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The Double Entry Counting Method (2016)

• onos 4y ago
  I’ve read that the development of double entry book keeping was very important, enabling less error in accounting, then driving significant gains in commerce. But reading this didn’t explain exactly why. Is it just the simple sum rule that ensured errors in transcription would (usually) quickly be caught? I’d guess automated accounting services today would be less prone to such errors — does that mean double entry is no longer as important as it once was?
  • hirundo 4y ago
    The importance is in the "accountability" of accounting. By forcing each entry to cross accounts, you make each account reconcilable with the others. "Books" are no longer independent because they can be cross-checked. Where books are departments that makes departments responsible for justifying each entry in a way that is visible across accounts, to the cent. It's a validation layer. With double entry you can't cook just one book, you have to cook all the books.
    • rco8786 4y ago
      This is what is sold in theory. Practice is wildly different. Reconciling across departments looks absolutely nothing like what you’ve described and does not go to the cent or even close. As long as in you’re in the ballpark of reconciling and can reasonably explain the sql queries and reports that got you to a number within an okay range of error you’re good to go.
      • doctor_eval 4y ago
        This is absolutely not my experience at all. Books that don’t balance to the cent suggest a problem that needs to be resolved. Electronic books that don’t balance to the cent are defective. I’ve certainly seen lax accounting and reconciliation practices in businesses such as those you describe but it’s absolutely not been the norm in my experience.
        • nulbyte 4y ago
          I agree, mostly. You have to understand the implications of a few cents' difference. One cent (or even one dollar) could be the effect of rounding. Or it could be a single typo. Or it could be multiple errors involving larger transactions with opposite signs.
        • rco8786 4y ago
          > Books that don’t balance to the cent Individual books, yes (though I am still very dubious of the value in doing this given the guarantees that modern computers/databases offer). I'm talking specifically about cross-department reconciliation where different departments are keeping their own books and have their own data pipelines/etc. They absolutely still have to be reconciled, but there is no expectation of an exact match from the SEC or internal/external auditors.
    • jimnotgym 4y ago
      Can I give an example to extend your comment. I have a remote shop that takes cash and credit card payments. If i just ran a cash book like some on here are suggesting how would I know my sales for a day? I could wait until the money hits my bank account and categorise it, but then how much of that money is sales tax not sales? How much did the goods they sold cost me? Did they put all of the cash in the bank or did they steal some. Did the credit card merchant pay me everything due? Imagine the customers have credit terms with you? Now when do you know your sales, when they pay? What if they don't pay? Double entry has answers to all of those questions.
  • wolfgang42 4y ago
    In addition to error checking, the process of double-entry bookkeeping also provides a way to get different views into the state of a business: balance sheets, P&L statements, transaction histories, and so on. A lot of the mechanics of doing it manually—journals, ledgers, day books, trial balances, etc.—are less important now that computers can slice-and-dice at the push of a button, but the fundamental idea of a business transaction as a set of balanced money movements between different accounts is still a useful way to structure financial data. (“Double entry” is also something of a misnomer; it’s really “N-entry” accounting, where all N entries that make up a transaction have to balance out to make sure you know where the money came from and where it went to. It’s just that for simple transactions the minimum number of entries that makes sense is 2.)
    • kqr 4y ago
      This is indeed the right answer. I sometimes try to use simpler accounting mechanics than double entry (usually because the person I'm doing it for requests it) but it doesn't take long until I want to run a query against the data that becomes complicated under simpler systems but just falls out of the data under double entry.
    • fsckboy 4y ago
      > “N-entry” accounting it's called double entry bookkeeping because each value (each number) gets entered in two places, once as a debit, and once as a credit.
      • pgt 4y ago
        Yes, but in practice split transactions are common, where you will have 1 credit and 2 debit entries in a transaction. For example, if you work from home and pay rent out of one account, the you may want to claim back tax on the office portion of your rent: 1. Credit $1000 Cash account, 2. Debit $600 Personal Rent account and 3. Debit £400 Office Rent account, considered a tax-deductible Expense account. Sum of credits = Sum of debits, but now you can account for different tax treatments.
