~ "the greatest innovation"
Italian merchants were the leaders in bookkeeping techniques during the Medieval period, and we have books dating back to the thirteenth century ce. Merchants kept their books either in Latin or in Tuscan, and usually used Roman numerals, though they calculated with Arabic numerals. A merchant's accounts would be recorded in a libro dei debitori e creditori ("book of debtors and creditors," a ledger; also called libro grande, reale, mastro, or campione), a libro di entrata e uscita ("book of incomes and expenditures," a cashbook), a libro di balle mandate ("book of dispatched bales," in which large, long-distance exchanges were noted), and a libro secreto ("secret book," which contained notes on the income and expenditures of the merchant's socii or associates, as well as managerial decisions or large contracts). At first these books were referred to simply as libro nuovo and libri vecchii (the "new book" and "old books") and were recorded by single entry – they were records of to whom Giacomo della Chiesa (for example) gave money, and when, or from whom he received money, and when. Later, each volume was named, marked, and colour coded.
In 1458ce, the merchant Benedetto Cotrugli wrote a treatise entitled Delia Mercatura et del Mercante Perfetto (Of Trading and the Perfect Trader), which included a short section detailing the principles of what we today call double entry bookkeeping. This is the earliest known treatment of this method of accounting, and although Cotrugli's book would not be published until the sixteenth century ce, it did come to the attention of one Frater Luca Bartolomes Pacioli, a Franciscan mathematician. In 1494ce, Pacioli's treatise Summa de Arithmetica, Geometria, Proportioni et Proportionalita developt these ideas in a section devoted entirely to bookkeeping, entitled De Computis et Scripturis. This book was responsible for the popularization of double entry bookkeeping, and its subsequent success as a cornerstone of the modern economy.
The principles of bookkeeping by double entry spread across Italy, and were in place from the very beginning of the Renaissance. When capitalism began spreading out from Italy to the Netherlands, England, France, and the German countries, double entry bookkeeping came too. It became an essential component of modern commerce. In Wilhelm Meister's Apprenticeship, Goethe calls double entry bookkeeping "one of the finest inventions of the human mind." Ludwig Mises, in his treatise Human Action, points out that "Our civilization is inseparably linked with our methods of economic calculaiton. It would perish if we were to abandon this most precious intellectual tool of acting" (231), which "establishes money prices of the available means and confronts this total with the changes brought about by action and by the operation of other factors." (ibid) The very existence of accounting and bookkeeping by double entry, by which you can manage your own or someone else's finances easily and exactly, is a testament to the advantages of a market of free and private association and of a common standard of exchange – the two necessary and sufficient conditions for the possibility of monetary calculation.
~ accounting for everyone
Here's how it works.
You need at least two big, empty books.
One is called your ledger. When you open the book, of course, there are two pages facing you; one on the left, and one on the right. The one on the left of your ledger, traditionally, is your reckoning of debits; the one on the right is your reckoning of credits. You will need fields on each side in which you can write the date of a transaction, a few details about what it was for, and the amount being exchanged.
Now, most people are familiar with the two key terms of double entry bookkeeping: debit and credit. We're most familiar with the way the bank uses them to name their accounts in relation to us as their customers – credit is the money the bank gives us, and debit is the money we take out of our accounts. It's tempting, therefore, to think of debit as money that we're spending, and credit as money we're receiving. But that's not quite right. Rather, debit is money that is being spent (whether it's by us or by the other person); credit is money that is being received (whether it's by us or the other person).
Now, this is kinda fucked up and took me a while to get my head around; maybe you'll have an easier time than I did, and hopefully that'll be because I know what I'm talking about. In most business transactions, only one person is actually getting money; the other person is getting goods, services, property, a promise, or something else that can't be measured in dollars and cents. Whether you are the person giving the money for some good or service, or the person receiving the money for something you are selling or some service you're rendering, will vary from situation to situation. The ledger isn't the place to record that; the ledger is used to record the transaction itself. Therefore, the place where your own accounts appear will switch back and forth between debit and credit depending on the specific transaction.
Debit is when someone gets money. Outstanding debit is a reckoning of what other people owe us – it is the IOUs and "debts" that we have coming to us. It's also a list of expenditures made to maintain operations or acquire new property. Debits are recorded on the left-hand page of a ledger, under a column marked "DR" (for "debtors").
Credit is when someone spends money. Outstanding credit is a reckoning of what we owe to other people – what we have on "credit," trust, from them because they believe in our ability to pay them back (credo). If someone takes us into their debit, it is to our credit. Credits are recorded on the right-hand page of a ledger, under a column marked "CR" (for "creditors").
When you sell something, your account is receiving the debit, and your customer's or client's account is providing the credit. When you buy something, on the other hand, your account is providing the credit, and your client's account is receiving the debit.
