PACIOLI, VISITING HIS FRIEND LEONARDO DA VINCI
Are you puzzled by double entry accounting?
Do you wonder why assets and expenses are treated in the same way?
Why one account is debited and, at the same time, another is credited with the same amount?
Why debits increase one account yet reduce another, and why credits do the opposite?
Many books tell you to learn a set of rules and follow them, almost religiously.
Don’t do it! The real reasons are explained in ‘Understand Accounting’
Fear not, after reading it you will never have any problems with double entry again.
In 1494, Luca Pacioli, a Franciscan Friar and eminent mathematician, wrote a treatise on the double entry system in use in Venice. He was the first person to record it and that is why he is called The Father of Accounting, though he wasn’t even an accountant at all!
The system he described was (and is) based on these three premises:
A business has to be thought of as if it were a person, separate from its owners; it is their robot, working tirelessly on their behalf!
The records of the business have to be kept from the point of view of the business, not that of its owners.
From the business’s point of view the owners’ capital is a liability, as is any profit that it makes for them.
(1) Assets = Liabilities + Profit
(2) Profit = Revenues – Expenses.
(3) Assets = Liabilities + Revenues – Expenses
(4) Assets + Expenses= Liabilities + Revenues -Expenses +Expenses.
(5) Assets + Expenses = Liabilities + Revenues
This explains why assets and expenses are dealt with in the same way in the double entry system; it is because they are both on the same side of the equation. The same is true of liabilities and revenues; they too are on just one (the same) side of the equation.
This topic is dealt with in more detail in chapter ten of ‘Understand Accounting’