Double-Entry Bookkeeping

1. Explain the history of double-entry bookkeeping.

2. List the four steps followed in the accounting process.

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3. Indicate the purpose of a T-account.

4. List the rules for using debits and credits.

5. Understand the reason that debits and credits are always equal.

Question: Transaction analysis determines the changes in account balances as the events of each day take place.

Financial statements provide a formal structure to communicate the resulting balances periodically to an array

of interested parties. Revenues, expenses, gains, and losses are presented on an income statement where they

are combined to arrive at reported net income for the period. Total income earned and dividends paid by the

company over its entire life are netted to compute the current retained earnings balance. Assets, liabilities, capital

stock, and retained earnings are all displayed on a balance sheet. Changes in cash are separated into operating

activities, investing activities, and financing activities and disclosed on a statement of cash flows. Notes offer

pages of additional explanatory information. The amount of financial data that is readily available is impressive.

The accountant for a business of any significant size faces a daunting challenge in creating financial statements:

gathering, measuring, and reporting the impact of the many varied events that occur virtually every day. As

an example, for 2008, Xerox Corporation disclosed revenues of over $17.6 billion and operating expenses

and other costs of $17.4 billion. At the end of 2008, the Kellogg Company reported holding $897 million in

inventory—which is a lot of cereal—and indicated that its operating activities that year generated a net cash

inflow of nearly $1.3 billion. How can any organization possibly amass and maintain such an enormous volume

of data so that financial statements can be produced with no material misstatements?

Answer: Over five hundred years ago, Venetian merchants in Italy developed a system that continues to serve in

the twenty-first century as the basis for accumulating financial data throughout much of the world. Today, when

every aspect of modern society seems to be in a constant state of flux, a process that has remained in use for over

five centuries is almost impossible to comprehend. However, the double-entry bookkeeping procedures that were

first documented in 1494 by Fra Luca Bartolomeo de Pacioli (a friend of Leonardo da Vinci) remain virtually

unchanged by time. Organizations, both small and large, use the fundamentals of double-entry bookkeeping to

collect the information needed to produce financial statements that are fairly presented according to the rules of U.S. GAAP.

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