        • 4y ago
  • rahimnathwani 4y ago
    "does that mean double entry is no longer as important as it once was?" What are the alternatives? Sure, you could do single entry accounting (making an entry corresponding to each cash movement, but then you'd need a separate system to keep track of - money the business owes - money the business is owed - inventory - other assets I don't know much of the history, but I can say: - I've found it helpful to compare to look at the income statement alongside the opening and closing balance sheets. I've even found errors this way. - AFAIK all business accounting systems are based on double-entry accounting, so the existence of these systems can't obviate the need for double-entry accounting. If you have a cash business where you hold almost no inventory, e.g. if you're a baker who buys flour at the beginning of each day, and close your shop when you've sold out of bread, you might not care about tracking assets, accounts payable etc.
    • jdougan 4y ago
      REA accounting is one of the alternatives [1]. It is used in some managerial accounting systems. I would imagine you could make it generate a set of double entry records to make regulating authorities for financial accounting happy, but you'd have to extend it a bit to add the unnecessary properties. [1] https://en.wikipedia.org/wiki/Resources,_Events,_Agents https://en.wikipedia.org/wiki/Resources,_Events,_Agents
      • jimnotgym 4y ago
        > regulating agencies for accounting happy That is not really what the accounting standards are for. The people that need to be kept happy are the users of the accounts. The standards are there to stop me misleading, or defrauding them. Here is a list of some users of my accounts: Managers: need to know how their business unit is performing so they can take action Shareholders: need to know how the directors are managing their money Banks: I borrow money from them, and they want to see that I can pay it back Tax authorities: I collect sales tax for them. I collect payroll taxes for them. I have to pay taxes on my profit Creditors: I need suppliers to advance me credit. They need to work out the risk of giving it to me. Employees: before I joined the company I wanted to know it was solvent Imagine how I could manipulate them if there wasn't a standard way of communicating the accounts.
  • fsckboy 4y ago
    you get different amounts of money coming in at different times (investors, loans, revenue from sales) and you have different amounts of money flowing out at different times (paying workers, paying for supplies, equipment...) double entry bookkeeping not only "checksums" these quantities for errors, but also gives you different snapshots of your business, how much money do you owe in the short term, how much in the long term, on average what's the profit margin, how much tax do you owe this year. other people can also look at your accounts and check up on random sample pieces of information to ensure it's not all made up. It creates a clear picture where the raw data is somewhat murky, which enhances trust on many levels.
  • rco8786 4y ago
    Yes! I was both tech lead and EM on a multi billion dollar double entry accounting system for years. It was completely unnecessary and overall a drag to keep the double entry system. You end up inventing a ton of random accounting procedure to account for the “other side” of transactions that just don’t need another side. You invent accounts that do nothing and mean nothing just for scorekeeping. If you trust computers to do basic arithmetic and if you trust ACID databases, double entry accounting is outdated and unnecessary.
    • langsoul-com 4y ago
      What's a good daily accounting system then? Would just a excel spreadsheet be good enough or a legit accounting software?
      • lakeeffect 4y ago
        I'm a CPA and I recommend my extremely small businesses clients use a single entry excel system. If they use debit for everything they can download the bank transactions in csv. Then use a deep downlist to categorize the transactions. Then a pivot table to display the year end or quarterly income statement. I usually send them the Excel with the pivot table and dropdown list.
        • jimnotgym 4y ago
          This sounds fine for a contractor sending out one bill per month, but would you recommend it for a larger entity? I couldn't fit all of the transactions in a given month into Excel for my business. There are more than 1m rows. We are only an SME.
          • hedora 4y ago
            Excel PowerBI would easily handle millions of transactions, but it's arguably a completely different product hidden inside an excel menu.
  • danielschonfeld 4y ago
    I think the biggest and also least attributable benefit of it was it enabled the Venicians of Venice (iirc?) to create money, outside of what hard currency allowed at a time and with it opened the world of financing. By create money I mean the same way your bank today creates money anytime it finds a willing and credit worthy borrower. Double entry book keeping basically invented the concept of ledger money which is pretty much the “money” we use today. It enabled elasticity of the money supply where elasticity was lacking.
