The arrival of the personal computer 40 years ago was a momentous development. Bookkeeping and accounting software meant bookkeepers could process large amounts of data quickly and with better accuracy.
Then, in 2000, the introduction of GST in Australia triggered an explosion of bookkeeping software sales. This software enabled business owners to complete the GST portion of their business activity statements (BAS) themselves.
Most business owners were untrained in bookkeeping and considered this software “a magic bullet” to help them meet their GST obligations, without having to pay fees to accountants and bookkeepers. Everything balanced because it had to, but for many, the reports were meaningless. With no understanding of what “double-entry bookkeeping” meant, many entries went to the wrong accounts and/or incorrect GST codes. Their accountants then had to spend a lot of time sorting out the mess and amending the returns – and charging for it.
Knowing how to process payments, invoices, etc., is like knowing where to put your groceries: you would not put the milk in the bathroom, or the toilets roll in the fridge. “A place for everything and everything in its place” is the rule in bookkeeping. And when you don’t know where something goes, you should leave it in a place where it is easily seen and flagged as requiring inquiry.
The double-entry system is an effective one and has existed for more than 500 years. In 1202, Leonardo Fibonacci published his influential book, Liber Abaci, which introduced Europe to the Indian/Arabic decimal number system. Then, in 1494, Italian mathematician Luca Bartolomeo de Pacioli published Details of Computing and Recording, which gave merchants a method to calculate profits and wealth. This helped families, such as the Medicis, achieve great wealth.
My first year as a trainee accountant (when all books were manuals, known as “books of account”) was spent learning about double-entry bookkeeping. It embedded in me the skills I use to this day in terms of understanding the financial statements of businesses large and small.
A simple example of double-entry bookkeeping is an Apple iPhone cash sale of $1,100. Apple debits the bank account (in their books) with $1,100, credits the “Sales of iPhones” account with $1,000, and credits “GST received” with $100. If they didn’t record this accurately, Apple might think the $1,100 was all theirs and spend the government’s $100 on something else!
The double-entry system provides an enormous benefit for all organisations, although it can cause problems through error and ignorance. There is also the issue of manipulation, which investigative journalist Richard Brooks points out in his book, Bean Counters: “The same genius of double-entry bookkeeping that so enhanced the understanding of a business’s results could also be used to distort them.”
Understanding the principles of the double-entry system helps business owners and investors make better assessments of the financial statements they rely on to make sound financial decisions.
If you need help navigating your financials, email me at email@example.com.