Double-entry bookkeeping as a directed graph

... microeconomics works amazingly well!

scroll down and look at that graph! https://www.fda.gov/about-fda/center-drug-evaluation-and-res...

also go to and read about the studies https://www.noahpinion.blog/i/142905737/the-evidence-is-in-f... and you can see the exact numbers from the datasets, these are all spherical cow parameters basically!

These are the sorts of comments that make accounting and bookkeeping more difficult for people who are learning it. It helps no-one to try to think of income and expenses as equivalent to liabilites and credits. They are merely on the same sides of the accounting equation.

Assets + Expenses = Liabilities + Equity + Income

Expenses are not assets. For example, depreciation is not an asset. It is the representation of the life of the asset getting used up. It is an expense, a pure expense. Interest paid on a debt is not an asset. It is a pure expense. There are no word games that turn these into assets, like you might have for a software subscription or a gas bill.

Expenses diminish the business. Unlike assets, they do not represent anything that can be liquidated. Income increases the business. Unlike a liability, it does not represent a claim against the business.

Why aren't expenses and income on the balance sheet? Because they are netted out into retained earnings for the period. Imagine a business that cannot have a liability. Its accounting equation would simplify to:

Assets = Equity.

Income increases equity, expenses decrease it. Is equity a liability? NO. It is a separate account category with a credit balance. Want to look silly? Do as I did when I was a young programmer who knew everything and confuse the two.

People not learning bookkeeping before writing accounting software (which is a lot more software than people expect) make many dumb errors that frustrate users, bookkeepers and accountants. A decent bookkeeping book (e.g. Bookkeeping for Dummies) goes a long way to familiarizing someone with how to handle double entry accounting.

Double-entry bookkeeping is inferior to N-entry bookkeeping, whereby a transaction generates N entries, that sum to zero. Multiple dual-entry transactions are needed to record a single N-entry transaction which is clumsy and harder to follow.

Also, by the way, the whole debit/credit thing in English-language accounting is supremely idiotic: a credit is an increse in this account, but a decrease in this other type of account? What? It's purely for job security for accountants.

There are accounts which represent outside interests/stakes in the company. Then there are accounts which represent what the company has.

The outside interest accounts run negative (under normal conditions). An interpretation of that is that the company owes what it has to the outside interests.

The sum of all the accounts is zero.

The outside interest accounts go negative when the company grows. E.g. $100 added to cash (account representing what the company has) might be balanced by a -$100 into the owner's equity account. The company owes $100 more to the owner.

If the $100 came from a bank, then rather than the equity account going down by $100, the account representing that bank or loan (outside interest) would go down by $100, more negative.

If the company buys some equipment for $100 for cash, then -$100 goes into cash, and $100 into assets.

When that asset depreciates, turning to $80 dollars a year later, -$20 goes into assets, and $20 into owner's equity, bringing it closer to zero.

I agree that the accounting equation is a good starting point. Without it there is no context for the individual accounts.

Over the ~20 years since I qualified as an accountant, I've found the concept of debits and credits useful. It has saved me from memorizing rules (like what's on the left and what's on the right), to design charts of accounts, to design rules for recording transactions etc.

Someone who doesn't ever need to design charts of accounts or accounting policies, and is never called upon to verify the correctness of an accounting approach, probably doesn't need to understand debits and credits. They can read a balance sheet and income statement without thinking about the concept.

And many people (even bookkeepers and accountants) are content to memorize rules without needing to understand their source.

But that doesn't mean the underlying concepts don't exist, or that they aren't valuable.

Imagine if there were a subreddit for accountants, some of whom dabbled in coding. There might be a back and forth about principles of objects oriented design. The general consensus might be that it's pointless to understand the principles, and that it would be better to focus on some small set of rules of thumb, that give the right answer in most cases.

They might be right in that context (accountants who code on the side), but it doesn't mean the principles don't exist or aren't valuable for people who do that stuff all the time.

(BTW I think accounting is, in general, taught very poorly. I wish more instructors used Frank Wood's books. An intuitive grasp of debits and credits is really useful and not hard to pick up, yet many people spend a semester studying accounting without developing any intuition at all.)

I'm surprised that there are no mentions of a great hacker-friendly plain-text accounting software called `ledger` https://ledger-cli.org/ in this thread. It has amazing documentation when it comes to understanding basic principles of double-entry bookkeeping and goes through many typical situations and usecases. There are also several forks, most popular and advanced is `hledger` https://hledger.org/ (h is for Haskell), which provides some neat features out of the box, such as a simple web interface. All of them are very primitive compared to "professional" accounting software, but in return it offers great opportunities for hacking around while ensuring validity of your books.