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Double-entry bookkeeping as a directed graph

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Re: Double-entry bookkeeping as a directed graph

#261

Post by epcoa »

lisper wrote: post #224
mhink wrote: post #206

Earlier quoted context omitted.

That's not entirely correct- or at least, it's more complicated than that. The question of whether a debit/credit increases/decreases an account has to do with the kind of account you're talking about. When I deposit money, it modifies two accounts at the bank: - the account which represents how much money they owe me - and the account which represents how much money they have on hand. The former is a liability, and…

The problem is that whether something is an asset or a liability depends on your point of view. If I have $100 in cash, that is an asset to me and a liability to the rest of society. If I have a $100 loan, that is a liability to me and an asset to my creditor. So there is no way to say whether something is an asset or a liability in an absolute sense. Every debt is an asset to the creditor and a liability to the debt…

> It increases liability only from the bank's perspective.

You missed the context: When I deposit money, it modifies two accounts at the bank.

It appeared to me they were very much explaining this from the banks or utility company’s perspective.

Re: Double-entry bookkeeping as a directed graph

#262

Post by eviks »

renewiltord wrote: post #248
eviks wrote: post #205

Earlier quoted context omitted.

Depreciation isn't relevant here, again, you're confused in the types of assets, not all of them are depreciated, only some with some specific properties like time of expected user. Just read the definition of assets in any (accounting) dictionary, or try to record your snack purchase in real accounts and see which side of the balance sheet this account end up in (hint: inventories, assets).

Do you actually do that? When people are working late at the office and you order pizzas you put that into your inventory and then remove it as people consume the pizzas? I record that into a separate operating expenses account meant for this kind of fringe benefit, not into inventory. Pretty small so I do the accounting as well, but I think I'd lose my mind if I had to record them into inventory. Then when they leav…

you don't need to record the halves, nothing stops your pizza order to be automatically recordered as

-A_cash +A_inventory

-A_inventory + L_expenses

Sure, if your pizza is frozen and consumed in another period, your books will not reflect reality, but so what, when talking about the very basics of accounting you offset that misrepresentation of a simple example by gaining an important pedagogic benefit! Which one, though? What do you gain by denying that pizza is an asset, going so far as calling recognition of an asset as an asset a fraud (but only in extreme cases of 5 pizzas!) and bringing depreciation/core business in?

Re: Double-entry bookkeeping as a directed graph

#263

Post by mrkeen »

thomastjeffery wrote: post #225
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 purpose of the words "credit" and "debit" is the same purpose of the structure of double-entry bookkeeping: to make every statement unambiguous, no matter what order or context you put the words in. By replacing familiar verbs like "paid" and "earned" with the nouns "debit" and "credit", we can write sentences where the order of words doesn't change the meaning, and where we never need to figure out what tense (p…

> Bob's account has a credit of $12 and a debit of $7

(I'm 80% sure that the above reads that Bob actually owns $5 he can spend. But I'm equally sure that I get Debits and Credits backward, so I probably read it wrong.)

In any case, you've only described a single account at rest. You need to go one step further and describe an entire transaction in those terms, so that someone can swoop in and say "you got it backwards".

Re: Double-entry bookkeeping as a directed graph

#264

Post by BayesianDice »

test6554 wrote: post #204
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?

Bob and Alice each have a "money" account and a "books" account. Each money account tracks how much money they have on hand while each books account tracks the total value of their private libraries. So to be clear, there are 4 accounts. Bob's Money, Bob's Books, Alice's Money, Alice's Books. Because these two homeless librarians only have money and books, you can add the two balances together for each person to get…

And when the book is ruined, she credits her books account (an asset account) $20 and debits her "depreciation/impairment" account (an expense account) $20.

Re: Double-entry bookkeeping as a directed graph

#265

Post by nuttingd »

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.

> which makes a very simple concept vastly more confusing than it needs to be.

Agreed. The concepts are all very simple. You can throw away all of the domain-specific terminology and reason about accounting theory with nothing but positive and negative numbers.

The utility of the confusing terminology and age old accounting frameworks isn't obvious unless you are a practitioner living "in it". It's not until you face the complexities of real world transactions (an accountant booking closing entries for a F500 company or something) that the strange left/right debit/credit way of thinking is very valuable.

Re: Double-entry bookkeeping as a directed graph

#266

Post by rahimnathwani »

lurkingmba wrote: post #250
rahimnathwani wrote: post #216

Earlier quoted context omitted.

It sounds like your accounting instructor may have focused too much on implementation details (left/right), and too little on accounting principles. The terms debit and credit have meaning independent of their columnar position on a traditional ledger. I could create a ledger with the columns reverse or (shocking!) use a computer program with a data structure that doesn't encode the concept of left or right. I think…

That's too simple. That logic roughly works the balance sheet. However, it says nothing about the income statement. For the income statement, CR -> revenue and DR -> expense.

I addressed this earlier: https://news.ycombinator.com/item?id=39991837

When you record transactions in accounting, you're updating various account balances, such as assets, liabilities, and equity. These updated balances contribute to the creation of the balance sheet, which provides a snapshot of a company's financial position at a specific point in time.

The income statement, on the other hand, reflects the changes in these balances over a period of time. There's nothing special about the line items on the income statement (e.g. revenue or expense). Any value on the income statement represents a change in what the company owns (assets) or what it owes (liabilities or equity).

