CORE CONCEPTS
DOUBLE ENTRY
A key concept that makes accountancy very elegant and immensely powerful
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Peter Burgess COMMENTARY
During my training with Cooper Brothers & Co in London in the 1960s I was dispatched to a variety of small businesses to complete their financial statements. While London was home to some of the biggest financial institutions in the world, it was also home to a huge community of small traders who handle every conceivable product. Many of the vegetable traders were located on the Covent Garden neighborhood and the fish traders were at the Billingsgate Market. These markets were real markets, compeletely different from the 'supermarkets' that retail food and have a nerve putting the word market in their names!
I am also reminded of an incident I remember from being about 8 years old. My mother used to buy tomatoes at the end of the day when the local vegetable trader in the local market would reduce the price to close out the sales for the day. On this occasion the price did not go down at the end of the day but went up. My mother was furious and the local vegetable trader gave my mother an excellent ... and polite ... lecture on the principles of the free market economy and the role of supply and demamd. On this occasion, there were more buyers of tomatoes late in the day than usual, and accordingly he was putting up the price!
Fast forward a long time ... around six decades ... and the dynamic of 'market' is no longer apparent at the 'retail' level but is still alive if not well in wholesale markets. While it is rarely referenced in popular news the 'market' at wholesale levels is seriously compromised and gamed in all sorts of bad ways with little or no oversight or regulaton of a whole range of monopolistic practices.
Peter Burgess
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DOUBLE ENTRY
STATE, PROCESS AND FLOW / BALANCE SHEET, P&L, CASH FLOW
Double entry is the core concept that has made conventional accounting so powerful and so reliable for hundreds of years. The system of double entry enables a clear distinction between balance sheet accounts and profit and loss (or transaction) accounts. This enables easy reporting of both the 'state' of the business entity (Balance Sheet) and the 'flow' of the business (Profit and Loss Account).
Because of the double entry construct, the 'profit (or loss)' or 'surplus (or deficit)' for the period may be determined in either of two ways. The result for a period is shown in the profit and loss account as the difference between the costs and revenues (debits and credits). The period result is computed using the balance sheet accounts as the difference between the balance sheet at the beginning of the period and the balance sheet at the end of the period.
Conventional financial accounting based on double entry gives a clear distinction between balance sheet and profit and loss accounts. This enables easy reporting of both the 'state' of the business entity (Balance Sheet) and the 'flow' of the business (Profit and Loss Account).
The 'profit (or loss)' or 'surplus (or deficit)' for the period may be determined in two ways. It is shown in the profit and loss account as the difference between the costs and revenues (debits and credits) and it is also shown in the balance sheet as the difference between the balance sheet at the beginning of the period and the balance sheet at the end of the period.
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Double Entry ... a core concept of accountancy
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Double Entry ... BOOK by JANE GLEESON-WHITE
‘Lively history … Show[s] double entry’s role in the creation of the accounting profession, and even of capitalism itself.’ The New Yorker
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Open file 12014
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