Accounting Problems And Solutions - Why Double-Entry Bookkeeping Is Often Really Quadruple-Entry

"Every day at 2.00 in the afternoon, you empty the cash register, except for $50 in mixed notes and coins, count the remainder, and go to the bank to credit the account before the bank closes at 3.30", the shop keeper told his new assistant. "It's 2.00 now, so get started, I'll look after any customers. Take the cash drawer into the back-shop, bring it back with $50 inside as soon as possible and then go back to count the remainder. You'll find a bank bag on the table. It's got a strap to secure it to your wrist so nobody can grab it from your hands. When you get back, you can make the necessary entry in the ledger. It's debit bank and credit sales".

"It can't be debit bank, you've just told me that I'll be crediting the account when I make the lodgement," the new recruit replied, a little surprised that he was being trusted with cash on his first day.

"Don't ask me; ask our over-paid accountant, that's what he told me to do. I was surprised too," the boss said. "I'm just a humble shop owner. I don't need to know the ins and outs of double-entry bookkeeping."

The honest young employee performed his duties, and at 5.00 p.m. he went home scratching his head as to why he had been asked to debit the bank account in the ledger, when, surely, the entry should have been a credit. Arriving home, he even checked his own bank statements and, although he had to go back a long way to find his last lodgement, there it was, clearly in the column headed "credits".

"The over-paid accountant's balmy," he thought to himself.

Whether the accountant was over-paid is possibly a debatable point, but he certainly wasn't balmy. If an enterprise has cash in the bank it is an asset. If it has an overdraft it is a liability. Assets have debit balances, while liabilities have credit balances. So the lodgement of the takings from 2 p.m. on one day to 2 p.m. on the next has to debit the cash at bank in the enterprise's records. The lodgement will have either increased a debit balance or reduced a credit balance. Both of these results are achieved by a debit entry.

Why then, does the bank tell you that you are crediting your account when you make a lodgement?

Simply, it's looking at the transaction from its own point of view, not that of the shop owner. If the enterprise has cash in the bank, the bank owes that money back to the enterprise. Therefore the shop is a creditor of the bank, a liability of the bank. So the balance in the bank's records must be a credit. If the enterprise has an overdraft, the bank is owed money so, in this case the shop is a debtor of the bank, an asset of the bank. So, in this case the balance in the bank's records must be a debit. The lodgement would have either increased the bank's liability or decreased its asset. Both outcomes are achieved by a credit entry in the bank's records. That is why a bank says that a lodgement is a credit, while the enterprise would debit it's cash at bank account in its ledger to record the same transaction. Similarly a payment is credited to the cash at bank account in an enterprise's ledger, while the bank statement will indicate that it is a debit.

This phenomenon is not restricted to banking transactions. Buyers debit purchases while sellers credit sales. Renters debit rent paid, while landlords credit rent received. Enterprises debit accounting fees, while accountants credit fees earned. And so the list goes on. When more than one entity is involved,double-entry becomes quadruple entry, and each entity treats the entry in the opposite manner.