The Economic Value of Debits = Credits
52 Pages Posted: 2 Jan 2018 Last revised: 17 Jun 2018
Date Written: May 11, 2018
We explore why double-entry bookkeeping (DEB) initially displaced single-entry bookkeeping (SEB) as an accounting system in thirteenth-century Italy. We argue that, even when no financial statements are produced, basic DEB routinely produces more precise and timely data on transaction-specific profits than SEB. The DEBITS=CREDITS constraint unique to DEB alters transaction analysis to emphasize monetary values, wealth changes, profit measurement, and future contingencies. Repeated use of DEB-based transaction analysis sharpens mental models of economic exchange by strengthening feedback from the more precise and timely profit data to entrepreneurial strategic and operating decisions. DEB works like eyeglasses that lets an entrepreneur more accurately distinguish ex ante between transactions for products that generate small profits versus those that yield small losses, while this boundary was fuzzier under SEB. This small improvement for a single transaction scales to very large profit differences when large organizations like Amazon or Walmart transact billions of times every year.
Keywords: Double-entry bookkeeping, economic exchange, profit measurement, discovery process
JEL Classification: M41, D23, D83, B15
Suggested Citation: Suggested Citation