4 ms·
Double entry forces you to account for both sides of the transaction. Where did the money for groceries come from? Checking account. What the hell is this $200k
by andreareina 4y ago
Double entry forces you to account for both sides of the transaction. Where did the money for groceries come from? Checking account. What the hell is this $200k spend? Office equipment. That money from Bob, was that a gift (income) or a loan (liability)?
So why not model exactly those account transfers? Because it's not always that simple. How do you translate this?
CREDIT $ 1.10 Expenses: Coffee
CREDIT $8.80 Assets: Gift Card
DEBIT $10.00 Assets: Checking
You could say Checking -> Gift Card -> Coffee, or Checking -> {Gift Card, Coffee}. Does it actually matter? Probably not, so that's a pointless choice leading to false precision. If you did need to specify which one it was you'd put them in separate transactions (and you'd probably structure the actual spends from the assets accordingly).
Maybe contra accounts are an outdated concept. Ok, don't use them and directly reduce the balance of the account. You also don't need a separate account for every little thing, we certainly had misc accounts in every day of books I've seen. But you at least have to be able to say whether something is income, expense, asset, liability.
- andreareina 4y ago*every set of books. Also s/8.80/8.90/, and my alignment's all messed up. That'll teach me to reply on mobile haha.
- fsckboy 4y ago> Maybe contra accounts are an outdated concept. for the readers, contra accounts keep track of expected adjustments, particularly "opposites", So when you sell items you also expect a percentage to be returned later by dissatisfied customers. If you book all sales revenues as they occur, that will show an "untrue" number, so you book expected returns into a contra account so you can see what your actual revenues are expected to be. Then later when you have accurate information on returns you use those values to unwind the expected values you put in. Accounting is all about providing accurate information to various "stakeholders" who might be looking at the books.
- andreareina 4y agoThanks! To be clear I didn't mean to imply that I think contra accounts are outdated, but I can certainly imagine people feeling that way.
- rco8786 4y agoNone of this is mutually exclusive to a single entry system. Tracking where money is coming and going can be done any number of ways that is not double entry bookkeeping. These are also examples of cash basis accounting which is much simpler. When you get into accrual basis and revenue recognition especially is where the double entry stuff (IMO) just starts to break down. Meaningless accounts get invented just for the sake of having something to balance against, and your entries are no longer tied to actual money changing hands.