  • galaxyLogic 4y ago
    I think there is more to it than meets the eye perhaps. It is the way to understand human activity as a set of transfers beween accounts. All the money must go somewhere, perhaps spent perhaps saved in a different currency. All these different types of transactions including startup of the business that occur within can all be modeled with the "simple" concept of 2-entry system. It is a general way to track human co-operation numerically.
  • lottin 4y ago
    The kind of errors that double-entry accounting prevents aren't just arithmetic errors, but also conceptual errors. Double-entry accounting ensures that the accounting identity, which states that Assets = Liabilities + Equity, is true at all times, and it does that by requiring that all individual transactions are balanced.
  • simonjgreen 4y ago
    In terms of error detection, one of the principal tools in double entry is the Trial Balance. A trial balance lists all of your accounts in your ledger, with debits and credits in opposing columns, sums them all, and the two columns totals should match. If they do then all entries are at least complete. If they don't then you have lost records along the way. By correctly assigning debit or credit normal to each account type you ensure there is always a credit for every debit and vice versa.
  • mymythisisthis 4y ago
    It allowed people to be quantified with a single number, 'he owes X amount of dollars', 'he has X amount of dollars'. During the dark ages, and early middle ages, people didn't have much money. Instead there were complex relationships based on obligations 'loans', IOUs, real estate transactions to hide usury, dozens of different currencies with different exchange rates. Determining wealth was a complex affair. On a completely different tangent, Leonardo da Vinci probably illustrated the first book about double entry book keeping. He was interested in math and knew the author, most likely traded his artistic skills for math lessons.
• Bloating 4y ago
  Its all about the ying-yang
• the_cat_kittles 4y ago
  since computers are reliable, isnt a modern accountant just a tax code knower?
  • doctor_eval 4y ago
    I think there’s some truth to this but there’s also the need to set up books well and to implement important practices like reconciliation. For example the way accounts are grouped together can be important, eg to be able to see COGS and EBITDA. Mostly what I see is that an in house accountant does the books and an external accountant does the tax. But that might not be the case in all jurisdictions. All of that said, I’ve seen a lot of P&Ls and balance sheets over the years and most of them are so overcomplicated that it’s difficult to understand the business fundamentals. I’m not sure if that’s because accountants make things complicated, but I suspect it’s because accountants aren’t asked to be involved when they should be.
  • jimnotgym 4y ago
    I'm an accountant, I run a finance team at an sme. I don't know much about tax at all. I certainly don't know 'tax code(s)' My accounts are fairly large, span 4 companies and several companies. My primary role is to keep the company solvant, and score keep for the shareholders and management team. My tax reporting is infrequent, outsourced to specialists, and not my primary concern. I look at the cash flow forecast every day. I look at tax once a year.
    • WastingMyTime89 4y ago
      You don’t deal with salaries or collected VAT at all? That sounds unusual to me but I’m European. My parents own a moderately sized SME which involves multiple branches and a holding. While monitoring cash flow and dealing with invoices and payables take the lion share of their accounting, taxes related activities still take a significant amount of times.
  • simonjgreen 4y ago
    This massively diminishes the value of the decision making process of the accountant and bookkeeper. I'm not aware of any SMB finance software that will, for example: - Know whether to post a transaction as COGS, OpEx, or CapEx. - Be able to decide if a transaction should be journals across a 24 month period or taken in a single hit. - Judge the length of depreciation for a particular piece of plant - Attribute unclear bank receipts to due invoices for reconciliation. That's just a handful of examples. The software ENABLES the finance team to make their decisions and provides them intelligence, but they still do a huge amount of the decision making. The decisions bookkeepers and accountants are taken are largely individual business specific, and based on the accounting principles of that business. Frankly if the decisions are taken well and the software is good, then the tax element can become one of the easiest components where the computer CAN just get on with it, along with the tax specialists
• eatonphil 4y ago
  One interesting challenge I've been hearing a lot lately in accounting tech is that some accounts become a hotspot and slow down overall transactions. For example, you might take a commission on all transactions and you track that commission in a company-related account. I'm curious how folks using a generic SQL or document database solve this.
