Learn all about double-entry accounting and t accounts in just a few minutes! Fabio Ambrosio, CPA, instructor of accounting at the Central Washington University, introduces the concept of recording economic events that affect at least two accounts, and then details utilization of t accounts as an accounting tool to keep track of beginning and ending balances as well as changes (debits and credits) within an account.
History and Single-Entry Accounting
A simple type of bookkeeping, the single-entry accounting system, was an early accounting system, used to keep track of grain and rations. It is still used for tasks such as keeping track of hours worked.
The single-entry accounting system is a simple type of bookkeeping in which only one side of a transaction is noted. When keeping score in a game, a single-entry accounting system is used. Each time a point is scored, it is recorded and added to the points already recorded. It may be helpful to keep the idea of a simple list in mind. It is easy to be overwhelmed by the rules and standards created around accounting. Accounting is basically list keeping.
Ancient clay tablets like this one for an account of barley rations, written in cuneiform script, show early accounting practices using a single-entry system.Credit: Mzmatuszewski0/174images/PixabayLicense: Creative Commons CC0
The earliest documented use of arithmetic and accounting is attributed to the ancient Sumerians in the Middle East. Many clay tablets documenting grain stores and rations have been found by archaeologists. The primary purpose of accounting then was stewardship. A steward was a representative of a monarch or their chief servant. They would make day-to-day decisions on behalf of the king, similar to a company manager today. As the king's representative, they had a great deal of power and access to all the kingdom's resources. Sometimes, this led them into temptation. Stewardship accounting refers to retelling the history of economic events. The king wished to know how his resources had been used. He needed to be assured that the resources had not been misused or stolen.
Granary Inventory Log
Notes/Events
Grain In
Grain Out
Grain Left
Sept
100
7
93
Oct
Harvest Fest
10
83
Nov
8
75
Dec
Solstice
10
65
Jan
7
58
Feb
7
51
Mar
7
44
Apr
Planting
12
32
May
7
25
June
Election
9
16
July
Midsummer Fest
10
6
Aug
6
0
The past is often referred to in order to make decisions about the future. Notice in the list that grain was running short in August (modern calendar). So much grain should not have been used up on the midsummer festival.
Another example of a simple form of single-entry accounting is keeping a list of hours to be paid for a job. For example, for doing repairs or building a fence, a list may be kept of materials purchased and the costs of those purchases. Perhaps car expenses or gas mileage are tracked. This may help to budget for future expenses related to driving to work. Scoring a game, tracking grain inventory, and monitoring auto expenses are all forms of accounting for economic events: recording time, materials, and expenses. The system does not have to be complex to be an accounting system. It can be a simple list if it works.
Double-Entry Accounting and T Account
Best suited for complex decisions or situations with many decision makers, the double-entry accounting system may have been adopted by Venetians doing business with Arabic traders.
Double-entry accounting is a system of recording economic events in which every entry affects at least two accounts. This can be especially beneficial for businesses, as they have numerous transactions and need to make complex decisions. The Western use of double-entry accounting can be traced to Fra Luca Pacioli, a Franciscan monk and mathematician living in Florence, Italy. In 1494, he set out to document the Venetian system of accounting. He summarized his findings in his book Summary of Arithmetic, Geometry, Proportions and Proportionality. Portions of the book eventually became the founding textbook for accounting.
Venice, located on the northeast coast of Italy, traded extensively with the Arabic countries of the Middle East. Venice was perfectly positioned as a 15th-century center of trade. At that time in history, Arabic cultures, which included large parts of the Indian subcontinent, were far more advanced than European cultures. It is almost certain that the double-entry accounting system came to Venice from Arabic traders.
Venice, Italy, and Early Trading
Merchant ships from across the Arab region brought goods to Venice that were distributed throughout Europe. Italian business owners and European traders adopted double-entry accounting practices from Arab traders as early as the 13th century.
Regardless of where it originated, double-entry accounting overcame the main problem of keeping single-entry lists. Simple lists work well for simple decisions and single users. They do not work as well for more complex decisions or when there are many decision makers.
In the case of the ancient Sumerians, consider the case where two kings, Nanniya and Zimudar, each kept grain in the same granary. The steward had to keep track of how much grain was left in the granary, how much of the grain in the granary belonged to each king, and how much each king had used. Since grain is a food product, the steward needed to account for grain that had spoiled, rotted, or been eaten by rats. He would need to do this so he would not be blamed for stealing the grain.
