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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

#181

Post by jncfhnb »

rjinman wrote: post #104

Double-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…

Imo the only time the terms get confused is because there are classes of accounts where it was decided it was preferable to give it the opposite name rather than carry a negative balance. If we didn’t do that, the separation would be intuitive.

Re: Double-entry bookkeeping as a directed graph

#182

Post by freedomben »

abdullahkhalids wrote: post #162
abtinf wrote: post #150

Earlier quoted context omitted.

> So many graphs with the independent variable on the Y axis I was perplexed by this as well and none of my profs could cogently explain it. The classic example are supply and demand curves, with price as the Y axis. I finally realized they are actually trying to communicate that price is not under the control of the buyer or seller, but that the market dictates the price given a level of production. This kind of “sp…

Indeed, one of the main problems with econ education is that at the most basic level they teach a model for the "spherical cow" free-market. Which is all that most people end up learning. And then those people try to apply this reasoning to real world markets - the vast majority of which do not satisfy the assumptions of the free-market model. So almost all public discussions of micro-economics is totally useless.

I mostly agree, but I hardly think it's useless. Much like beginning your understanding of physics with Newtonian equations, it just needs to be qualified. But it's shocking how many people don't understand the basic idea of supply and demand and how the relate relative to some rationing system (usually price).

If you don't understand that foundational idea, then considering the effects of different rationing systems is utterly impossible. For example, that gets you a whole lot of people who make decisions that exacerbate housing crises by creating rent controls or building restrictions, and then being utterly perplexed when there isn't enough supply to go around (because they decoupled the signalling mechanism that the suppliers use (aka price) from what the buyers use (who got there first, or who is luckier with timing, or who is more politically connected). This is not to say that price controls are always bad, because real life is much more complicated than econ101 concepts lay out. But with nearly every other subject we expect people to have a basic level of understanding (like biology, history, english, etc) because we recognize it's importance for society and individuals to have at least a basic level of understanding in many different subjects. One that has as big an impact on life as economics seems like one of the worst to omit.

Just like we tell 8th grade physics students that "in the real world, cows aren't spherical so it's a little more complicated than this, but this gets you 80% to 90% of the way there" I don't see why we shouldn't do the same for economics.

Re: Double-entry bookkeeping as a directed graph

#183

Post by chimeracoder »

Mister_Snuggles wrote: post #175
chimeracoder wrote: post #127

Earlier quoted context omitted.

> Unfortunately, QuickBooks won't help you understand accounting. It's not a true double-entry accounting system, at least it wasn't the last time I touched it. QuickBooks absolutely is a double-entry accounting system. The "bookkeeper" mode abstracts away and hides what's going on under the hood, but if you enter "accountant" mode, you'll see the full ledger, and you can even make direct journal entries to modify it…

I must have only ever encountered it in "bookkeeper mode". That abstraction is likely what threw me off!

> I must have only ever encountered it in "bookkeeper mode". That abstraction is likely what threw me off!

I personally find the bookkeeper mode very confusing, and having observed others (non-accountants) using it to manage small businesses, I think that folks would be better off taking a one-day course in accounting and learning just enough to use it in accountant mode.

You don't have to be a CPA, just literally enough about A = L + E to follow the flow within Quickbooks and record one side of each entry.

Re: Double-entry bookkeeping as a directed graph

#185

Post by grantc »

mikeyouse wrote: post #146
EvanAnderson wrote: post #132

Earlier quoted context omitted.

The accounting equation is the right thing to think about. People want debit and credit to mean something more than they need to. My 100-level accounting instructor said it pretty succinctly: Debit means an entry in the left column. Credit means an entry in the right column. What a transaction means for the business depends on the accounts.

Right - the words themselves aren't as important as the concept. Any replacement word will suffer the same confusion. There's a reason that the language of debits and credits has largely remained the same for the past thousand years, and the language describing accounting is unlikely to be 'optimized' by first-principles CS concepts from people only loosely familiar with the field.

Well said. It's actually not complicated or arbitrary. It also works effectively in practice over the gdp of the known universe. If you are savvy enough to be interested in and understand the different computing approaches to double-entry bookkeeping, one can assume the whole DR/CR concept isn't beyond you.

Re: Double-entry bookkeeping as a directed graph

#186

Post by [deleted] »

sudhirj wrote: post #140
rjinman wrote: post #104

Double-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…

The way I understand debits and credits is to take the same equation and name the left and right side. Assets + Expenses = Equity + Income + Liabilities Sum of all debits = sum of all credits These two equations have their sides associated. Assets and equities increase with a debit and decrease with a credit, and vice versa.