  • peteradio 4y ago
    Sharting. edit: Wrong thread, sharding.
  • lostapathy 4y ago
    In your example, setup a per-department commission account for general use then move those balances to the company wide account periodically.
• sushmi 4y ago
  Doible entry system is useful and reliable when you mainatain system for large business. If you have 100s of vendors and need to track balance between these vendors, then double entry system helps you to keep your account in check. The basic rule of having sum of different amounts in a transaction should be zero is simple and powerful in resolving conflicts.
  • simonjgreen 4y ago
    It's also useful in the smallest of businesses. It allows for a more mature thinking about your finances and how to leverage them beyond cash=profit. It's very difficult to scale beyond a micro entity with single entry bookkeeping, for example you cannot produce a balance sheet with single entry.
• arjvik 4y ago
  What's the best tool to get started keeping track of our finances using double entry accounting? Ideally, I'd love a tool that lets me import data from my credit card and/or bank accounts through something like Plaid rather than having to manually enter every transaction I make.
  • moron123 4y ago
    Quickbooks does this. But I Hate quickbooks, I just don't know anything better.
    • JoeyJoJoJr 4y ago
      I was using Quickbooks Self Employed and must recommend to stay far away. Besides there being no way to migrate to the other Quickbooks services, the xls report export feature was broken for me and gave me incorrect amounts. After some time explaining the situation to a support person I was told the bug was an ongoing issue with some user accounts, and the support person had to manually calculate and edit cells in the xls document. It blows my mind that such an important feature can be so broken. There was no forthcoming information about the bug and I had no other way to send a report to my accountant.
    • PopAlongKid 4y ago
      I don't hate Quickbooks; I love it. But I hate Intuit. I've been using QB both personally and professionally for over 15 years, it has just about every feature a small to medium sized business could want, and it's a default in the sense that you can go to just about any tax professional who prepares business tax returns and they will have no problem using your QB data, often by working with a copy of your actual company file, and providing year-end journal entries for you to reflect various tax adjustments. The current problem is that Intuit is forcing everyone to subscription-only, even for the desktop product, and they've nearly doubled the annual license fee, mostly to try to force people to QB Online.
  • jonahbenton 4y ago
    Beancount, software written by the author of the parent piece, is a terrific "plain text" double entry accounting system. I've used it for more than a decade on both personal finances and non-profit treasury projects. It was many tools in its ecosystem for reformatting (single entry) transactions into double entry.
• mongol 4y ago
  I wrote a simple double entry bookkeeping program for myself, and I wanted to use as accurate terminology as possible. My native language is Swedish, and we have a word for the task of categorizing statements into accounts. Basically, when you look at a recipt and tell "this is for inventory, then I will use account X." In the past, you then wrote that down with a pen in a kind of inverted-T table that you had stamped on the receipt. The Swedish word for that activity is "kontera", loosely translated to "accounting". But in English that is the word for the entire activity of keeping books up to date. Is there a word for the specialized task of identifying the accounts? Edit: Wikipedia has articles for this word in Swedish, Danish and German. But no other languages. Puzzling.
  • tophi 4y ago
    Classify I think
    • fifticon 4y ago
      it's not wrong, but kontera is the very specific act of assigning a transaction to the proper account, with none of the general meaning of classify. Kontera sort of implies the act and transaction, the "commit".
      • mongol 4y ago
        Yes, I probably explained it a little too simplistic. Describing it as the commit is quite accurate I think. In my program I came up with the verb "book" for this, as book a transaction, but I have no idea if it is correct in the English-speaking world.
        • tepitoperrito 4y ago
          maybe record? or enter? I'm not sure what I'd use and I'm a native english speaker : )
          • mongol 4y ago
• teeray 4y ago
  I want to love the plain text accounting tools. I used them for over a year on all my finances. They’re incredibly expressive and exact, and they play well with vim and git. The trouble is ingesting transactions. You do your best—save receipts, try to note things in your phone. Then some auto-pay thing blindsides you. Or, that separate tip charge from Uber Eats. Yes, you can capture all of these things, but it will require hours of weekly time investment to counteract financial entropy. I ended up just buying Banktivity. I do miss the perfection offered by plain text accounting. I miss nothing now because they’ve contracted with teams that write scrapers and API clients for banks I would have otherwise had to write myself. Reconciliation is now the work of minutes. It’s not perfect, but everything is a tradeoff.
