knowledge of double entry

The paper investigates how the perception of double-entry impacts business performance for companies operating in dynamic markets. Prices in such markets are frequently dictated by the forces of demand and supply. The condition prohibits companies from exploiting markets to their favor, leaving them with the option of managing costs as one of the ways to maximize their margins. The paper has a history section in which the relevant variables are analyzed in detail for a deeper understanding. The data is then gathered using a predefined technique from both secondary and primary sources. Under the primary data collection initiatives, volunteers take responses from two groups of business owner respondents who have been classified as A and B. Then, analysis is done qualitatively and findings discussed in the context of prior research information from secondary sources. Those respondents who had some form of double entry way of recording financial information recorded higher returns and were more satisfied than their counterparts. The former had an easy time tracking costs and expenses, had less difficulty understanding the profitability of their operations, and were less susceptible to experiencing fraud. The latter, in contrast, experienced just the opposite of what the former underwent. Afterward, the paper recommends that it would be in the best interest of the small business owners to adopt the double entry practice no matter how costly they might perceive it. If the adoption is done well, then there is the prospect that the particular business will weather the fierce competition in its market and emerge victorious. Overall, double entry adds to the value of a business in such a market.



































The Double Entry Rule of Accounting

Introduction

Many aspects of doing business have been changing since time in memorial when barter trade was done. For instance, currencies have been introduced of different nature including the online crypto currencies. Nonetheless, some aspects of business have not changed. One such aspect is the rule of double entry that underlies and defines accounting. This paper provides an insight into the rule of double entry and how it has helped businesses in the competitive business environments to prosper. In achieving this aim, the paper will also look at how the knowledge of double entry accounting shapes business success in a competitive environment.

Background Information

Double entry rule: this decree can be traced back to 1340 when the Messaris of the Republic if Genoa first used a double entry system of accounting (CPA Australia 42). By the end of the 15th century, the uptake of the double entry mechanism was widespread. From there onwards, the rule has shaped and changed business in significant ways. Nonetheless, despite the business environment transforming in several ways, the concept has remained stable and has continued to inspire many aspects of financial reporting (CPA Australia 25). The concept is founded on a simple equation presented as follows.

Assets=Liabilities + Capital

Recording of a debit figure to one or more accounts and a similar amount to one or more accounts creates a totals debit figure that is equal to the totals credit figure for all accounts. This way, businesses can keep track of transactions by ensuring that there is a balance (Ellerman 21). Without such a system, it would be challenging and time-consuming to keep reliable data. Consequently, ensuring that financial entries comply with the equation can help detect errors where the balances fail to balance.

Example

For a transaction where a business buys stock @ $1000, the following double entry will be made.

Debt: Inventory account 1000/= (An increase in the level of inventory)

Credit: Cash at hand account 1000/= (a decrease in the level of cash)

Placing that transaction in the context of the double rule shows that the equation is maintained. That is, the increase in assets following a debt is offset by a decrease in the same asset in terms of cash payment.

Competitive business environment: this is a market defined by many small sellers and buyers. The firms in such a market take the prices as set by the forces of demand and supply. There is very little control, if any, on the market prices as any slight alteration of prices can make one lose clients. Thus, competing in such markets often requires that business look for other ways of keeping their costs lower than the prices. In fact, the lower a business manages to lower its expenses bill the higher the level of profits it will get. This paper looks at how the rule of double entry can help such businesses in their endeavors to post good returns. Finding the answers to this question will go a long way towards helping governments in devising the best solutions for benefiting small and medium-sized enterprises.

Methodology

The information relied on in this paper was sourced from a mixture of online and print sources. Also, interviews were made with business leaders from two categories of groups of businesses in the competitive small-scale grocery market. One category, group A, consisted of business leaders who had managed to set up some form of crude double entry system for recording their financial data. The other group consisted of traders who were yet to embrace such a practice; they were referred to as group B. 20 leaders were approached for an interview and responses obtained were placed on open-ended questionnaires. A qualitative data analysis was then done and the findings discussed in the context of secondary information. Finally, recommendations were provided.

