There are three basic reports that businesses produce regularly: the balance sheet, income statement, and statement of cash flows. A=L+E describes the balance sheet. The equation that describes the income statement is profit (or change in assets) = Income-Expenses, except remember, accountants prefer to add, so they think of this as dA+X=I. (I'm using dA to mean profits, a change in assets.) We're skipping the cash flow statement for now.
Another equation accountants are fond of, since they don't like subtraction, is debits=credits. If we substitute in the balance sheet equation, we get that debits=A, and credits=L+E. For the income statement that means debits=dA+X, and credits=I. Now accountants hate to subtract, so how do they deal with things like paying down a credit card from a bank account? Well, some accountant long ago figured out that if you subtract debits and credits from both sides of debits=credits you get -credits=-debits, or -credits=A and -debits=L+E, and -credits=dA+E and -debits=I. So instead of subtracting from an asset, we can just add a credit. And instead of subtracting from liability by paying it down, we can just add a debit to it. So along comes Ledger, written by a computer scientist, not an accountant. Computer scientists don't have anything against subtraction since it's really just 2's complement addition, and they hate added complexity, so they do away with credits and debits entirely by just moving everything to one side of the equation. Debits+-Debits=0. What are debits? A. What are -debits? L+E. Substituting in we get A+L+E=0, and we remember that if we want to add to a liability or an equity, we add a negative number. For the income statement this becomes dA+X+I=0, and remember that adding to income means adding negative numbers. (Thinking of income as negative is certainly counterintuitive, but if you think of depositing your paycheck, income, in your checking account, an asset, you can see it makes sense. I think there's a Ledger variant that gets around this counterintuitive result by allowing you to declare accounts as credit accounts and flipping the minus sign for you.) Accountants have something they call a trial balance, which basically just adds the balance sheet equation and the income equation together. A+X=L+E+I. This is called a trial balance because the books can be verified at any time against this equation Computer scientists like the reduced complexity of using just one equation, so that's what ledger uses. Ledger moves everything to one side of the equation, A+X-(L+E+I)=0, and gets rid of the minus sign by remembering that L, E, and I are negative balances. That's pretty much all I know about accounting, along with how I apply it to Ledger. I only have those five top level accounts. Everything else is a subdivision of one of those five accounts, and I only subdivide accounts if I absolutely have to. If I can accomplish something with tags rather than by subdividing an account, that's what I do. And if I can get the job done without adding a tag, then I won't even do that. There's a lot of things you can account for. I could track the serial numbers of the bills I use in a transaction, for example, but if that information isn't going to be worth more to me in making some future decision than the time it's going to cost me right now, I don't bother. -- --- You received this message because you are subscribed to the Google Groups "Ledger" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. For more options, visit https://groups.google.com/d/optout.