Now, obviously, your generated income will not necessarily always match its costs. Hopefully, your income will be greater than the costs, which means you're using what you have to make more wealth; sometimes, your costs are greater than the income, which means your loan managers may soon be knocking at your door. None of this, though, will show up directly on your ledger. The ledger doesn't record profits (that's more what the cashbook is for); the ledger records transactions. In every transaction, money is always going from a source to a destination; therefore, you must record at least two entries for every exchange: one or more debit entry for a certain amount, and one or more credit entry for the same amount. Hence the name of this accounting system, double entry.
And because both entries analyse the same transaction, debits and credits should always come out equal (even when you're generating profit or sliding into debt). Hence the term, balance – as in, a "balance sheet," to "balance the books," or "outstanding balance." If you ever have to put together a "balance report," all you have to do is transcribe passages from the ledger that deal with the dates you're supposed to be reporting on.
The next big book you'll need is called your cashbook; this is what you're going to use to figure out if you're actually making money or losing it. Recording in the cashbook is much more intuitive. For every transaction, you're going to make an entry in your cashbook detailing whether it was an expenditure or an income. This information can be derived from the ledger entry, but you'll want to keep a cashbook as a sort of running commentary to your ledger; when you want this information, you will want it right away, so it's best to make the cashbook entry at the same time you're making the ledger entry.
When you sell something, your account is receiving income. When you buy something, your account is making an expenditure.
Here's an example. On May 10, 2002, I gave a $10 donation to Blockstackers Intergalactic from the e2 donation box. This donation was effected through PayPal from my credit card. Let's say that five days later, on May 15, 2002, I paid that incurred credit card debt back from my chequing account. (I wish I were really that organized, and since this is my example, I can pretend I am and you'll never know the difference!) Here's how I would record that: —
DR | CR
|
10/5/02 $10 PayPal debit for | 10/5/02 $10 MasterCard payment
Blockstackers | for everything2
...
|
15/5/02 $10 Outstanding | 15/5/02 $10 Chequing account
MasterCard debt |
And in my cashbook I'd make some entries that had this information, including the repayment of my credit card debt: —
10/5/02 Got +10 $ from MasterCard, for PayPal
10/5/02 Paid -10 $ to PayPal, for credit to everything2
...
15/10/02 Paid -10 $ to MasterCard, payback
for e2 donation on 10/05/02
And somewhere, nate might have a similar listing in his ledger, only on his, my $10 will be listed as a credit, and the e2 bank account will be the debit. Like this: —
DR | CR
|
10/5/02 $10 Deposit to e2 | 10/5/02 $10 PayPal money from
bank account | Cletus the Foetus
And nate's cashbook might look something like this: —
10/5/02 Got +10 $ from PayPal, on behalf of Cletus
...
31/5/02 Paid -1,500 $ from bank account, for e2
As we can see, the ledger and the cashbook record the same facts, but from two different perspectives; the ledger records a transaction according to the flow of money, and the cashbook records it according to the flow of money toward or away from the accounts that I control. So, I record all my transactions like this: In my ledger, money coming into my hands, from any source (including my bank accounts) and for any reason, is marked in "CR;" money leaving my hands, for any destination (including my bank accounts) and for any reason, is marked in "DR." In my cashbook, money coming into accounts that I control are marked as positive and are assets; money that is going out of accounts that I control are marked as negative and are liabilities or expenses.
This system has a two-fold redundancy; first, in the balancing debit and credit entries of the ledger (for which "double entry bookkeeping" is named); and second, in the recording of information in the cashbook as well as in the ledger. Most managers keep a third book, called a journal, in which they record every transaction a third time, grouped by day, with information about where and why the exchange occurred. Additionally, this information is usually transferred over from a small manual daybook, which the managers carry around with them, and which is also kept once it's been filled. This quadruple redundancy, in which every aspect of each transaction is readily indexed by every perspective from which it would have business significance, means that a decision-maker can assess the affairs of his company relatively quickly, and therefore is in a better position to act in a timely manner upon opportunities to improve his material standard of living. It also provides security against human error – miscalculation is less likely when you have to cross-check everything three times – which reduces, on the one hand, the risk of losing money for yourself, and on the other hand, the risk of committing some civil negligence by losing someone else's money.
And that's about all you need to know to get started. Of course, in this day and age, there are a number of personal finance programs you can get that will allow you to do all your bookkeeping without using real books – you can do it all on your computer. This should not stop you from learning the principles of double entry bookkeeping, though, for two reasons. First, you need to know how to use the program properly, and if you know the very simple principles according to which the system works, you will be able to keep much better records. Second, you should always have hard copy of your finances, even if you're doing it on the computer; and if something happens to your computer, you should know how to read that hard copy. If I've done my job here, this will hopefully not be a daunting task.
With this system, the flow of capital across a society can be very carefully tracked, and the consequences of a manager's policies can be seen and evaluated quickly and easily. Mises wasn't exaggerating when he said that the history and destiny of our civilization was linked to double entry bookkeeping; it is the technique in which participants of a liberal capitalist market can take responsibility for their own money in a way that had never been possible before.
And who knows? Maybe it'll help you get a bigger tax refund next summer.