Sally M. Schultz: Compiling Data on Early American Business Transactions – Single- versus Double-entry Bookkeeping. Abstract # 18 (random order)
1. Comparing single- and double-entry accounting
Accounting, as an element of culture, adapts to the organizational and social context. This presentation describes the difference between single- and double-entry accounting, and explains how each approach provides information that is adapted to the economic and social milieu in which it is used.
Both single and double-entry accounting generally employ two (or more) types of account books. Transactions are recorded chronologically in a book of original entry—variously called a waste book, daybook, or journal. Later, these journal entries are posted (transferred) to the appropriate account(s) in the ledger. It is the types of accounts that appear in the ledger, and the number of ledger accounts that a transaction is posted to that are the keys to determining whether single- or double-entry accounting is in use. For historians, this judgment can be complicated since only a portion of the archival record may have survived in the collection.
In single-entry accounting, the ledger consists of personal accounts established in the names of individuals or businesses with whom the bookkeeper trades. In colonial and early America, single-entry accounting was widely used in rural agricultural communities in the northeast. Cash was in short supply, and local economies were often based on asynchronous exchanges, facilitated by “bookkeeping barter.” When payments were made, they were often “in kind,” with agricultural products, or other goods or services delivered in settlement. In agricultural communities exchanges were often asynchronous: a farmer who purchased tools from the local store during spring planting season would expect to make payment after the crops were harvested. Bookkeeping was indispensable for keeping track of the balances due between individuals.
Also, during the early American period, there were no requirements for individuals or family businesses to report their income or wealth to external parties, and business owner-managers could judge inventory levels and profitability without the need for accounting reports. Thus, single-entry accounting was well-suited to the reporting needs in these rural communities.
In contrast, double-entry accounting is intended to capture the information needed to measure profitability and financial position, rather than merely receivable and payables. Each transaction recorded in the journal would be posted to two (or more) ledger accounts, and these will now include accounts for cash, inventory items, and other assets, liabilities, or equity balances. So, for example, a merchant who purchased cloth from a supplier on credit terms would record both an increase to cloth inventory and an increase in the amount payable to the supplier. In single-entry accounting, only one part of transaction—the increase in the amount payable—would be recorded in the ledger.
The double-entry method was used by Italian merchants during the 15th century, and is generally attributed to Fra Luca Pacioli, who described it in a chapter of his 1494 text in mathematics. The method spread throughout Europe, and was illustrated in a popular English language bookkeeping text by Scottish mathematician, John Mair, which appeared in multiple editions between 1736 and 1808.
John Mair explained the need for the double-entry approach in the 1772 edition of Bookkeeping Methodized (available on Google Books) as follows:
A merchant who deals in proper trade … ought to know, by inspecting his books, to whom he owes, and who owes him; what goods he has purchased; what he has disposed of, with the gain or loss upon the sale, and what he has yet on hand; what goods or money he has in the hands of factors; what ready money he has by him; what his stock was at first; what alterations and changes it has suffered since, and what it now amounts to [Mair, 1772, p 2].
Double-entry accounting becomes necessary when firms must report on their operations and financial position to outside investors. And, of course, whenever regulatory requirements exist for reporting profitability or wealth, the double-entry system would be needed to generate the data needed for compliance.
2. XBRL = eXtensible Business Reporting Language
Today, business reporting continues to evolve. XBRL is an open global standard for exchanging business information, and allowing semantic meaning to be expressed in business reporting. It is managed by a nonprofit consortium, XBRL Int’l (https://www.xbrl.org/). Increasingly, regulators worldwide are requiring XBRL filings for corporate tax returns and financial reports.
XBRL is based on XML and uses its syntax. Metadata set out in taxonomies serves to capture the definitions of individual reporting concepts and the relationships between them. Information being communicated or exchanged is provided within an XBRL instance. The XBRL language can be extended as needed—it doesn’t limit the kind of information that is defined. In addition to allowing the exchange of summary business reports, like financial statements, XBRL also enables the tagging of transactions data, which can then be aggregated into XBRL reports.
Sally Schultz (State University of New York at New Paltz)
Presentation: Oct 22, 5.20-5.40 p.m., Haus der Begegnung [PROGRAMME]
Picture credits: Salem shipping colonial color, [public domain], via Wikimedia Commons