Essentially, double-entry bookkeeping is a process by which business entities track the flow of resources from one place to another. However, because accounting reports were developed when computational tools were limited or nonexistent, they do not report a measurement of this all important flow.
Contrary to myth, the recording of each transaction in two places is not a method of error checking; each of the two data entries of an accounting transaction has a specific meaning that allows businesses to maintain a record of their dynamic activity, rather than mere static positions. The two entries of double-entry bookkeeping, of course, are called “credit” and “debit.” The credit entry represents a withdrawal from the source of the transfer and the debit entry represents a deposit in the transaction’s ultimate destination. By entering both the credit and debit ends of resource transfer, the bookkeeper is actually producing a complete record of a movement of financial resources, a “flow” of resources from one place to another.
The standard GAAP reports are all produced from the balances that remain at the various source and destination accounts. With the exception of the Cash Flow Statement, they do not report the important record of what is originally recorded by the bookkeeper – the actual flow of resources that occurs between various accounts. This is surely a product of the crude and limited computational tools that were available to the originators of the reports. Perhaps with the recent invention of the Cash Flow Statement, however, this limitation is beginning to change.
The Cash Flow Statement represents a leap forward in accounting practices. It reports more than the existing balances within various accounts; it actually attempts to track the flow that changed those balances during a period. The Cash Flow Statement, however, is limited to only those flows that affect the Cash account, but it perhaps points to the potentially much greater amount of information that can be produced with modern automation.
With modern automation and data structures, the Cash Flow Statement, or even a more general flow report, should be the easiest to produce. That fact that it is problematic for most accounting departments is a result of the fact that financial reports are produced from the resulting balances in accounts rather than the potentially trivial process of measuring flow by simply totaling all transactions by the combination of the account that they credit and the account that they debit.
A complete report of the total amount of flow between all of the accounts can be done easily with modern data warehouse architecture and, from these total flows, we can measure the changes of balances that they cause and thereby produce all of the other GAAP reports. Furthermore, we can keep a database of daily flows that would allow us to produce dynamic reports for arbitrary windows of time, rather than the current practice of generating reports for specific periods only.
