheet simply reflects the loss of twenty thousand dollars of

accounts payable right They pay their bills at the same

time losing twenty thousand dollars out of the corporations BankAmerica

account That's it Pretty simple huh That's double entry Or

in the case of the lot of Goo Dahl double

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