The Evolution of Double-Entry Bookkeeping

Abstract

Double-entry bookkeeping (DEB) is used by most large firms even though scholars do not understand why they chose DEB. We address three questions about DEB’s gradual displacement of single-entry bookkeeping (SEB): (1) What is the main benefit of DEB? (2) How did DEB emerge and evolve? and (3) Why did DEB help individual firms and economies survive? We argue that the main benefit of DEB over SEB was that it enabled better measurement of the profits from individual transactions. We argue that the crucial innovation that drove DEB’s evolution was the DEBITS=CREDITS constraint that required an equity account to balance assets and liabilities, which led to continuously updated cumulative profits in a single monetary unit of account. Most importantly, we hypothesize that DEB shifted mental analysis of transactions to a more future-oriented focus that enabled competitive discovery of profit opportunities. We propose several tests of our arguments.

Keywords: Double-entry bookkeeping, economic exchange, profit measurement, discovery process, monetary unit of account

JEL Classification: M41, D23, D83, B15