What is the advantage of recording every transaction twice in two separate accounts instead just recording it once?
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It makes it far easier to detect mistakes. It also makes it easier to manage more complicated transactions since it enforces a discipline to break down the transaction into a series of credit and corresponding debit entries.
It also makes it much easier to compare transactions across accounts – say between two companies. This makes it easier to resolve disputes as each company will keep a record of both sides of their transactions -ie if company A and B are in dispute there will be 2 entries in company A and 2 in B and each can be compared to understand where the dispute lies. This makes it harder to forge payments and far easier to verify.
Money doesn’t come from no-where, nor does it just disappear. It’s transferred. The 2 entries are your “From” and your “To” records for each transfer.
Value was transferred from your bank account, to the inventory when you bought more stuff to put on the shelves to sell.
Value was transferred from your accounts receivable, to your bank account when someone paid their bill.
Value was transferred from your bank account, to your employees’ when you paid them their salaries.
Value was transferred from your inventory, to your accounts receivable when someone bought stuff and was invoiced, due in 30 days.
Think about it like this. You want to record the money going someplace, but also where it went.
If I’m balancing a checkbook, its fine to say ‘-100’. But I really have no easy way to know what I spend that on, if i want to check down the road.
So instead, I would say:
Cash -100
Utility Expense +100
I can always see what the account balance is, by checking cash. But if I want to know what I spend on utilities in the last year, or 10 years, I can pull that information in less than 5 minutes. A business large business might have 1000 general ledger accounts. There would be multiple managers, each with their own budgets, so this allows the accountants to see how much each manager has spent, how much they have left, or to see if certain operations are profitable.
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