THE INHERENT DIFFICULTY IN UNDERSTANDING

ACCOUNTANCY.
THE CHANGE OF METHOD FROM THE SINGLE-ENTRY SYSTEM TO DOUBLE-ENTRY
BOOK-KEEPING.

By Juan Palao Uceda.

At the times when Mercantile Traffic began, the accountancy

registers were only intended and limited to collecting debts and credits,
Example: Peter owes me 4, Frank owes me 5, I have (Credit) 7 from
Lewis. In this manner, one can understand the way in which a Bank
Statement is settled, the bank entity issues its own account facing the
client, locating the positive amounts as Credit and the negative ones as
Debit.

A balance of the aforementioned nature, would be expressed, in

accordance to the previous example, a form as simple as the following:

Credit Debit
_______________________
Peter 4 | 7 Lewis
Frank 5| .

From this, we would deduce that we, really, have 2. When a cloth
merchant knows the state in which his cartload is, the small volume of
cloth he carries,... he can deduce, from this rudimentary accountancy
system, his patrimony or assets. As the commercial reality developed
and, above all, at the summit of mercantile relations and organizations in
Italian cities in the Middle Ages, it becomes apparent that a more
purified, detailed and precise system of accountancy was needed. This
system, formally created by Fray Luca de Paciolo 1, was named Double-
Entry Book-Keeping. This system did not only match persons with an
account, but also it matched things with accounts. Here is where the
natural difficulty for understanding Accountancy resides. Now, in the
language of Accountancy, we could state that the cartload and the cloth
are “debiting” to the merchant or his company, their value, in the same
way that any debtor debits or owes a quantity2. This is the main

1Summa Aritmetica, Geometrica proportioni et proportinalita (1494).

2 GARRIGUES, J. Curso de Derecho Mercantil. 1ª. Madrid: 1956-1960, Silverio Aguirre Torre.
Pag. 532.- << Estas cuentas se consideran como personas (principio de personificación de las
cuentas) y se les adeuda cuando reciben un valor o se les abona cuando, al contrario, lo
suministran.>>
hindrance and obstacle we find in comprehending the accountancy
system, as it is quite difficult to understand and assimilate that things are
debtors of their own value. This is the consequence of the inclusion of all
the patrimonial values in the accountancy registers, which facilitates the
balance being a reference which we all can understand and which is
needed to arrive to the point of the global patrimonial state of the
business.

Corporate Enterprises, with absence of personal responsibility,

have included in their liabilities, an entry which immobilizes a group of
funds in such company, the Share Capital. Following the last pattern, and
due to that it is a contribution by a third party (the shareholders), it is a
liability, in the same manner than a loan or a debt, but, the difference
with ordinary debts, strides in that the shareholders cannot demand its
devolution. A clear example would be the following: If the shareholders
were to contribute 20 and these 20 were invested in stock which was sold
for the value of 40; in this case, these, could be divided, but not the legal
reserves, that is, 20 in dividends, but nothing more, as the rest must
remain in the company to answer its creditors. On the other hand, if due
to a loss, for example, in sales, the resources which are truly owned
(suppressing debts), are inferior to half of the sum of the capital, the
company is forced to reduce/ enlarge the capital or to wind-up to
adequate the external declaration of the share capital to reality. If the
shareholders have incorporated a company with a share capital of 10 and
everything has been invested in stock which, in the end, has been sold
resulting in losses, leaving 4 as a result, such company would be forced to
wind-up.

The Debit side of the balance is, thus, known as financial structure as,
with the cash of the share capital (and accumulated earnings), we lend,
we debit creditors, it nourishes and sells the assets or credit side, bank
account, buildings, vehicles, cars, stocks, credits,...

Due to its completion, accountancy, at present, has become an

instrument of company control, which serves the laws and regulations.
However, once assets/ things appear and are valued by accountancy and
we set our trust upon them, the problem of accountancy fraud increases,
for example: companies like World.Com, which included, in their credit
side, the publicity entries when they were really expenses which were
dwindling the benefits of the company.