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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

#231

Post by tantalor »

braiamp wrote: post #152
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…

Because people don't understand that credit and debit only make sense in the context of the account being applied to. If you deposit money to your bank account, it's a credit in your . If you withdraw money from the ATM, you debit your bank account and credit your cash account. But globally you haven't gotten more money.

> If you withdraw money from the ATM, you debit your bank account and credit your cash account

You have that exactly backwards!

Assets (like bank accounts and cash) are "debit accounts" meaning they increase with debits and decrease with credits.

When you withdraw money from your bank account, the bank account goes down, so we know that must be a credit to the bank account, while the cash goes up, that is a debit to the cash account.

Your confusion might be due to perspective. From the bank's view your bank account is a liability (credit account) so it increases with credits and decreases with debits.

Re: Double-entry bookkeeping as a directed graph

#233

Post by EvanAnderson »

ebolyen wrote: post #222

I see a lot of consternation about credits and debits and the nomenclature. Something that makes this simpler to think about from a modern perspective is that accounting is older than the popular use of negative numbers. By a lot. If we were to invent accounting today, we'd probably use positive and negative accounts instead of debit and credit accounts. Algebra over addition is second nature to us at this point, but…

I enjoy using the alliteration of "Capital" and "Credit" to remember the normal balance of the capital/equity accounts. Memorizing that and the accounting equation is all that's necessary to derive the normal balances of every other account type.

Re: Double-entry bookkeeping as a directed graph

#234

Post by randomdata »

tromp wrote: post #126
m3kw9 wrote: post #113

Earlier quoted context omitted.

What if your company decides to be generous and just gave 1000 to random Joe, what is the double entry for that?

Cash account is credited $1000, and Gifted (or Cash_Gifted) account is debited $1000.

That method only works if money can be created out of thin air, and also destroyed. The grandparent comment was pretty clear that money cannot be created out of thin air, nor can it be destroyed.

A curious contradiction. How do we resolve it?

Re: Double-entry bookkeeping as a directed graph

#235

Post by nlitened »

lisper wrote: post #190
nuttingd wrote: post #171

Earlier quoted context omitted.

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.

> 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

I used to think that way, then I understood this thinking is the exact opposite of what’s happening.

Hundred million people on earth know how to work with debit and credit exactly as it has been written in accounting books for hundreds of years. When you need to expand your accounting department, you go and hire a person who understands things exactly the same way as your current accountants, can pick up their work, they can communicate effectively. As a CEO, you are spared of teaching every new junior accountant your own flavor of first-principles accounting, you don’t need to write your custom accounting software, and convert your company’s books for tax authorities and outside auditors who are not familiar with your system.

Same with music notation. Same with Java language. Same with every other piece of human knowledge.

Re: Double-entry bookkeeping as a directed graph

#236

Post by tantalor »

mijoharas wrote: post #122
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 "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…

I solve this by remembering "debit = destination" (d=d) in all cases.

Examples:

If you deposit money into a checking account (asset) that is a debit (account increases) because the money "goes to" in that account (destination).

If you borrow money from a credit card (liability) that is a credit (account increases) because the money "comes from" that account (not destination).

The hard part is remembering debit accounts increase with debits, and credit accounts increase with credits.

Re: Double-entry bookkeeping as a directed graph

#237

Post by yandrypozo »

EvanAnderson wrote: post #233
ebolyen wrote: post #222

I see a lot of consternation about credits and debits and the nomenclature. Something that makes this simpler to think about from a modern perspective is that accounting is older than the popular use of negative numbers. By a lot. If we were to invent accounting today, we'd probably use positive and negative accounts instead of debit and credit accounts. Algebra over addition is second nature to us at this point, but…

I enjoy using the alliteration of "Capital" and "Credit" to remember the normal balance of the capital/equity accounts. Memorizing that and the accounting equation is all that's necessary to derive the normal balances of every other account type.

nice trick, thanks!

Re: Double-entry bookkeeping as a directed graph

#238

Post by [deleted] »

mrkeen wrote: post #220
thetwentyone wrote: post #200

Earlier quoted context omitted.

The -5 doesn't belong in your ledger, it belongs in the ledger of the person who bought the lemonade. As other commenters have pointed out, the "double entry" refers to multiple entries within your own ledger, it has nothing to do with someone else's ledger.

> The -5 doesn't belong in your ledger, it belongs in the ledger of the person who bought the lemonade. This is just prescriptive (do it because I say so). It doesn't explain anything. > As other commenters have pointed out, the "double entry" refers to multiple entries within your own ledger, it has nothing to do with someone else's ledger. I didn't introduce the other guy's ledger, but since you did: I lost lemonad…

[deleted]

Re: Double-entry bookkeeping as a directed graph

#239

Post by vezuchyy »

Ten years in SAP working on FI, SD and AA. (not anymore, I'm done with that)

The post triggered PTSD and I want to go home and cry. You created your double entry, cool, now let's split it (because of million reasons) and add taxes. So now we deal with a basic 25 line document where some lines are doing nothing but move funds through certain tax accounts. Oh, no, there is a typo, but we cannot just create the reversal because for some accounts, the transaction should stay reflected in turnovers, for some it should not and for most it depends on fiscal period and stuff.

Don't forget that everything varies between countries. With all that let's create a financial statement for eg Walmart (who has every line item sold posted to SAP system when you buy things at store)

Re: Double-entry bookkeeping as a directed graph

#240

Post by ericpauley »

vezuchyy wrote: post #239

Ten years in SAP working on FI, SD and AA. (not anymore, I'm done with that) The post triggered PTSD and I want to go home and cry. You created your double entry, cool, now let's split it (because of million reasons) and add taxes. So now we deal with a basic 25 line document where some lines are doing nothing but move funds through certain tax accounts. Oh, no, there is a typo, but we cannot just create the reversal…

> Walmart (who has every line item sold posted to SAP system when you buy things at store)

Shudders

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