Accounting Essentials - Part 2

In Part 1 we covered the movement of 200 from Customer to Bank. We described this event as 'Take deposit from Customer' and valued this journal in a table:

This article covers the additional dimensions that support a bare bones accounting system.

#8 - All movements must be identifiable

Over the life of a business, there could be more than one movement of 200 between Customer and Bank. For this reason, we must uniquely identify movements related to the same business event - we could use the following naming convention:

Using this naming convention, we now have a unique handle for specific movements. In this example the unique journal is called Event-1 but accountants are free to create any naming convention so long as each event identifier is unique.

#9 - All movements occur on a specific date

Let's expand our Customer/Bank event to reflect the date:

💡Time is excluded from the event when reporting.

#10 - All movements specify a unit of measure

Value in modern society is measured with currency - let's expand our Customer/Bank event to reflect the unit of measure:

💡 There are things that are extremely valuable but difficult to measure - for example, a company's relationship with its customers or 'Brand'.

#11 - Double Entry is a misnomer

You may have assumed that two entries per movement is the reason why we call this form of bookkeeping 'Double Entry' - this is not strictly correct.

Although it will take at least two tabular entries to represent any business event, consider a purchase (entry 1) funded partially by cash (entry 2) and the remainder placed on a credit card (entry 3) - this would be an example of a three sided entry.

#12 - Computers changed accounting

Today's computers perform huge sums automatically and instantaneously when needed. This was not the case 500 years ago. Luca Pacioli implemented double-entry accounting with extra routines to solve mechanical limitations.

Unfortunately, most tutorials still promote jargon such as 'Balance carried forward', 'Balance brought forward' and 'T-Accounts' but these are rote implementation details that can be ignored for now.

Summary

The financial effects of any business are easily represented by rows and columns in a database table. This table is called a ledger and has five essential columns - bucket, date, event identifier, amount and currency.

Part 3 expands on these columns as they relate to double entry accounting.