Double-Entry Bookkeeping is great - I have learned it when started implementing ERP systems.
This article is a bit overcomplicated and also, where is the Balancing Entry for the Opening Balances? It should be balanced against some Technical Account...
Double-entry bookkeeping as a directed graph
111–120 of 388 posts
Re: Double-entry bookkeeping as a directed graph
#112Earlier 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)…
So double entry is defeated if you uses a computer to enter the entries. For example if you brought a laptop for 1000, but you accidently wrote 2000 AND the computer automatically entered 2000 in the asset account it would still balance even though it was a mistake to enter 2000.
In addition, you can still make the same mistake by hand for both entries. So I’m still not getting how double entries catch mistakes
Re: Double-entry bookkeeping as a directed graph
#113Earlier 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…
What if your company decides to be generous and just gave 1000 to random Joe, what is the double entry for that?
Re: Double-entry bookkeeping as a directed graph
#114Earlier 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)…
So double entry is defeated if you uses a computer to enter the entries. For example if you brought a laptop for 1000, but you accidently wrote 2000 AND the computer automatically entered 2000 in the asset account it would still balance even though it was a mistake to enter 2000. In addition, you can still make the same mistake by hand for both entries. So I’m still not getting how double entries catch mistakes
When you reconciled the balance in your bank account / credit card statement against that in your set of accounts, you'd notice the error as the statement balance would be 1000 higher than reflected in your accounts.
Re: Double-entry bookkeeping as a directed graph
#115I find it a strange choice to explain double-entry bookkeeping with the example of "one entry for Alice, one entry for Bob". That's really not what it's about. It's obvious that a transaction with two parties could be recorded in two places, but to me the crucial point of double-entry bookkeeping is that it requires two entries for each party of the transaction . So if Alice buys book from Bob, four entries are made.…
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?
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Re: Double-entry bookkeeping as a directed graph
#116Double entry can track networth better. Instead of a single entry of recording 500$ paid for laptop, which decreases your networth by 500, in reality you still have 500$ worth of a laptop in your hand. You would also record the asset increase as a +500$ from gaining a laptop. Which reflects reality of your situation better.
Re: Double-entry bookkeeping as a directed graph
#117Earlier quoted context omitted.
It’s a checksum; by decomposing every transaction into a double of (credit A, debit B) that must sum to zero, you catch random arithmetic errors. You can think of it as “conservation of value”, so you can’t just create money out of thin air in your payment service (credit), without tying it to some account with a corresponding debit. This originally was intended to protect against typos; eg write a 10 instead of 100,…
> This originally was intended to protect against typos; Double entry bookkeeping is much older than typing, but, yes, its a check against incorrect entries.
Babylonian dogs walking on your clay tablet.
Re: Double-entry bookkeeping as a directed graph
#118This is my mental model and how I built the backend of a budgeting web app. Two types of accounts: - assets (you want your balance to be more than 0) - liabilities (you want your balance to be 0) Two types of entries: - debits (increase balances of assets, decrease balances of liabilities) - credits (increase balances of liabilities, decreases balances of liabilities) Rules: - A transaction represents a transfer of v…
Given just the two accounts you have, your goals are impossible to achieve, because Assets = Liabilities, so you cannot have one more than zero and the other zero. I think in this problem hides two mistakes: - Zero liabilities is not a reasonable goal for most people. - There's an equity account type also. (Also income and expense accounts.)
I don't understand your point. But instead of rationalizing with words, let's put it into practice.
- I receive my paycheck in my bank account.
- I want to budget $800 for groceries every month.
- I have a credit card with a balance of $250.
- I want to know how much I have left; we will have an account named Left to Budget (LTB).
Let's outline them as accounts:
- Bank Account. It's an Asset and has a balance of $0.
- Groceries "category" Account. It's a Liability and has a balance of $0.
- AMEX Account. It's a Liability and has a balance of $250.
- LTB is my income account. It's a Liability (yeah, I know, but stay with me).
When I receive my $1,000.00 paycheck.
- Debits Bank (ASSET) for $1,000.00
- Credits LTB (LIABILITY) for $1,000.00
Balances:
- Bank (ASSET) $1,000.00
- Groceries (LIABILITY) $0.00
- AMEX (LIABILITY) $250.00
- LTB (LIABILITY) $1,000.00
I budget $800 for Groceries for this month.
- Debits LTB (LIABILITY) for $800.
- Credits Groceries (LIABILITY) for $800.
Balances:
- Bank (ASSET) $1,000.00
- Groceries (LIABILITY) $800.00
- AMEX (LIABILITY) $250.00
- LTB (LIABILITY) $200.00
I go to the grocery store and buy Milk for $50 and Bread for $10.
