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Accounting Allah shmoop double entry bookkeeping double entry bookkeeping Zen

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accounting system that developed over a long period of time

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began centuries ago in most bean counters used a pencil

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and graph paper to track their you know Lima's Garvan

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Zoe's and kidneys Well the system evolve such that there

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was kind of perpetual balance and cross checking which well

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perpetuated accuracy as companies grew bigger and more complex As

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

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from the shelves inventory needs to be adjusted or deducted

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in value then by one basketball But a sale happened

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as well so revenue comes in at the same time

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And yeah that revenue might come in the form of

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an IOU also known as a credit card payment or

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other kind of credit payment or other delayed payment system

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The double entry bookkeeping system allows for error checking and

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granularity to exist in the management of financial records Computers

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today automatically double enter as records are kept The reality

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is that accounting offers no room for error and a

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lost penny causes the same havoc as one lost in

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

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it So with double entry bookkeeping the theory remains that

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errors are minimized and that there exists an intrinsic fact

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checking system For example take a company that pays twenty

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thousand dollars to buy raw plastic for its lot of

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Goo Dahl When the purchase first happens it books twenty

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thousand dollars as an account payable and it books twenty

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thousand dollars of raw plastic as an account receivable Then

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the plastic is shipped to the company and instead of

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being an account receivable the twenty thousand dollars is booked

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as an asset Yeah it might be labeled something like

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raw materials assets and since company already probably had say

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a million dollars worth of raw materials just sitting around

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on the shelves the new number then would be presented

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on the balance sheet as a million twenty thousand Note

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

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the people who sold them the plastics and that would

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still exist on the balance sheet as an accountant payable

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So now a new transaction happens and the company wires

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twenty thousand dollars to the plastics provider The cash account

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in their existing say Bank of America account declines by

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twenty thousand and goes from exactly five hundred thousand dollars

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to exactly four hundred eighty thousand dollars And note that

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in all these example of accounting practice each time we

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made an entry it was essentially entered twice Paying for

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the plastics took twenty thousand dollars out of our bank

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account in cash but it also got rid of twenty

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thousand dollars of accounts Abel Liability There is a lot

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of action and grief to write everything down twice But

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generally speaking this system takes care of the risk of

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errors from at least being very high to being a

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pretty minimal In essence you can think about every entry

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in a balance sheet as being Newtonian not like the

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FIG For every action there is an equal and opposite

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reaction Yeah the more common pilots in describing double entry

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bookkeeping names the process in the form of credits and

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debits Well a debit is usually put on the left

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side of a T account there which increases the value

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

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kind of thing And a good asset either Increases in

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cash increases in accounts receivable increases the value of some

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intellectual or really property or decreases a liability and expands

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or some other bad thing on a credit film just

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does the opposite A T account credit increases liability and

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or expense or it decreases the value of an asset

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

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first event purchase of twenty thousand dollars of plastic Raw

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material from plastics are us by the lot of Goo

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Doll company All right first thing that happens is that

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a document is signed A lot of goose signs a

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binding contract where they agreed no matter what to purchase

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Twenty thousand dollars worth of raw plastic material from plastics

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are us Had there been some thirty day money back

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guarantee or some other price discounting wealth then that would

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change the way the dollars get accounted for But at

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this point those air corner case events and they just

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

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contract is signed There are two balance sheet items Then

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that happened First a debit of twenty thousand dollars is

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made to the duck accounts receivable line on the balance

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sheet At the same time a twenty thousand dollar credit

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is made to the accounts payable line Then magically on

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March one the plastic shows up on the loading dock

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and the new book looks like this Why is there

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an asterisk on the million twenty thousand dollars worth of

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raw materials Well because the previous day lot of Gu

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Corporation already had a million dollars worth of raw materials

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The fact that the material showed up and were put

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in the bin with all the other raw materials now

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changes the state of being that asset So then a

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lot of go writes a check for twenty thousand dollars

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to the plastics are US corporation and the new balance

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sheet simply reflects the loss of twenty thousand dollars of

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accounts payable right They pay their bills at the same

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time losing twenty thousand dollars out of the corporations BankAmerica

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

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in the case of the lot of Goo Dahl double

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exit

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