Double entry book-keeping explained by Pacioli

Double entry bookkeeping was first introduced by an Italian mathematician and a monk Luca Pacioli in his famous book Summa de arithmetical, geometria, proportioni et proportionalità. The book was published in 15th century and it described the method of accounting used by Venetian merchants of the time. Double entry book-keeping became the standard method of accounting (in Finnish = kirjanpito) very soon, and the Pacioli's book became a bestseller.

Double entry bookkeeping is a system where each transaction is recorded twice into the columns on the sheets of the ledgers. These columns were named debit and credit, the first being the left side column and the other one the right side column. The basic idea is to follow two different financial transactions: where the money has come from and where it has been spent. In double entry book-keeping the money spent is also the money which is staying in the company account for the time being as well.

All transactions must be recorded in the both columns and that serves as an check for any mistakes or errors, since the sum of total credits and total debits of different accounts must equal and if not, there is an errors. In case of this the debit and the credit can be traced back with the help of the marking of the date and identifying code which is usually attached to the record.

Double entry bookkeeping features two different kind of approaches to the accounting, named Traditional Approach and Accounting Equation Approach. In Traditional approach the accounts are divided into real, personal and nominal accounts. Accounting equation approach, which is also called American approach, transaction records are based on the equation Assets=Liabilities + Capital.