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If your banana is for consumption and you pay cash: Then debit Food Expenses (decrease equity) and credit Cash (decrease assets). Accounting equation is balance

by buyx 6y ago

If your banana is for consumption and you pay cash: Then debit Food Expenses (decrease equity) and credit Cash (decrease assets). Accounting equation is balanced. If your banana is for resale and you pay cash: Credit Cash (decrease assets) and Debit Trading Stock (increase assets). Accounting equation is balanced. If your banana is for consumption and you buy it on credit from your supplier: Credit Loan account (increase liabilities). Debit Food Expenses (decrease equity). Accounting equation is balanced. If your banana is for resale and you buy it on credit: Debit Trading Stock (increase assets). Credit Loan account (increase liabilities). Accounting equation is balanced. If your banana is for resale and it spoils before you sell it: Credit Trading Stock (decrease assets) and Debit Spoilage Expenses (decrease equity). Accounting equation is balanced. If your banana is for resale and you sell it [this one I'm a bit rustier on, it's been 25 years, but I'm pretty sure it's correct]: Debit cash (increase assets). Credit Sales income (increase equity). ALSO Debit Cost of Sales (an expense, so decrease equity). Credit trading stock (decrease assets). Accounting equation is balanced. (Your Gross Profit is reflected in Sales minus Cost of Sales). Granted, these are unsophisticated examples, and based solely on decades-old high school-level accountancy, but I think your banana example should be covered here.

inopinatus 6y ago
It doesn’t quite. You’ll also need to consider allocations and accounting for tax (sales and income), depreciation, transaction fees, warehousing, shipping revenue and expenses, revenue and expense recognition, discounts, returns, overpayments, prepayments, futures, chargebacks, refunds, credit notes, invoicing, subscriptions, subsidies, tariffs, reconciliation, adjustments in the current financial year, adjustments for already reported periods, gains & losses on foreign exchange, and subledger roll-up for your parent fruit company’s GL. You’ll need to maintain consistency and coherence in multiple combinations of the above, and when the auditors show up, be able to show unequivocally that you understood every edge case when recording and reporting transactions, especially the ones that crossed a financial year boundary. Accounting software mechanises all this. It is not simple.
- buyx 6y ago
  I specifically stated it was an unsophisticated example. GP wanted to know what happens with the "simplest transaction" when he buys a banana.
  - tgb 6y ago
    Yeah, exactly. The first or second example in any explanation should be buying a banana that you immediately eat. That way the reader sees that an "account" doesn't have to be a bank account nor even a collection of physical goods that exist, it's just a virtual bucket made to keep track of certain transactions. Until I figured that out, double-entry made no sense at all. This is all exacerbated by the common "Assets = Liabilities + Equity" equation which hides expenses entirely. All of this is, of course, a problem about pedagogy in the quick guides found all over the internet. (Including the one linked to here, though the second example is at least an expense but not in the way that would enlighten a beginner.)
  - inopinatus 6y ago
    That was the simplified version.
- Krustopolis 6y ago
  Apples and oranges. By way of analogy, the OP was talking about C while you are describing building a commercial Windows app. DE accounting is a simple tool that can be used in complex ways.
  - inopinatus 6y ago
    OP is neither, it is in Python, but this merely demonstrates that accounting can be incorrect in any language. The problem isn't just terminology, but when people use the term double-entry accounting interchangeably with double-entry book-keeping, they reveal how little they know about the subject matter, and how unqualified they are to be implementing either.
wodenokoto 6y ago
I'm glad you guys understand it in South Africa, and if I ever wanna open an accounting start-up, I'll be sure to source talent from there, but you lost me: > Then debit Food Expenses (decrease equity) and credit Cash (decrease assets) Why are you decreasing the number in two columns? I don't really need to know personally, but I hope this gives you an idea of what kind of things confuses people. I don't think the basis of double accounting in the sense that "every thing in and out must end up equalling zero" is super sophisticated concept to grasp, at least superficially. But once it is applied to situations where things intuitively are just going out of your budget (like buying and eating something: you're left with no money and no banana) and on top of that use counter-intuitive words, I hope you can appreciate that people get confused.
- dhagz 6y ago
  > Why are you decreasing the number in two columns? It's not two columns, it's both sides of the equation: Assets = Equity + Liabilities So if you're decreasing equity, but not gaining any liability, then the only option is to decrease assets to be balanced.

by buyx 6y ago

inopinatus 6y ago

It doesn’t quite. You’ll also need to consider allocations and accounting for tax (sales and income), depreciation, transaction fees, warehousing, shipping revenue and expenses, revenue and expense recognition, discounts, returns, overpayments, prepayments, futures, chargebacks, refunds, credit notes, invoicing, subscriptions, subsidies, tariffs, reconciliation, adjustments in the current financial year, adjustments for already reported periods, gains & losses on foreign exchange, and subledger roll-up for your parent fruit company’s GL. You’ll need to maintain consistency and coherence in multiple combinations of the above, and when the auditors show up, be able to show unequivocally that you understood every edge case when recording and reporting transactions, especially the ones that crossed a financial year boundary. Accounting software mechanises all this. It is not simple.

buyx 6y ago
I specifically stated it was an unsophisticated example. GP wanted to know what happens with the "simplest transaction" when he buys a banana.
- tgb 6y ago
  Yeah, exactly. The first or second example in any explanation should be buying a banana that you immediately eat. That way the reader sees that an "account" doesn't have to be a bank account nor even a collection of physical goods that exist, it's just a virtual bucket made to keep track of certain transactions. Until I figured that out, double-entry made no sense at all. This is all exacerbated by the common "Assets = Liabilities + Equity" equation which hides expenses entirely. All of this is, of course, a problem about pedagogy in the quick guides found all over the internet. (Including the one linked to here, though the second example is at least an expense but not in the way that would enlighten a beginner.)
- inopinatus 6y ago
  That was the simplified version.
Krustopolis 6y ago
Apples and oranges. By way of analogy, the OP was talking about C while you are describing building a commercial Windows app. DE accounting is a simple tool that can be used in complex ways.
- inopinatus 6y ago
  OP is neither, it is in Python, but this merely demonstrates that accounting can be incorrect in any language. The problem isn't just terminology, but when people use the term double-entry accounting interchangeably with double-entry book-keeping, they reveal how little they know about the subject matter, and how unqualified they are to be implementing either.

wodenokoto 6y ago

I'm glad you guys understand it in South Africa, and if I ever wanna open an accounting start-up, I'll be sure to source talent from there, but you lost me: > Then debit Food Expenses (decrease equity) and credit Cash (decrease assets) Why are you decreasing the number in two columns? I don't really need to know personally, but I hope this gives you an idea of what kind of things confuses people. I don't think the basis of double accounting in the sense that "every thing in and out must end up equalling zero" is super sophisticated concept to grasp, at least superficially. But once it is applied to situations where things intuitively are just going out of your budget (like buying and eating something: you're left with no money and no banana) and on top of that use counter-intuitive words, I hope you can appreciate that people get confused.

dhagz 6y ago
> Why are you decreasing the number in two columns? It's not two columns, it's both sides of the equation: Assets = Equity + Liabilities So if you're decreasing equity, but not gaining any liability, then the only option is to decrease assets to be balanced.