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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

#301

Post by danielmarkbruce »

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.…

It's also technically wrong.

For example, a bank might decide you likely can't pay your loan and write it down to zero. You might still have the liability on your books because you plan to repay it. They'll make the relevant entries in their system (and the debits and credits will balance) and you'll do nothing (which balances).

Double entry bookkeeping has zero to do with other entities. It's solely about your own books.

Re: Double-entry bookkeeping as a directed graph

#302

Post by ChirronT447 »

EvanAnderson wrote: post #230
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…

The sheer amount of discussion this has created (both here and back in August, 2022, when you and I commented back and forth to each other in your link) validates my my instructor's philosophy to me. Concentrating on the accounts and the accounting equation, ignoring any "meaning" for the words debit and credit, results in the "right answer" without a lot of consternation.

I completely agree with this; I remember reading that prior thread on double entry accounting and being so frustrated and confused about the use of debit/credit terminology and then, as now, your comments (and others) were very very helpful and insightful.

Something I find frustrating is the - almost - endless debate and nitpicking on small details or elements implied but not explicitly stated...but I guess people are trying to be helpful (or right).

I didn't have an account to comment then but I really appreciated your perspective; it was extremely valuable seeing a few people saying 'forget about the credit/debit nomenclature, it's confusing' and recognising not everyone knows the terminology. Now I have an account here and can thank you for fighting the good fight again.

Re: Double-entry bookkeeping as a directed graph

#303

Post by ChirronT447 »

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…

'Double-entry bookkeeping is very easy to understand once you ditch the ridiculous "credit" and "debit" terminology.'

I love it, let's do it!

Thank you this is very helpful.

The whole credit/debit terminology usage here is incredibly confusing to someone who hasn't studied accounting and many of the comments and replies to people who are confused are, while technically correct, simultaneously, unhelpful - to those not familiar with the terminology.

I read a comment earlier: "Why would my bank account be debited when the balance went up? Is a debit not negative? Is the cash balance presented as a negative?" And thought: "Yes! Great question! This doesn't make sense..because debits are always negative right? A direct debit takes money out, you spend money using a debit card, a debit is a debt right? So debits are always negative and debiting is always minus-ing money..." - but the replies, while technically correct weren't satisfying at all because they assumed knowledge.

It's both amusing and frustrating to watch people effectively speaking past each other like they're talking a different language. Especially when you have the same perspective as the person who is confused and trying to seek understanding. It seems like people nitpick on small points of what was said seemingly in order to be right.

Re: Double-entry bookkeeping as a directed graph

#304

Post by ChirronT447 »

tantalor wrote: post #231
braiamp wrote: post #152

Earlier quoted context omitted.

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…

Do they have it backwards? It sounds like a valid perspective to me. I take money from an ATM: the number in my current account decreases, the cash I have on hand increases. Nothing wrong there.

Sure the banks perspective is different but maybe I'm not interested in that.

I love that this thread is full of people confidentally saying something that sounds correct or at least reasonable and the first reply that comes back is no you've got that wrong and then what your saying also sound's reasonable but it just seems to depend on the context and perspective.

I would have thought accounting a solved problem but apparently not.

Re: Double-entry bookkeeping as a directed graph

#305

Post by ChirronT447 »

nlitened wrote: post #235
lisper wrote: post #190

Earlier quoted context omitted.

> 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 ex…

That's because people are trained into the system.

If you started teaching it another way, eventually that other way would be the norm.

Re: Double-entry bookkeeping as a directed graph

#306

Post by galaxyLogic »

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.…

> So if Alice buys book from Bob, four entries are made.

What if Alice does double-entry bookkeeping but Bob does single-entry bookkeeping?

Re: Double-entry bookkeeping as a directed graph

#307

Post by galaxyLogic »

awirick wrote: post #291
mulmen wrote: post #286

Earlier quoted context omitted.

It’s been 15 years since I took an accounting course. Why would my bank account be debited when the balance went up? Is a debit not negative? Is the cash balance presented as a negative?

Your bank account is an asset for you, so debits increase the balance while credits decrease it. This is also called a "debit normal" account. Liability accounts are tracked in reverse and are "credit normal". You increase the value (how much you owe) with a credit to the account and decrease the value (payments you receive) with a debit.

One way to think about is you always "credit" the source of the money.

If you get money from somebody you "credit" them for giving you the money. You say "I must give you credit for having done this".

If money goes into your bank-account you don't credit your bank-account because money didn't come from there it went there. If you don't credit the bank account you must be doing something else and that is called "debit". When money goes to your bank-account you "debit" it because now the bank-account is more "indebted" to you. You don't have the cash in your wallet but the bank-account is indebted to you by that amount.

From the view-point of the bank-manager things are of course reverse. When you put money into your bank-account the bank-manager "credits" you-the-account (in their books) for having done so.

I guess a crucial thing to realize is that your bank-account in your books is a different thing from your bank-account in the books of the bank. It seems like there is only one bank-account, but two different parties (you and the bank) each have their own version of that "account" in their book-keeping system.

A double-entry book-keeping system is "subjective" in that it always describes things only from the viewpoint of whoever it is who is doing the book-keeping.

Re: Double-entry bookkeeping as a directed graph

#308

Post by mulmen »

galaxyLogic wrote: post #307
awirick wrote: post #291

Earlier quoted context omitted.

Your bank account is an asset for you, so debits increase the balance while credits decrease it. This is also called a "debit normal" account. Liability accounts are tracked in reverse and are "credit normal". You increase the value (how much you owe) with a credit to the account and decrease the value (payments you receive) with a debit.

One way to think about is you always "credit" the source of the money. If you get money from somebody you "credit" them for giving you the money. You say "I must give you credit for having done this". If money goes into your bank-account you don't credit your bank-account because money didn't come from there it went there. If you don't credit the bank account you must be doing something else and that is called "debit…

Thanks this explanation helps. Does that mean that from the banks perspective my deposits are a liability?

Re: Double-entry bookkeeping as a directed graph

#309

Post by jimbokun »

ectopasm83 wrote: post #117
dragonwriter wrote: post #101

Earlier quoted context omitted.

> 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.

Cats, more likely.

Re: Double-entry bookkeeping as a directed graph

#310

Post by halfcat »

mulmen wrote: post #286
toong wrote: post #46

Earlier quoted context omitted.

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…

It’s been 15 years since I took an accounting course. Why would my bank account be debited when the balance went up? Is a debit not negative? Is the cash balance presented as a negative?

> Is a debit not negative?

Indeed this is confusing to most people (myself included the first time I dealt with it), since if your phone company says they’re giving you a credit, you're getting money.

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