> From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED]]
>
>
> Christopher Browne <[EMAIL PROTECTED]> writes:
>
> > Dare I comment, again, that a presentation of this is already there?
> > Possibly not in as much gory detail as the recent
> discussion, but it's
> > certainly there...
> >
> > It probably went in back in December when I did some major
> revisions to
> > the documentation.
> >
> > Look for: xacc-double.html
> >
> > In particular, look for the phrase "Not-quite-an-aside."
>
> Well, I had seen that, but it's not quite what I meant. I was talking
> about a more elaborate, hopefully somewhat intuitive description.
>
> Something like this, perhaps (presuming it holds water):
>
> In the double-entry accounting model gnucash uses, when considering
> the terms "debit and credit", you have to think of things from a
> particular perspective; the terms must be taken as indicating what
> other people's position is with respect to you.
>
> * In the case of a debit, the've incurred a debt to you -- they owe
> you.
>
> * In the case of a credit, the've extended you credit -- you owe
> them.
>
> Now it's immediately obvious why, from your perspective, debits are
> "good". They're obligations to pay you. This also makes it clear
> why putting money into your savings account is, properly speaking, a
> debit, not a credit.
>
> From this perspective, it's equally obvious why you want to avoid
> too many credits. They can be bad for your financial health,
> especially if they're credits from high interest lenders.
>
> Is this, roughly speaking, correct?
In a word: No.
My major objection is the last two paragraphs. It would tend to lead people
to believe that "debits" are good and "credits" are bad. So people would
want to have lots of debits, and few (if any) credits.
But in a double-entry accounting system, debits = credits, always. Is this
good or bad?
Also, expenses are debit accounts -- they normally have a debit balance, and
spending money on an expense is a debit to the expense account. Is having
lots of debits in an expense
account "good"? Does it in any way represent a debt to you?
Similarly, income accounts are credit accounts -- they have credit balances,
and earning
money credits the account. Is having lots of credits in an income account
"bad"? Who do you owe in such a situation?
----------------------
People normally think of "creditors" as being people who have lent them
money (or other things of worth) who eventually want it back, with
interest.. But business accountants treat the owners of the business in a
very similar way -- the owners are people who have invested money (or other
things of worth) in the business, and want a return on their investment.
If you step back, and view your personal finances as a "business" that you
own ("The Estate of Rob Browning", unincorporated"), you can see that you
have contributed money (or other things of worth) to your estate, and you,
too, want a return on your investment. So, for "The Estate of Rob
Browning", you are (similar to) a "creditor".
I said treat in a similar way, because accountants do keep separate money
invested in the business and money lent to the business. The first is
called "equities" (or "net worth" for personal finances), the second
"liabilities". And there are subtle rules as to why this is so, but in the
gross overview, they are virtually identical.
Under this viewpoint, every bit of money and property owned by a business is
actually a debt owed to the "creditors" in this broad scheme. And at the
personal finance level, every bit of money and property owned by your
"estate" is actually a debt owed to your "creditors" -- keeping in mind that
Rob Browning is a creditor to the Estate of Rob Browning. How many times
have you heard the phrase "you owe it to yourself..."? In this case, it's
the literal truth.
Looking at balance sheet accounts (assets, liabilities, equities), debit
accounts (assets) represent how your debt (money and property) to your
creditors is distributed. Credit accounts (liabilities and equities)
represent who your creditors are, and how much they each are owed. I think
you can see why the debits should balance the credits.
Income and Expenses are handled a bit differently, and this is where the
distinction in the handling of equities and liabilities comes from. Income
represents money flowing into the business (or estate) from outside sources
that isn't expected to be paid back. This represents an increase in the
amount owed to the owners, so income is effectively an increase in net
worth. Expenses represent money flowing out of the business (or estate) to
outside sources that isn't expected to be returned. This represents a
decrease in the amount owed to the owners, so expenses are effectively a
decrease in net worth. This should be reasonably evident.
In theory, income and expense transactions could be applied directly to net
worth, but in practice, they are handled separately. It is a lot easier,
for instance, to tell that you spent $1000 last month on auto repairs when
they are kept separate from your food bills, your wage statements, your
rent, your cat's surgery, etc. So what is done is that separate Income and
Expense accounts are kept, and then periodically these are "folded in" to
your net worth. Because of the mechanics of bookkeeping, expenses are
treated as debits (so when you do the folding, you can credit expenses
(decreasing them) and debit equity (decreasing it), and income is treated as
credits, for similar reasons.
But this changes the picture of debits being debts, credits being creditors.
Without income and expenses, this worked, but it's hard think that "money
coming from an outside source not expected to returned" is the same as
"where you owe money". So at this point, it may be better to think of it as
a "money sink/money source" issue.
Debit accounts are "money sinks", they tell where the money goes to. Money
is spent on expenses or is kept as an asset (cash or property). Credit
accounts are "money sources", they tell where the money comes from. Money
either comes from lenders, from owners, or from income.
That covers the account-level of things. But it doesn't explain debit and
credit at the transaction level.
Debits and credits exist at the transaction and ledgerbook level because
when modern accounting was invented in the 12th and 13th century, negative
numbers were not accepted as being real. Mathematicians and accountants
were not comfortable with doing lots of subtractions, since there was the
possibility of getting negative numbers, which would have been (in their
eyes) nonsense.
So what the early accountants did was record debts and creditors in two
columns: Increases
in debts were written on the left, increases in creditors were written on
the right. Decreases in debts and creditors were written on the opposite
sides. You could find out the balance of any account simply by totalling
both columns, and subtracting the larger total from the smaller. No
negative numbers involved. The only problem came when things weren't
working properly -- an overdraft on an bank account, or a renter pre-paying
rent before he owes it, etc. In those sorts of cases, the balance might be
on the wrong side, so accountants would indicate that by writing the balance
in red, or with parenthesis.
Over time, the language changed, new account types (income and expense,
mainly) were added, but the underlying mechanics remained amazingly stable.
But because of income and expenses, "debits" no longer represented solely
increases in debts and decreases in creditors (and vice versa for
"credits"). Many books on bookkeeping say that "debit" and "credit" now
represent abstractly "left" and "right", referring to which column they are
recorded in. But like at the account level, thinking of it in terms of
"money sinks/money sources" makes debits and credits more concrete.
Every transaction has two sides: A debit side, which explains where the
money is going, and a credit side, which explains where the money came from.
Again, it should be obvious why debits and credits should balance for each
transaction. This balancing feature is handy because it provides an obvious
error-check. Across all accounts, at any time, the sum of debits balances
the sum of credits.
Did this help?
>
> --
> Rob Browning <[EMAIL PROTECTED]> PGP=E80E0D04F521A094 532B97F5D64E3930
>