[deleted]

Re: Double-entry bookkeeping as a directed graph

#187

Post by lisper »

pessimizer wrote: post #168
lisper wrote: post #160

Earlier quoted context omitted.

> A debit doesn't have some intrinsic meaning about the "flow of money". But it does. "Debit" is an English word with an established meaning in common usage. It means to take money out of an account. It is related to the word "debt" which is something that decreases the net worth of the debtor and increases the net worth of the creditor . If you overpay a bill, the (positive) difference between what you paid and what…

> If you overpay a bill, the (positive) difference between what you paid and what you owed is a credit on your account Or it's a debit on the company's account. I think that's the point that was being made; not to confuse technical terms with English common usage, and not to go to the dictionary or etymology(!) as the arbiter. Debits are credits and credits are debits, but the real question is which column does it go…

> Or it's a debit on the company's account.

That's exactly right. They owe you money, so it is (or at least it should be) a credit on your account, and a debit on theirs. But that is not what the definition given in the article says. TFA's definition of "credit" was "An entry that represents money leaving an account" and likewise a debit is "An entry that represents money entering an account." So when you paid your bill, that was (by the articles definition) a credit to your checking account and a debit to your account with company whose bill you were paying, which is exactly backwards. According to the standard English definitions, a credit is something that makes your net worth go up, and a debit is something that makes your net worth go down. So when you pay your bill, that should be a debit to you (cash going out decreases your net worth) and a credit to the counterparty (cash coming in increases their net worth).

> Same nature as discussions about clients/servers.

How so? It seems to me that distinction is clear: the client is the machine that initiated the connection, the one that did the DNS lookup.

Re: Double-entry bookkeeping as a directed graph

#188

Post by lisper »

freedomben wrote: post #169
lisper wrote: post #147

Earlier quoted context omitted.

But that just begs the question because you have to remember the arbitrary assignments of what things go on the left and what things go on the right.

It's easy! Debits add to the left, credits add to the right :-) (to be clear, I'm backing up your point by giving the same circular explanation that I got constantly through Accounting 101 and 102, and then occasionally after that when dealing with the books)

Yeah, they should be called leftits and rightits. Or CARs and CDRs.

Re: Double-entry bookkeeping as a directed graph

#189

Post by fauigerzigerk »

lisper wrote: post #157
mijoharas wrote: post #122

Earlier quoted context omitted.

> The "credit" and "debit" terminology is ridiculous because their definitions swap around depending on which account you're talking about, which is an utterly absurd (mis)use of language and the main reason people find this confusing What would you suggest as an improvement? The article suggests "incoming" and "outgoing" which seems to have the same issue, as does everything I see in your comment (the person spendin…

> What would you suggest as an improvement? Use the intuitive meaning of the words: a credit means you have money coming in, a debit means you have money going out. An increase in assets, income, or equity is a credit, and an increase in expenses or liabilities is a debit, and vice versa. Or, alternatively, just use "credit" for any increase, and "debit" for any decrease. But this: "Definition 6: Credit - An entry th…

>Use the intuitive meaning of the words: a credit means you have money coming in, a debit means you have money going out. An increase in assets, income, or equity is a credit, and an increase in expenses or liabilities is a debit, and vice versa.

An increase in assets is a debit.

>Or, alternatively, just use "credit" for any increase, and "debit" for any decrease.

How is this consistent with the fact that an increase in my bank account balance is a debit?

Re: Double-entry bookkeeping as a directed graph

#190

Post by lisper »

nuttingd wrote: post #171
lisper wrote: post #147

Earlier quoted context omitted.

But that just begs the question because you have to remember the arbitrary assignments of what things go on the left and what things go on the right.

It's the accounting equation being represented in canonical form. A chart of accounts is visualized in the minds of an accountant as: Assets | Liabilities + Equity Accounts classified as assets are debit accounts (left side), and accounts classified as liabilities or equity are credit accounts (right side). The theory discussed everywhere in this thread is sound. You really don't need to use terminology like debit/cr…

> You really don't need to use terminology like debit/credit for accounting.

That's exactly right -- you don't need to. The problem is that people do use this terminology, and they use it in a way that conflicts with common usage, which makes a very simple concept vastly more confusing than it needs to be.

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