An Ancient Form of Double-Entry Accounting
Ancient Sumerians used a form of double-entry accounting for complex accounting.
In tracking the grain store, at election time King Nanniya did not have as much grain available as King Zimudar. Also, King Zimudar did not distribute as much grain to his subjects during most of the year, contributed equally to the important winter festival and spring planting, and had enough left to spend lavishly on the midsummer festival as a way of showing his people how well he had managed his stores of grain before the new harvest began.
Essentially, this is a form of double-entry accounting. It keeps track both of how much grain, or inventory, was available and how much belonged to each king. The grain, a type of inventory, is an asset. An asset is an economic resource that a business owns that is expected to provide future benefits. Assets can be resources of value, such as cash, property, or an intangible resource, owned by the company that is the result of past transactions. The amounts owned by each king are called owner's equity, which is the value after debts and obligations have been accounted for, or the total business assets less liabilities.
T Accounts, Debits, and Credits
One way of keeping track of things is to create what are called T accounts. A T account is an accounting tool to keep track of beginning and ending balances as well as changes (debits and credits) within an account with a debit and a credit side for each specific account T accounts can also be useful when there are multiple events that affect each account, as they bring these together in one place and can help determine the ending balance to that account. By tradition, and for no other reason, debits are on the left, and credits are on the right. Debit refers to an addition to an expense or asset account or a deduction from a revenue or liability account. A credit is an addition to a revenue or liability account or a deduction from an expense or asset account. The subtotals are sometimes referred to as footings, meaning they have been added down at the bottom.
Structure of a T Account
The T account keeps track of beginning and ending balances and changes within an account with a debit and a credit side.
Accountants do not think in terms of positive or negative numbers so much as in terms of increases and decreases, which translate to debits and credits. In a traditional transaction two things are exchanged. For example, a person gives another person a goat, which is a decrease to the first person's number of goats and an increase to the second person's. The second person gives the first person a sack of grain, which is a decrease to the second person's grain and an increase to the first person's grain. The first person cannot have negative sacks of grain, and the second person cannot have negative goats. The things exchanged are physically real. In a complex economy, transactions do not have to involve physical items. Buying access to an online game using a cryptocurrency, such as Bitcoin, involves no physical exchange.
On a bank statement there might be withdrawals on the left and deposits on the right. There may also be debits for withdrawals and credits for deposits. This may confuse individuals who later see that they record deposits to the bank as a debit to cash. This may seem like the opposite of what they should be. It should also be mentioned that debit cards and credit cards are also not similar to debits and credits in accounting.
A statement is a summary of all activity that has occurred during the period in an account, whether it is from a business or a bank's business.
What is called a customer's bank statement is actually the bank's statement about the customer. It is accounting from the bank's perspective. If one lends the bank money—which is what is done when a deposit is made—the bank records it as a credit to denote that the bank owes this money to the customer. Essentially, the deposits are the bank's liabilities. When money is taken out from the bank, the bank offsets the money it owes to the customer with the money that has already been repaid. The offset shows as a debit on the bank's books as a record that it has made good on its debt to the customer.
Cash and Bank T Account Example
The T account for a customer's account, from the bank's perspective, shows a liability for the bank.
It is important to note that T accounts are not part of an accounting system. They are a simple way of visualizing the record created by double-entry accounting. They are a form of shorthand that an accountant can scribble on a piece of paper before they make an actual entry to the accounting books.
Using Double-Entry Accounting
Double-entry accounting can be seen as a complex list. Jim's list in the examples and the bank's list are two sides of the same coin. The double entry does not refer to how both Jim and the bank record the same transaction. The double entry refers to how Jim changes at least two of his accounts when he makes a deposit. What the bank does in its books is not within Jim's control. The thought process to recognize is that Jim got the $100 from somewhere. He should keep track of both where it came from and where it is now. For example, Jim earned the money by working a few hours for a friend and was paid in cash.
Cash and Wages T Account Example
T accounts can show how a cash deposit is recorded (debit) versus how a wages earned deposit is recorded (credit).
The economic event summarized in these accounts is that Jim earned some money and deposited that money directly into the bank. In the entry, if one side is a debit, the other has to be a credit. That is the nature of double-entry accounting.
If this were the only transaction, Jim would be just as well off to keep a simple list. When there are many or complex transactions, a more complex system of accounting is needed.
