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That method only works if money can be created out of thin air, and also destroyed. The grandparent comment was pretty clear that money cannot be created out of

That method only works if money can be created out of thin air, and also destroyed. The grandparent comment was pretty clear that money cannot be created out of thin air, nor can it be destroyed. A curious contradiction. How do we resolve it?

bregma 2y ago
No money was created or destroyed. The "cash gifted" account would have a corresponding entry in the recipients books reflecting the cash received. Unless he's delinquent about updating his books in which case it's implied but not realized. Few (unmedicated) individuals are going to track every transaction to that level though. If it was important to account for the cash donation, the company would require a receipt in exchange. If it's part of a coverup the receipt may be for something unrelated but at least the books are in good order.
- randomdata 2y ago
  Cash went out. One half of the double entry is correct. But nothing came back in return. There is no corresponding element of trade to account for. The transaction doesn't balance. Which is obvious in human terms. That's the point of a gift – the transaction isn't supposed to balance! But formal accounting methods are not as fluid as people are. So, of course, in reality money was created (and then destroyed, it being a gift) in order to make the transaction whole. But as far as this magical fairytale land where money can't be created the entry doesn't work. You can't account for nothing. Let's say it's not a gift. Let's say someone is borrowing $1,000 cash instead. The same applies. There is no corresponding element in trade to account for. It doesn’t balance. Thus, when the cash goes out you need to create money out of thin air to satisfy the other side of the transaction, which is later destroyed when the cash is returned.
  - thereticent 2y ago
    You're misunderstanding double-entry bookkeeping. Something does not have to come into the company got every transaction moving something out of the company. If your company gives $1000 to Billy, you document a $1000 debit from your gift account and a $1000 to Billy's account payable. The goal isn't to get any one account to zero but to get a source and destination recorded separately for every movement of funds. Lending would be at least two sets of doubly-recorded transactions.
    - randomdata 2y ago
      > The goal isn't to get any one account to zero but to get a source and destination recorded separately Right, because transactions are actually two-sided. I give you something, you give me something in return. That's how people work with each other. And, as such, we account for a source and destination because that matches what actually happens. But often times you only offer a promise. For example, I write some software for you, and in return you offer me food. But I'm not hungry right now, and I certainly don't want food that is going to spoil before I get around to eating it, so instead you promise to give me fresh food sometime in the future when I am hungry. How do you account for that? You received software services, but gave nothing back in return other than a promise. Well, what if you recorded the promise? Software services in, promise out. You got your software, I get my food, the credit and debit accounts match. Everyone is happy. Congratulations, you just created money out of thin air! -- And now, later on, I am feeling hungry and am ready to take you up on your food offer. You give me the food, I give back the promise, food out, promise in, I'm fed, debits match credits, and the money is destroyed. That's exactly why we invented accounting: To keep track of the money being created and destroyed. You wouldn't need accounting if promises never needed to be made. Without promises, you'd have the software services, I'd have the food, and we'd have no reason to think about the transaction ever again. It is the promise that has us wanting to look back to make sure that promises outstanding are made good.
omichowdhury 2y ago
While money can’t be created or destroyed (unless you run a central bank…), value can be. Ledgers always have a specific perspective, and that perspective can assign a different value to something than someone else. In the case of gifting something, from the perspective of the gifter, they destroyed some value they had on their books and got nothing of value in return. There’s an account type for tracking why your net worth decreased - Expense accounts. The giftee received value and they have an account to track why their net worth increased - Income accounts. If value was objective, then the net worth decrease on one side would exactly equal the net worth increase on the other. With something like cash, the unit of account and the store of value are the same thing - so 100 USD objectively the same value in everyone’s ledger. But say you were gifted a painting. The gifter may have valued this painting at 100 USD, while the giftee actually thinks it’s worth 50 USD. If the gifter didn’t tell them the price, there would be no way of knowing they recorded different numbers. So in this transaction value was destroyed. The same thing happens when you buy and sell things. Say the painting was sold instead of gifted, then the difference in what the buyer and seller thought the painting was worth is value that was created and destroyed. Each person’s net worth would go up or down depending on whether they thought the painting was a bargain or overpriced. When providing services, value is created at the moment of usage and a ledger will track the creation of value in your landscaping business.
- randomdata 2y ago
  > While money can’t be created or destroyed (unless you run a central bank…) That's not the case. Money, of course, is just a promise to provide something of some defined value at some point in the future. Anyone can make such promises. Heck, that's why we invented accounting – to keep track of the promises outstanding and delivered!
- dragonwriter 2y ago
  > While money can’t be created or destroyed (unless you run a central bank…), value can be. Money is created and destroyed by extending and resolving credit. central banks do it, but so do regular banks and non-bank institutions.
  - 2y ago

bregma 2y ago

No money was created or destroyed. The "cash gifted" account would have a corresponding entry in the recipients books reflecting the cash received. Unless he's delinquent about updating his books in which case it's implied but not realized. Few (unmedicated) individuals are going to track every transaction to that level though. If it was important to account for the cash donation, the company would require a receipt in exchange. If it's part of a coverup the receipt may be for something unrelated but at least the books are in good order.

