Mental Model Posts ‘Double-Entry Bookkeeping’

How to Understand Accounting: Translating Geek to English

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Topics: Accounting
Accounting Pic

Photo by Timm Suess

Accounting is needlessly complicated.  And there is often a huge communication barrier between the Accounting department and the rest of an organization.  Maybe that Intro to Accounting class was supposed to help you understand the difference between Debits and Credits, but in my experience, very few (if any) people actually retain this concept.

Debits and credits are part of Double-Entry Bookkeeping, which can trace its roots back to the ancient Greek mathematicians – it’s just a simple Algebraic equation.  But the concept was first codified and published by an Italian Friar named Luca Pacioli in 1494.  It seems pretty clear that Pacioli was using this system as a tool concerned mainly with who owed what to whom.  And there was clear benefit to this system.  Each transaction had to balance out (the debit side equaled the credit side); double-entry bookkeeping is one of those closed systems that must always be in balance.  It forced discipline, it forced transparency, and it forced honesty.  And while this system originally created great virtue effects, those effects are not quite so clear today.

So in order to understand Accounting, we first have to overcome the following aspects of it:  Read More »