Findings and Discussion

A majority of the responses obtained confirmed that the business that kept financial records in a double entry manner, no matter how crude, posted higher profit margins than their counterparts. This view also concurs with what CPA Australia (8) asserts. The paper claims that entrepreneur can find it much easier to keep track and control business operations if one can clearly distinguish between revenues, expenses, assets, liabilities, and business capital (9). In truth, it would be difficult for a business owner to know whether he or she is making profits or losses with having a grasp of how the particular aspects of the business fare.

It was also noted that most of the business owners in group A found it relatively easier to track debtors and their respective outstanding figures. This capability was owed to adherence to the matching and accrual concepts. As expected, this ability was almost absent in group B, which preferred to sell their produce on a cash-basis. Thus, in some way, the latter group was likely to find it challenging increasing their sales by opening a credit line and the low profits posted could be partly attributed to such limitation.

Then, a significant population of group B complained not understanding why their businesses were diminishing in capital outlay despite making “profits.” In their minds, these leaders knew that they were making a lot of money on a daily basis; yet they could feel that their business was shrinking rather than expanding. According to Kaplan (9), this confusion can be traced to the inability to distinguish between private and business aspects. It can also be attributed to a difficulty in distinguishing the different classes of accounts. In particular, the traditional and somewhat uninformed approach for many is to measure profitability by subtracting day expenditures from day sales. This is obviously wrong, as a day’s expenditure can constitute many things such as withdrawal of money for private use or a purchase of long-term assets that do not constitute a part of the business inventory. Also, without proper consideration, a day’s income can include none revenue items such as gains from a sale of capital equipment. Thus, while the affected leaders could feel as if they were making significant strides, the actual performance was in most poor.

Finally, information captured also shows that the second group was more prone to losing its funds and resources through fraudulent activities at the premises or through pilferage of stock. Once again, this challenge stems from the inability to understand the double entry rule and its derivative applications that enable one to monitor and hold accountable employees. Apparently, the affected businesses lacked the appropriate checks and balances that can detect and prevent misappropriation - despite their counterparts being less informed about the accounting principles; they had some form of internal controls that helped keep fraud at bay. According to Australia CPA (64), a simple exercise such as splitting the ledger alphabetically and having each section handled by a different accounts clerk can prevent collusions and, thus, lower the probability of fraud taking place.

Recommendations

Businesses operating in a competitive environment should adopt some form of a double entry in recording financial information. The best interest of small business owners is to track and control costs as a way of improving their profit margin. The idea of disregarding the inclusion of an accounts clerk by claiming otherwise can prove disastrous in the long term. If a business owner feels like hiring a full-time accountant would be expensive, there is the option of outsourcing similar services from third parties at relatively low costs. The ultimate benefit obtained from assimilating this practice will come to surpass the costs attached as time progresses. In fact, small businesses should know that the integration of double-entry mechanism of data recording becomes indispensable as they grow, which is their objective anyway.

Conclusion

Apparently, the significance of double entry cannot be understated. The mechanism has empowered accounting to such an extent that businesses feel comfortable expanding. The financial-related shortcomings reported by the section of respondents who did not keep double entry records is an example of the setbacks an enterprise in a competitive marketplace can expect if this practice is disregarded. Thus, businesses have a task to ensure that they adopt and improve on the manner in which they record and comprehend financial information. Firms that are successful in adopting this culture have a more positive future than their counterparts.







Works Cited

CPA Australia. Foundations of Accounting: Foundation Level, BPP Learning Media Ltd, 2012.

Print

Ellerman, David. The Mathematical Formulation and Generalization. Ellerman. Accessed on 10/15/2017.

Kaplan. Double Entry Bookkeeping-Introduction. Processing Bookkeeping Transactions. Accessed on 10/15/2017. < http://financial.kaplan.co.uk/Documents/aat-pbkt-sample- chapters.pdf>