randomdata 2y ago
Cash went out. One half of the double entry is correct. But nothing came back in return. There is no corresponding element of trade to account for. The transaction doesn't balance. Which is obvious in human terms. That's the point of a gift – the transaction isn't supposed to balance! But formal accounting methods are not as fluid as people are. So, of course, in reality money was created (and then destroyed, it being a gift) in order to make the transaction whole. But as far as this magical fairytale land where money can't be created the entry doesn't work. You can't account for nothing. Let's say it's not a gift. Let's say someone is borrowing $1,000 cash instead. The same applies. There is no corresponding element in trade to account for. It doesn’t balance. Thus, when the cash goes out you need to create money out of thin air to satisfy the other side of the transaction, which is later destroyed when the cash is returned.
- thereticent 2y ago
  You're misunderstanding double-entry bookkeeping. Something does not have to come into the company got every transaction moving something out of the company. If your company gives $1000 to Billy, you document a $1000 debit from your gift account and a $1000 to Billy's account payable. The goal isn't to get any one account to zero but to get a source and destination recorded separately for every movement of funds. Lending would be at least two sets of doubly-recorded transactions.
  - randomdata 2y ago
    > The goal isn't to get any one account to zero but to get a source and destination recorded separately Right, because transactions are actually two-sided. I give you something, you give me something in return. That's how people work with each other. And, as such, we account for a source and destination because that matches what actually happens. But often times you only offer a promise. For example, I write some software for you, and in return you offer me food. But I'm not hungry right now, and I certainly don't want food that is going to spoil before I get around to eating it, so instead you promise to give me fresh food sometime in the future when I am hungry. How do you account for that? You received software services, but gave nothing back in return other than a promise. Well, what if you recorded the promise? Software services in, promise out. You got your software, I get my food, the credit and debit accounts match. Everyone is happy. Congratulations, you just created money out of thin air! -- And now, later on, I am feeling hungry and am ready to take you up on your food offer. You give me the food, I give back the promise, food out, promise in, I'm fed, debits match credits, and the money is destroyed. That's exactly why we invented accounting: To keep track of the money being created and destroyed. You wouldn't need accounting if promises never needed to be made. Without promises, you'd have the software services, I'd have the food, and we'd have no reason to think about the transaction ever again. It is the promise that has us wanting to look back to make sure that promises outstanding are made good.

omichowdhury 2y ago

While money can’t be created or destroyed (unless you run a central bank…), value can be. Ledgers always have a specific perspective, and that perspective can assign a different value to something than someone else. In the case of gifting something, from the perspective of the gifter, they destroyed some value they had on their books and got nothing of value in return. There’s an account type for tracking why your net worth decreased - Expense accounts. The giftee received value and they have an account to track why their net worth increased - Income accounts. If value was objective, then the net worth decrease on one side would exactly equal the net worth increase on the other. With something like cash, the unit of account and the store of value are the same thing - so 100 USD objectively the same value in everyone’s ledger. But say you were gifted a painting. The gifter may have valued this painting at 100 USD, while the giftee actually thinks it’s worth 50 USD. If the gifter didn’t tell them the price, there would be no way of knowing they recorded different numbers. So in this transaction value was destroyed. The same thing happens when you buy and sell things. Say the painting was sold instead of gifted, then the difference in what the buyer and seller thought the painting was worth is value that was created and destroyed. Each person’s net worth would go up or down depending on whether they thought the painting was a bargain or overpriced. When providing services, value is created at the moment of usage and a ledger will track the creation of value in your landscaping business.

randomdata 2y ago
> While money can’t be created or destroyed (unless you run a central bank…) That's not the case. Money, of course, is just a promise to provide something of some defined value at some point in the future. Anyone can make such promises. Heck, that's why we invented accounting – to keep track of the promises outstanding and delivered!
dragonwriter 2y ago
> While money can’t be created or destroyed (unless you run a central bank…), value can be. Money is created and destroyed by extending and resolving credit. central banks do it, but so do regular banks and non-bank institutions.
- 2y ago