Feature Column from the AMS

The Romance of Double-Entry Bookkeeping

2. Double entries and how they work

The basic ideas of double-entry bookkeeping are

Alvise's business universe is divided into separate accounts: Capital, Cash, The Priulli Bank, Jewelry, Silverware, Furniture, The Commercial Bank, The State, Property in Fossalta, Property in San Piero, Grain mill in Uderzo, Ship Vallaressa, Pepper, Ginger, Sicilian wheat, Cypriot cotton, Living Expenses, Clothing Expenses, etc., etc.
Every transaction is recorded as a movement of funds from one account to another. One account is debited (P), the other is credited (A). These transactions are recorded in the Journal as they happen, and numbered consecutively #1, #2, #3, .... Examples:
1. Purchase. On March 15 Alvise buys from Ser Polo Corner 1200 lbs of Ginger, at 18 ducats the 100, paying cash. 216 ducats is 21 lire 12 soldi. This was transaction #26.
  debit Ginger 21 lire 12 soldi, credit Cash, 21 lire 12 soldi. In the Journal for March 15, we find:
  - ```
   26. P Ginger // A Cash                      l.21 s.12 g.- p.-
```
2. Sale On April 2 Alvise sells 1200 lbs of Ginger, at 20 ducats the 100, for cash. This was transaction #50. For that day we find
  - ```
   50. P Cash // A Ginger                      l.24 s.-  g.- p.- 
```
3. Profit & Loss Alvise has made a profit of 24 ducats from his ginger transactions. This is recorded as a debit to Ginger and a credit to the Profit & Loss account:
  - ```
   51. P Ginger // A Profit & Loss             l.2  s.8  g.- p.- 
```
4. Inventory. On March 1 Alvise totals up all he owns: this is his Capital. The transaction is recorded as if he were selling each item to himself. His cash on hand that day is 250 lire, so we find, as transaction #1:
  - ```
   1. P Cash // A My Capital                   l.250 s.- g.- p.- 
```
He continues through his posessions. His ship Vallaressa, for example, with all its equipment, is worth 250 lire. The Journal entry for this item is
- ```
 18. P Ship Vallaressa // A My Capital       l.250 s.- g.- p.- 
```

Journal entries are transferred to the Ledger, where each account has its own 2-column tabulation. Each entry appears twice (the ``double entry''), once under the debited account in the left-hand column, and once under the credited account, in the right-hand column. The number of the transaction is recorded for easy reference to the Journal. Since each transaction involves a credit and a debit, it will produce one left-hand entry and one right-hand entry in the Ledger. Corresponding to the transactions above would be the following Ledger entries:

                                        CASH 1. To Capital       l.250 s.- g.- p.-   | 26. Ginger         l.21 s.- g.- p.- 50. Ginger           l.24 s.- g.- p.-   |                                        CAPITAL                                         | 1. Cash on hand   l.250 s.- g.- p.-                                           | 18. Vallaressa    l.250 s.- g.- p.-                                                                         GINGER 26. bought 1200 lbs.                    | 50. sold 1200 lbs.      @ d. 18%        l.21 s.12 g.- p.-   |   @ d. 20%         l.24 s.- g.- p.- 51. To Profit & Loss  l.2 s.8 g.- p.-   |                                    SHIP Vallaressa 18. to Capital     l.250 s.-  g.- p.-   |                                     PROFIT & LOSS                                         | 51. From Ginger     l.2 s.8 g.- p.-

Balancing. At the end of the year, if the numbers have been transcribed correctly, the total of the debit columns must match the total of the credit columns. Since each transaction is part of two different calculations, checking that the balances are equal will detect many numerical errors.
A further balancing is made inside each account. If the credits exceed the debits, a profit item is added on the debit side to bring them into balance. The global balance is restored by crediting that same item to the Profit & Loss account. This is illustrated above for the Ginger account. In case the debits exceed the credits in an account, a loss item is added to the credit side of that account; the same item is debited to Profit & Loss. This interior balancing then shows clearly in the Profit & Loss account which parts of the business-household complex are contributing to, and which are draining from, the sucess of the entire enterprise.