  • aliasxneo 4y ago
    I feel this pain every time I go to reconcile transactions for the week/month. At the same time, I'm not ready to trade the exposure I get to every penny of my income/expenses that manually typing entries gives me. It's just not the same as reviewing a ledger - the act of typing, reviewing, and reconciling has really boosted my confidence in how I currently manage my finances.
  • NoboruWataya 4y ago
    I find there's a balance to be struck between convenience and granularity. If I insisted on categorising every transaction into very specific categories it would be far too much of a pain for me. So, for example, I have a big expense account called "Eating and Drinking Out". Ideally it would be great if I knew specifically what I was spending on coffee, on lunch, on beer, etc, but it would just be too much work. Likewise, I don't track my cash - I just have an expense account called "Cash Withdrawals" (unless I am withdrawing a large amount of money for a specific purpose, which I usually remember so am able to allocate it to a more specific account). In the normal course I try to update my GnuCash once a week, which takes about half an hour on a Sunday. However I've been quite bad lately and today I'll be trying to input over a month of transactions which I'm not looking forward to...
    • kqr 4y ago
• kqr 4y ago
  Double entry accounting is useful any time you have limited amounts of a resource and want insight into how it is used. You don't need to apply it as strictly as accountants do -- very general categories and a random sample of transactions is fine for most types of analysis. The important part is that every unit of resource comes from somewhere and goes to somewhere. As long as you fulfill that property, you get powerful querying capabilities. Most recently I've used it to compare various means of acquiring more RAM for an operation (cloud offerings, incremental purchase, leasing large amounts, etc). One of the other benefits is that I can mix both "terabytes of memory" and "thousands of euros" in the same book, and exchange rates between the two also fall out of the equations.
• yobbo 4y ago
  > Moreover, posting a positive amount on an account is called “crediting” and removing from an account is called “debiting.” I think they confused debit/credit here.
  • unsafecast 4y ago
    They haven't; you have.
  • pgt 4y ago
    Ledgers are typically debit-normal from the perspective of the asset-holder. As a bank, your asset is my liability and vice versa, i.e. your mortgage (liability) is my asset (receivable), so it can make sense to model movement of funds as credit-normal to ease the construction of financial statements from the perspective of the bank. By convention: - Asset & Equity accounts are increased by Debits, decreased by Credits. - Liabilities, Expenses & Income are increased by Credits, decreased by Debits. Whichever convention you choose, consider that an Asset account like cash (Current Account) has to be funded from somewhere: either from a Owner Equity (investment in the business) or a Liability like a loan, so funds will flow from Equity -> Cash, i.e. credit Equity & debit Cash. To repay the loan, the flow is reversed: Cash -> Loan, i.e. credit Cash & debit Loan. Thus holds the accounting equation that: Assets = Liabilities + Equity (I build double-entry accounting ledgers for a living.)
    • jeejay 4y ago
      Agree about most of your text with one note: Expenses are always Debits, thus they increased by Debits. Consider buying a can of CocaCola by cash: - you give your cash — its amount decreases, that is you credit your Assets:Cash account — money flow goes to Expenses account, let's assume Expenses:Food. In terminology of beancount this transaction will look like this: Assets:Cash -1 USD Expenses:Food
      • pgt 4y ago
        From the perspective of the asset-holder, expenses are increased by Debits, yes - unless you're a bank and want to account for both parties with a single set of ledger entries. For example, if you are a bank and I am your customer, then when I spend some of my money to buy your products, my Expense is your Income. My cash asset is your liability. At scale, it can be convenient to construct statements for both parties by regarding the same entries as credit-normal. Alternatively you have to mirror all entries in a 99%-similar ledger, but reversed.
• simonjgreen 4y ago
  Developers understanding double entry well is critical to avoid what I call "programmers reinvent accounting principles". I stumble across this all the time as a major blocker trying to tightly integrate modern SaaS in to enterprise IT stacks.