Double-entry bookkeeping has been the traditional way of keeping track of a company’s revenue, expenses, and other financial categories for over five-hundred years. Proven by the test of time, double-entry bookkeeping is a powerful technique for recording the dynamic activity of trading wealth.
The importance of double-entry bookkeeping cannot be overstated. Because it allows the activity of trading to be accurately recorded, it actually makes trading more efficient and productive. As trading is made easier, the productivity of an economy is increased because its members are more able to exploit divisions of labor and the other comparative advantages that trading makes possible.
Why has double-entry bookkeeping been such an important part of our economic reasoning and why will continue to be in the future? Because the “double” in double-entry bookkeeping supports the recording of dynamic processes as opposed to simple static states. By relating each single transaction to two of its critical dimension, the bookkeeper memorializes the activity that occurs during a trade. Rather than just measuring the amount of wealth at a given location with single entries, double-entry measures the actual activity that occurs as financial resources are moved from one place to another.
The two entries that make up the double-entry record both the source and destination of a flow of resources (a trade). The entries record from where the resources are withdrawn (the “credit” entry) and to where they are deposited (the “debit” entry). From these two entries, enough information is recorded to allow an analyst to unwind a company’s history to any point in its existence. While a single entry may be sufficient to keep track of the balance in our checking account, two entries are necessary to keep track of the activity that creates those balances (see The Tao of Financial Information).
In later posts to this blog, double-entry bookkeeping will be explored as the foundation of our knowledge of commercial trades. Rather than question the efficacy of double-entry bookkeeping, we will show how this powerful technique can be expanded in the age of the computer to further empower the “knowledge is the business” company.
