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Double-entry bookkeeping as a directed graph

matheusportela.com

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Re: Double-entry bookkeeping as a directed graph

#91

Post by btown »

fauigerzigerk wrote: post #87
btown wrote: post #58

Earlier quoted context omitted.

In all fairness, if you're trying to understand a piece of software like Quickbooks and are not coming from an accounting background, anthropomorphizing each "account" at your company as an individual actor with their own ledger can actually be a helpful mental model. Everything needs to be a dance between actors, and, for instance, when you make a vendor payment in cash, you can only do so as a message sent simultan…

>Double-entry, I suppose, means each event must be ingested exactly once by an even number of actors.) No, the number of accounts (actors) does not have to be even. The sum of debits and credits has to be equal (or zero if you like).

You're right - it was a silly thing for me to write! Something more accurate would be that because debits and credits must balance, there is no way to send a message that would only be seen by a single account (other than a no-op); thus, any meaningful transaction will have an impact on at least two accounts.

Re: Double-entry bookkeeping as a directed graph

#92

Post by rahimnathwani »

t_mann wrote: post #71
rahimnathwani wrote: post #42

Earlier quoted context omitted.

Not really, the meaning of debit and credit depends on the type of account That's how most accountants think about it. But I think there's something more fundamental: a CR entry is an increase is what the company owes (to creditors or shareholders), and a DR is an increase in what the company owns. EDIT: see this link for how this relates to the accounting equation https://news.ycombinator.com/item?id=32501707

That's (somewhat) true for accounts that represent stocks (assets, liabilities, not really for equity though), it's not true for accounts that represent flows (income, expenses). Income is recorded as a credit entry in an income account, eg (the corresponding debit entry would typically be on something like a current account or claims on customers).

Consider the positioning of income and expense accounts within the accounting equation. Essentially, they are components of equity. View equity as the company's obligation to its shareholders. A credit entry signifies an increase in what the company owes, whether to creditors or shareholders, while a debit entry reflects an increase in the company's assets.

Re: Double-entry bookkeeping as a directed graph

#93

Post by atomicfiredoll »

Fire-Dragon-DoL wrote: post #76
atomicfiredoll wrote: post #66

Earlier quoted context omitted.

Remember, this was all done on paper before software with tagging and such existed. I'll give a description shot, since I've been doing finance work recently. Other people can feel free to correct. A company using double entry (as opposed to single) has a "chart of accounts." This means they have a bunch of imaginary accounts for tracking everything, including: - Assets (e.g. cash on hand.) - Liabilities (e.g. loans)…

How do you determine which thing goes in which account, is it subjective or there is a formal way with a definition

The chart can differ in different companies or sectors. In my mind, it comes back to what you want to be able to report on.

Some companies may have a larger and more detailed chart of accounts so that they can have very specific breakdowns of things. I've heard of big charts where each of a company's departments have specific accounts and all departmental transactions go there while the rest are lumped into a "Sales, General, and Admin" bucket. (Although I think it's more common to tag transactions with a department code these days?)

That said, categories can be broken down into sub-types beyond Assets/Liabilities/Equity/Income/Expenses. For example, assets are categorized based on how quickly they can be converted to liquid money and if they physically exist. So, under the assets account you may have accounts for current, fixed, and intangible (e.g. trademark or domain name) assets and you would record those appropriately.

Edit: To answer the question more directly, it depends on the company and how they've customized their accounts or guidelines. But, there are general accounting practices that mandate the need for specific things and common questions to be answered, so a lot similar structures and guidance emerge that a company's finance team could use to tell you where something belongs.

Re: Double-entry bookkeeping as a directed graph

#94

Post by PopAlongKid »

atomicfiredoll wrote: post #66
Octokiddie wrote: post #47

Earlier quoted context omitted.

Every explanation of double entry accounting seems to do the same thing. If I'm trying to understand the double part of double-entry bookkeeping, what exactly does the "double" refer to? What's being "doubled"? How would you salvage the article to actually explain the "double" part in detail? Could you do it purely from Bob's (or Alice's) perspective?

Remember, this was all done on paper before software with tagging and such existed. I'll give a description shot, since I've been doing finance work recently. Other people can feel free to correct. A company using double entry (as opposed to single) has a "chart of accounts." This means they have a bunch of imaginary accounts for tracking everything, including: - Assets (e.g. cash on hand.) - Liabilities (e.g. loans)…

>A company using double entry (as opposed to single) has a "chart of accounts." This means they have a bunch of imaginary accounts for tracking everything, including:

   - Expenses (e.g. team lunch or a flight cost)
   - Liabilities (e.g. loans)
   - Equity (e.g. investments in the company from outside parties)
   - Assets (e.g. cash on hand.)
Not sure why you didn't complete your list by adding "Income".