Re: Double-entry bookkeeping as a directed graph

#267

Post by jfengel »

t_mann wrote: post #253
jfengel wrote: post #195

Earlier quoted context omitted.

Thanks for that. Lemme probe a bit deeper. If you spend $X on sheep, you credit $X where? Debit it from where? You put "$X worth of sheep" on what account? When the sheep die, do you credit some account with "$X worth of dead sheep?" (Where presumably they remain as dead-sheep forever.) (I'm sorry, I know that sounds dumb.) How is that "$X worth of dead sheep" different from "$X worth of security guarding" that you s…

> If you spend $X on sheep, you credit $X where? Debit it from where? You debit your 'sheep' account (maybe called sth like inventory) and you credit your cash account, or a liabilities towards suppliers account. Your equity stays constant in either case (no profit or loss impact), if you paid cash you've swapped X worth of cash for X worth of sheep, otherwise your liabilities went up by X. When they die, you debit s…

Thank you. I really appreciate that.

It still feels exactly the opposite of what I thought a credit and debit were. Surely when you add sheep, you credit the sheep account and debit the cash.

I get it. It's just a shift.

Re: Double-entry bookkeeping as a directed graph

#268

Post by conductr »

Octokiddie wrote: post #47
dkyc wrote: post #16

I 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?

Always needs two entries to keep assets equaling liabilities plus equity. If you do anything it effects both sides of the equation, thus “double entry” is required to keep this relationship. It’s the accounting equation.

https://www.investopedia.com/terms/a/accounting-equation.asp

Re: Double-entry bookkeeping as a directed graph

#269

Post by samatman »

eviks wrote: post #205
chimeracoder wrote: post #191

Earlier quoted context omitted.

> Of course it would be, asset is anything of value, you're confusing with subtypes of assets. Just mujhe liability is anything you owe regardless of for how long If an office buys snacks on Monday for the office party on Friday, they're not counting it as an asset and depreciating it on their books. If food production or delivery were part of the core business, it would be one thing, but in the context that OP's tal…

Depreciation isn't relevant here, again, you're confused in the types of assets, not all of them are depreciated, only some with some specific properties like time of expected user. Just read the definition of assets in any (accounting) dictionary, or try to record your snack purchase in real accounts and see which side of the balance sheet this account end up in (hint: inventories, assets).

The person you're replying to is confused, but that's because accounting can be confusing.

An account is fundamentally either an asset or a liability. When you buy something with a credit card, you've incurred a liability, and gained an asset, no matter what you've purchased. If you use a debit card or cash, you're trading one asset for another.

One of the basic asset categories is expenses. That's the confusing part! When you acquire an asset, which is consumed or otherwise has no book value, that's an expense.

So when you buy groceries with a debit card for a hundred bucks, that's a +100 in Expenses:Groceries, and a -100 in Assets:Checking. If you buy the same groceries with a credit card, it's +100 in Expenses:Groceries, and -100 in Liabilities:CreditCard. When you pay off the credit card, that's -100 Assets:Checking, and +100 in Liabilities:CreditCard.

Asset is overloaded here, because Expenses are not included in calculating net assets. It's confusing! I find it even more confusing that Income is a liability, which always gets lower. That's because whoever paid you had a liability to do so, which they met out of assets.

This is also why, when you pull a CSV of a checking account, purchases are positive numbers, and income is negative. A CSV of a credit card will have purchases as negative, and payments as positive. It's the difference between an asset account and a liability account. Again, not to be confused with net liabilities: Income is a liability, but not one you owe anyone, rather the contrary, Income just gets smaller and smaller (ideally! If it isn't getting smaller then your net assets will be shrinking, most of us can't afford that for long).

The main thing is that an account which fluctuates from zero to positive, or accumulates, is an asset account. One which fluctuates from zero to negative, or accumulates negatively, is a liability account. There are times when this matters, notably when you can take a tax deduction for expenses, that's a good example of why they're on the asset side of the books.

Re: Double-entry bookkeeping as a directed graph

#270

Post by lisper »

epcoa wrote: post #261
lisper wrote: post #224

Earlier quoted context omitted.

The problem is that whether something is an asset or a liability depends on your point of view. If I have $100 in cash, that is an asset to me and a liability to the rest of society. If I have a $100 loan, that is a liability to me and an asset to my creditor. So there is no way to say whether something is an asset or a liability in an absolute sense. Every debt is an asset to the creditor and a liability to the debt…

> It increases liability only from the bank's perspective. You missed the context: When I deposit money, it modifies two accounts at the bank. It appeared to me they were very much explaining this from the banks or utility company’s perspective.

> When I deposit money, it modifies two accounts at the bank.

Yeah, I get that. I don't see what that has to do with the labels used to describe the transaction.

Actual physical cash is weird because it's an asset to its owner and a liability to the rest of society. But when you deposit cash in a bank, the bank doesn't become the owner of the cash. It has borrowed that cash from you. So that cash is both an asset (because having borrowed it from you it can turn around and loan it to someone else) and a liability (because the bank is in debt to you for the amount of the deposit).

A simpler example is depositing a check. In that case, money just gets transferred from the payor to the payee. It's a debit from the payer's account and a credit to the payee's account. Or at least that's how it should be.

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