Double entry system of Accounting

March 12, 2009


Even a subject as supposedly dry as accounting does have some life lessons to teach. The founding principle of modern day accounting as we know is the Double Entry System of Accounting. The concept of Debit and Credit is fundamental to this basic principle. Debit and Credit is analogous to Cause and Effect, and Action and Reaction. While this is easily understood from a physics concept and it appears logical to apply the same principle to life itself, being an accountant, maybe precisely because of that, it has taken me all these years to relate the double entry system of accounting and its inherent elegance to one’s own reality.

And the notion of a book keeper as one who is objectively recording commercial and business transactions in a non arbitrary, non controversial language like numbers reflects a beauty that I have hitherto failed to appreciate. This is not to imply that there is someone out there keeping books of accounts, but more in terms of having the maturity to objectively view our own everyday actions and identifying the debits and credits or as the case maybe the positives and the negatives. As long as our actions result in the creation of “equity” our ability to be “indebted” is also healthy. And the equity that we have, either in a business or in our own lives, is based on someone’s willingness to take a risk on us. The more we justify the risk that someone else is willing to invest in us by generating returns over a reasonable period of time, the more is our ability to raise further equity and in the process become more “valuable”.

The Profit & Loss account for a period of time reflects the gain or loss that have accumulated over a period of time and if we do have a sound balance sheet at that point, a temporary setback is ignored by the market and the business is allowed another opportunity to get back onto track. Conversely, there are few who are willing to support a balance sheet that has historically been awash in red. At the same time, I guess, in real life, one of the biggest challenges is to know when to draw up a Profit & Loss statement. If we keep doing it all the time, the odds are we will never be in a position to record a sufficient significant amount of “profits” or worse still record a series of “losses”. On the other hand if we wait too long to draw up a P&L statement, we may end up being too late in terms of figuring out that we have way off whack and may never be able to restore parity. This is the fine balance that most successful individuals do most successfully.

And just like the Balance Sheet of any commercial entity, at the end of the day, the Balance Sheet of life has to tally as well. And a Balance Sheet that is artificially shored up will give way some day, sooner or later. Life cannot be any different. You win some and you lose some. As long as the wins are even a little more than the losses, I guess one has had a beautiful life.

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