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Date: 2017-12-16 Page is: DBtxt001.php L0700-CC-DOUBLE-ENTRY


DOUBLE ENTRY
A key concept that makes accountancy very elegant and immensely powerful

DOUBLE ENTRY
STATE, PROCESS AND FLOW / BALANCE SHEET, P&L, CASH FLOW
Double entry is the core concept that has made conventional accounting so powerful and so reliable for hundreds of years. The system of double entry enables a clear distinction between balance sheet accounts and profit and loss (or transaction) accounts. This enables easy reporting of both the 'state' of the business entity (Balance Sheet) and the 'flow' of the business (Profit and Loss Account).
Because of the double entry construct, the 'profit (or loss)' or 'surplus (or deficit)' for the period may be determined in either of two ways. The result for a period is shown in the profit and loss account as the difference between the costs and revenues (debits and credits). The period result is computed using the balance sheet accounts as the difference between the balance sheet at the beginning of the period and the balance sheet at the end of the period.
Conventional financial accounting based on double entry gives a clear distinction between balance sheet and profit and loss accounts. This enables easy reporting of both the 'state' of the business entity (Balance Sheet) and the 'flow' of the business (Profit and Loss Account).
The 'profit (or loss)' or 'surplus (or deficit)' for the period may be determined in two ways. It is shown in the profit and loss account as the difference between the costs and revenues (debits and credits) and it is also shown in the balance sheet as the difference between the balance sheet at the beginning of the period and the balance sheet at the end of the period.
INCOMPLETE RECORDS
Professional accountants are often asked to prepared financial statements from incomplete records. This is almost the norm in many small businesses who always seem to have lost a variety of documents that would normally be posted to the accounts.
Because of the double entry construct it is possible to estimate the net of all the revenue transactions less the expenditure transactions by simply looking at the state of business at the date when the accounts are being closed. If the elements of the balance sheet are know from the beginning of the year and also from the end of the year, the difference in the net assets (i.e. assets less liabilities) is the profit for the year.
With this information, financial statements an be prepared that are likely to be a good representation of what actually happened in the period, albeit without a lot of supporting detail!
TPB Note: During my training with Cooper Brothers & Co in London I was despateched to a variety of small businesses to complete their financial statements. While London is home to some of the biggest financial institutions in the world, it is also home to a huge community of small traders who handle every conceivable product. Many of the vegetable traders were located on the Covent Garden neighborhood and the fish traders at the Billingsgate Market. These markets were real markets, compeletely different from the 'supermarkets' that retail food and have a nerve putting the word market in their names!

Double Entry ... a core concept of accountancy
Double Entry ... BOOK by JANE GLEESON-WHITE
‘Lively history … Show[s] double entry’s role in the creation of the accounting profession, and even of capitalism itself.’ The New Yorker
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