Financial accounting, also called double-entry accounting, is the system of collecting, processing, and periodically reporting a firm’s transactions. First described in 1494 by a Franciscan monk, Fra Luca Pacioli, doubleentry accounting was largely an oral tradition which, for centuries, was passed down through the generations. In the 20th century, two organizations, the FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) and the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA), were instrumental in codifying the accounting principles that had become widely accepted and generally agreed upon over time. No longer an oral tradition, this comprehensive set of published rules and methods is now referred to as GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). The establishment of GAAP has served to standardize the practice of accounting among all firms and organizations, and the federal government, most notably the INTERNAL REVENUE SERVICE (IRS) and the SECURITIES AND EXCHANGE COMMISSION (SEC), requires that all published accounting information be collected, processed, and reported in accordance with GAAP. Accounting is often called double-entry accounting because of the nature of the data (a firm’s transactions) that are collected and processed in an accounting system. Since a transaction is an exchange of equal-valued RESOURCES between two parties, a double entry is required to record a transaction: one entry recording what is received in the transaction and one entry recording what is given up. The first entry is the debit (abbreviated dr. from the Latin debere, meaning “left”) and the second entry, which is indented to the right, is the credit (abbreviated cr. from the Latin credere meaning “right”). Because equalvalued resources are exchanged in a transaction, the dollar amount of the debit entries must equal the dollar amount of the credit entries. While account names have evolved over time and new accounting principles have been added to comply with governmental and tax regulations, the practice of accounting today is in many ways much the same as what was developed over 500 years ago.
See also DEBIT, CREDIT; INCOME STATEMENT, GROSS MARGIN.