Ledger and the accountancy equation

[thail]

Hi, I am just getting started with ledger but am confused by how ledger treats income.

As I understand it, double entry accounting all derives from the equation:

Assets/Property = Claims against Assets/Property

Expanded several times:

Assets = Liabilities + Equity     (the two types of claim against assets)

Changes in equity are the net effect of its sub-categories: investment + income - expenses - draws

Assets = Liabilities + Starting Equity + Income + Investment - Expenses - Draws  (the expanded accountancy equation)

Anything that tilts that equation clockwise is a credit and anything that tilts it anti-clockwise is a debit.  Hence every credit must have a debit.


And so finally:  Ledger handles income by debiting the cash asset account, and also debiting an income account.  This just doesn't work in my head -- how can the account be a true income account? 

I need help reconciling the idea of moving currencies on which ledger is based and the accountancy equation.

Hopefully I have just made a dumb error and it's a quick fix.

T

[John Wiegley]

>>>>> thail <and...@vmail.me> writes:

> And so finally: Ledger handles income by debiting the cash asset account,
> and also debiting an income account. This just doesn't work in my head --
> how can the account be a true income account?

I'm not sure why you make this statement? The meaning of "+" and "-" switch
roles, depending on which account you're in. It doesn't use the credit/debit
terminology.

--
John Wiegley GPG fingerprint = 4710 CF98 AF9B 327B B80F
http://newartisans.com 60E1 46C4 BD1A 7AC1 4BA2

[Martin Blais]

Save yourself some pain: Flush your brain from the "debit" and "credit" terminology.

Your have accounts. Period. All accounts are treated the same from the calculation point of view, that is, amounts get "posted" to them. Think: the number gets added to the balance at that date. The balance is simply the sum of all postings to that account. It doesn't matter which type of account it is.

The double-entry idea is that the sum of all postings on a transaction must equal zero. It's a simple constraint.

So those equations become much simpler:

  

  The sum of postings of each transaction = 0

  Therefore, the sum of all postings = 0

  And finally, even if you group the postings in arbitrary ways, the sum of all of them still = 0

Now, you can label accounts with one of five categories: Assets, Liabilities, Income, Expenses, Equity.

If "Assets" stands for "the sum of all postings labeled with 'Asset'", these are just subgroups of all postings.

Therefore,

  Assets + Liabilities + Equity + Income + Expenses = 0

If you define Equity' = (Equity + Income + Expenses), you obtain

  Assets + Liabilities + Equity' = 0

If you render a detail of the balances for these accounts, this is called a "balance sheet."

If you render the detail of just the (Income + Expenses) accounts, this is called an "income statement."

In this worldview, the balance of these accounts has a "usual" or "normal" sign, e.g., an Asset is usually positive, Liabilities will be negative. Income will be normally negative (it counts the dollar equivalent of work you gave away in exchange for an asset), Expenses will be positive (they count the dollar equivalent of goods and services you obtained in exchange for something you gave).

The problem - and the genesis for all this credits & debits craziness - is that one doesn't usually talk about their credit card or mortgage balance using a negative number. All accounts are talked about using a positive variant. "I have a $100,000 mortgage" means "I owe $100,000" which really is the same as "I have -$100,000" (the latter view is how Ledger sees it). Accountants and people talk about positive amounts. Log into your bank website and check your balance: it'll be a positive number, yet, that's something you owe. For Ledger, that's a negative number.

This is why in regular accounting people talk about "a debit account" or a "credit account". And then you get sentences like "debiting from a credit account"; and while you can train yourself and reason these things out, do this for a few hours while trying to figure out where the 1c off-balance amount comes from in a large book and your mind explodes. Anyhow, if you define the always-positive variants of those accounts as the symbols Assets+, Liabilities+, Equity+, Income+, Expenses+, etc. now you get the equations you're talking about:

  Assets+ = Liabilities+ + Equity+

We don't need this. Free yourself. Just learn this once and for all to work with Ledger and you're golden:

- Assets usually has a positive balance

- Liabilities usually has a negative balance

- Equity usually has a negative balance

- Income usually has a negative balance

- Expenses usually has a positive balance

That's all you have to know. Now you can just treat all accounts the same. Done!

The last thing is: If you read an accounting text, you need to keep this in mind. But once you do understand the above... honestly everything becomes ridiculously simpler. (I hope you had an ah-ah! moment a some point reading the above. I hope this helps.)

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[Stefano Zacchiroli]

On Sat, Feb 06, 2016 at 05:25:12PM -0500, Martin Blais wrote:
> The last thing is: If you read an accounting text, you need to keep this in
> mind. But once you do understand the above... honestly everything becomes
> ridiculously simpler. (I hope you had an ah-ah! moment a some point reading
> the above. I hope this helps.)

Thanks for your mail, Martin. While I was myself already familiar with
the relationship between CLI accounting conventions and "regular" ones,
your mail here is really concise and to the point. I think it deserves
to be published somewhere more stable, so that we can easily point CLI
accounting newcomers to it.

Cheers.
--
Stefano Zacchiroli . . . . . . . za...@upsilon.cc . . . . o . . . o . o
Maître de conférences . . . . . http://upsilon.cc/zack . . . o . . . o o
Former Debian Project Leader . . . . . @zacchiro . . . . o o o . . . o .
« the first rule of tautology club is the first rule of tautology club »

[John Wiegley]

>>>>> Stefano Zacchiroli <za...@upsilon.cc> writes:

> Thanks for your mail, Martin. While I was myself already familiar with the
> relationship between CLI accounting conventions and "regular" ones, your
> mail here is really concise and to the point. I think it deserves to be
> published somewhere more stable, so that we can easily point CLI accounting
> newcomers to it.

It's welcome to go onto our Wiki.

[Martin Blais]

Believe it or not, the very LAST document to be written in the Beancount opus is the intro to the double-entry method one.

This is where that stuff belongs.

How's that for procrastination. 

Do everything else but the beginning. 

*Patting myself on the back with a meme-like irony*

http://cdn.meme.am/instances2/500x/4190245.jpg

It's linked from my docs index as 

http://furius.ca/beancount/doc/double-entry

And I've done three false starts on it, so there's a 15-page mess of notes there. Brilliant.

Maybe I should cut-n-paste that email in it too.

For now.

And then get my sh*t together and actually finish it, so I can call the docs "finished."

That might feel good.