- Credits Bank (ASSET) for $60.00
- Debits Groceries (LIABILITY) for $60.00
Balances:
- Bank (ASSET) $940.00
- Groceries (LIABILITY) $740.00
- AMEX (LIABILITY) $250.00
- LTB (LIABILITY) $200.00
As of now, I effectively know that:
- I have $940 in my bank, but I only have $200 available to spend (LTB).
- I have $740.00 left to spend on Groceries in my Bank.
- If I wanted to pay my Credit Card (AMEX) in full, I couldn't. Even though I have enough money in my Bank, most of it is already allocated to Groceries. BUT I could adjust my budget, like so:
Adjust my Groceries budget by moving $50 back to my LTB, so I can pay my Credit Card in full this month.
- Debit Groceries (LIABILITY) for $50
- Credit LTB (LIABILITY) for $50
Balances:
- Bank (ASSET) $940.00
- Groceries (LIABILITY) $690.00
- AMEX (LIABILITY) $250.00
- LTB (LIABILITY) $250.00
OK, so now I know that:
- I still have $940.00 in my bank.
- If I wanted to pay my Credit Card I can because I have enough in my LTB category.
- I have $690.00 available to spend in Groceries, because I moved $50.00 away.
Now, let's pay my Credit Card.
- Credit Bank (ASSET) $250.00
- Debit AMEX (LIABILITY) $250.00
Balances:
- Bank (ASSET) $690
- Groceries (LIABILITY) $690.00
- AMEX (LIABILITY) $0.00
- LTB (LIABILITY) $0.00
Now the money I have left in the Bank is for Groceries only. If I wanted to spend on something else, I'd have to either:
- Create a new Category and transfer an amount from Groceries, or
- wait for my next paycheck.
--
We were able to manage all this information with only one bank account, but we successfully managed a small budget.
Double-entry is a concept that's not necessarily applied directly to "physical" accounts. We transfer values between accounts even when the money stays where it is.
> - Zero liabilities is not a reasonable goal for most people.
Zero liabilities is not a goal; it's the direction on whether money balance increases or decreases; it's not tied to the money you have or owe. It's a concept or formula rather than a reality.
> - There's an equity account type also. (Also income and expense accounts.)
Equity and expenses are Assets. Income can be an Asset or a Liability, depending on how you want to represent it. For me, it is a liability because I want it to be 0. Even tho, my income account will have money, its representation of Money Left to Budget will be zero because the accounts that transfer value from it will include savings or investing accounts.
Re: Double-entry bookkeeping as a directed graph
#119Double-entry bookkeeping is very easy to understand once you ditch the ridiculous "credit" and "debit" terminology. Essentially, the goal is to keep the accounting equation true at all times. The equation is: Equity = Assets - Liabilities. Eventually, earnings (Income - Expenses) will become part of equity, so splitting that out, you have: Equity + Income - Expenses = Assets - Liabilities. Rearranging to get rid of t…
Double entry bookkeeping is very easy to understand once you ditch the ridiculous "accounting equation".
"Credit" means "source", "debit" means "sink".
Suppose you invoice a customer 10,000 euros. You now have a promise for 10,000 euros, but you account in dollars so it's a promise for 11,000 dollars at current exchange rates. So you credit the source, your "Income: Customer A" account ("income" and "expense" accounts represent the external world) $11000, and debit "Assets: Accounts Receivable" (an account for trade-credit promises like this) $11000.
Later, the customer pays your invoice, which gets you $10,500 because exchange rates have moved around. How do you account for this?
Your promise, which you accounted as $11000, is the source, so you credit Accounts Receivable $11000. You debit cash $10500, because you got $10500 in cash. Finally, credits and debits have to balance, so you debit "Expenses: Loss on Foreign Exchange" $500. (recall that "expenses", like "income", represents the external world, and you lost the other $500 to forex traders or whatever.)
Since you don't liquidate the business on any typical day of its operation, why would you attempt to figure out how that $500 fits into a hypothetical instantaneous liquidation when you could just... account for it by balancing credits with debits? (You do sort of instantaneous-liquidate when preparing financial statements, an infrequent task which is very mechanical compared to ledger entry.)
Re: Double-entry bookkeeping as a directed graph
#120Earlier quoted context omitted.
I wonder if this is why losses are written down with () instead of -.
Yes, that's part of it. The lengths accountants will go to to avoid having to deal with negative numbers is a bit funny.
it’s because they know it’s a slippery slope into allowing imaginary and irrational numbers, which is how accountants go to prison.