Is Double-Entry Accounting here for eternity?

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Take any popular

accounting software
 today, be it a SAAS player like us or our desktop counterparts or even the entreprisey ERP solutions, and I bet they all are based on double-entry accounting. For the uninitiated, double-entry accounting is a system of bookkeeping that enforces recording two aspects of a financial transaction – one that indicates the source of amount involved and another to indicate how it is put to use. It is said that this method was first codified by Luca Pacioli, an Italian monk in the fifteenth century (and I’ll leave it to The Almighty

 to explain the rest).

It is fascinating to see that a system devised to catch financial inaccuracies six centuries back still finds its place in the world of accounting software and remains largely untouched. This when accounting software by itself is undergoing a transformation of sorts from desktop to the web.

To explain this phenomenon, let me first enunciate the benefits of manual double-entry accounting. Double-entry accounting is advantageous because it:

  • Is self-balancing in nature, enforcing arithmetical accuracy.
  • Makes it to easy to understand the source and uses of funds.
  • Ensures all aspects of all financial transactions available in a single place, so preparation of financial statements is easy.
  • Helps in fraud detection.

All of these are extremely helpful in producing accurate financial statements. And when human beings step aside and software takes over, much of these benefits still hold true. The reason for this is that double-entry accounting enforces some sort of a relational structure on the way transactions are recorded. For example, an accounting software would still record the two sides of a financial transaction and moreover, all of these are typically recorded in a single place (table in Relational database parlance), which makes it easier to summarize financial information.

Alternative accounting models like

REA (Resources, Events and Agents)
 that did away completely with double-entry and models that retained the double-entry flavor but tweaked other aspects failed to take off. My reasoning for this: the traditional double-entry model was deeply ingrained in the business person’s and accountant’s psyches, and it was never going to be easily changed. Also, amongst the more complex accounting alternatives, double-entry has remained one of the easiest and most effective solutions.

The accounting software industry will definitely undergo some changes in the times to come, but double-entry accounting will be as relevant as ever. And I bet somewhere up there Luca Pacioli must be smiling.