Re: Double-entry bookkeeping as a directed graph

#95

Post by nolongerthere »

toong wrote: post #46
em-bee wrote: post #18

Earlier quoted context omitted.

i was about to write the same thing. knowing that double-entry is meant to apply to myself only, i actually found the example confusing, because well, of course bob is going to have an entry in his accounting book, but i don't care about bobs accounts, i don't want to track that. i only care about mine. i buy a book. how do i record this transaction using double entry bookkeeping in my accounting book? and bob is not…

You gained $20 worth of assets, so the counterpart of the $20 leaving your bank account is countered by your assets-account gaining $20 Now each year your book loses 1/5th of its value, due to wear and tear (4$ disappearing from your assets-account), this is countered by your depreciation-account (4$ tax write off, every year!) After 5 years, it is worth $0 according to your books, but you manage to sell it again for…

This is the best explanation, everyone else is giving wrong explanations that appear to be at least partially sourced from some AI.

Re: Double-entry bookkeeping as a directed graph

#96

Post by nyrikki »

shiandow wrote: post #86
nickpinkston wrote: post #7

I think people underestimate the beauty and impact of accounting. Just a tiny number of formulas (accounting identities [1]) and statements (P&L, balance sheet, etc.) can represent what's going on in any org in ways that can be roughly comparable. Reminds me of the "fundamental theorem of calculus" or "central dogma of biology". Accounting is also where we get math and written language [2] as ancient Mesopotamian civ…

I know people underestimate the impact. Before the 1800s or so Europe didn't have negative numbers, except for the odd mathematician who claimed you could calculate with them even if they were obviously meaningless. It was only after bookkeeping became ingrained into all levels society that negative numbers were considered equally real as positive numbers.

They didn't have modern notation, specifically the integers as a convention hadn't been adopted by primarily Greek mathematicians like Diophantus.

That is very different from understanding concepts like owing someone money, which is a form of negative.

Chinese and Indian mathematicians and accounting from Babylonian times didn't have the same mental blocks.

The Bakhshali manuscript is still the first known example of modernish notation I think, but used +

Re: Double-entry bookkeeping as a directed graph

#97

Post by PopAlongKid »

alexb_ wrote: post #39
wongarsu wrote: post #17

Earlier quoted context omitted.

On the other hand some things in how accounting is traditionally done suffer from accounting predating a lot of "modern" math. Negative numbers were first used around the 3rd century in China and took until the 16th century to be used in Europe. Modern double-entry bookkeeping was invented in the 14th century in Europe. So if you ever wonder why they traditionally use a column for debit and one for credit, with defin…

I wonder if this is why losses are written down with () instead of -.

It's just to make it more visually apparent. A tiny preceding hyphen is easy to miss. Same reason why negatives are sometimes printed in red, leading to such phrases as "drowning in red ink".

Re: Double-entry bookkeeping as a directed graph

#98

Post by fauigerzigerk »

bregma wrote: post #88
Octokiddie wrote: post #47

Earlier quoted context omitted.

Every explanation of double entry accounting seems to do the same thing. If I'm trying to understand the double part of double-entry bookkeeping, what exactly does the "double" refer to? What's being "doubled"? How would you salvage the article to actually explain the "double" part in detail? Could you do it purely from Bob's (or Alice's) perspective?

Every time money is exchanged, it has to come from somewhere and it has to go somewhere -- that's two places it need to be recorded (or "entered in the books"). Money can not be created out of thin air, and it can not be destroyed. Every movement of money has to be accounted for, which is why it's called "accounting". Double-entry accounting means you have to account for where the money comes from, and you have to ac…

>Where it can become confusing is when money leaves you or comes in from an external source. There are still two entries, but one entry is in one party's books and the other entry is the other's. For example, I get a paycheque and I enter my income in a little book with green paper and DB/CR columns. At the same time, my employer has entered an expense in their book. Double entries.

I agree with your first two paragraphs but not with this last one. When money leaves you or comes in from an external source, there is always some proxy account for that external party in your own books. And the whole situation is mirrored in the accounting system of the external party (unless they are a consumer). Each party records two entries.

Re: Double-entry bookkeeping as a directed graph

#99

Post by atomicfiredoll »

PopAlongKid wrote: post #94
atomicfiredoll wrote: post #66

Earlier quoted context omitted.

Remember, this was all done on paper before software with tagging and such existed. I'll give a description shot, since I've been doing finance work recently. Other people can feel free to correct. A company using double entry (as opposed to single) has a "chart of accounts." This means they have a bunch of imaginary accounts for tracking everything, including: - Assets (e.g. cash on hand.) - Liabilities (e.g. loans)…

>A company using double entry (as opposed to single) has a "chart of accounts." This means they have a bunch of imaginary accounts for tracking everything, including: - Expenses (e.g. team lunch or a flight cost) - Liabilities (e.g. loans) - Equity (e.g. investments in the company from outside parties) - Assets (e.g. cash on hand.) Not sure why you didn't complete your list by adding "Income".

Thanks, I was sure I was missing something obvious like that when trying to simplify the explanation.
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