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I never understood double entry bookkeeping and that's where the author immediately loses me again: Early on after 4th diagram, author includes sentence : "Bec

I never understood double entry bookkeeping and that's where the author immediately loses me again: Early on after 4th diagram, author includes sentence : "Because every transaction appears twice, once positive and once negative" There is something so obvious about this to accounting folks that they always make the massive jump without any explanation. The previous diagram absolutely does not have positive and negative for each transaction! In fact, there is 5000 going into banking account and 500+5 coming out of it. Nothing in 4th diagram is obviously the negative of that 5k transaction, to me. Similarly next sentence is "obviously" false: "If you partition the set of nodes into any two disjoint sets, and add up all of the balances in each set, then the sum for the one set is always the negative sum of the other set" -- the sum of the left two balances is minus five, and the sum of right three balances is 505. And just like that, I'm completely lost and booted out of yet another accounting lesson without passing the introduction :-( (fwiw, my experience of reading accounting is broadly the same as reading Plato: "it is obviously true that..." What, no, stop, that's not obvious at all, you gotta do better than that! :-)

throwaway74848 10mo ago
Accounting generally wouldn't depict it this way, and it's quite confusing with the bubble diagram. I always found it easier when looking at things called "t accounts" [1] Anyway, for the example you mention, it's supposed to mean that it takes 5k from the bubble on the left (founder) and gives to next bubble (bank) Then each line again takes from left and gives to the new bubble on right. So each line is a transaction that balances out by adjusting both sides. [1] https://en.wikipedia.org/wiki/Debits_and_credits https://en.wikipedia.org/wiki/Debits_and_credits
- NikolaNovak 10mo ago
  Thanks, I appreciate your answer, though sadly it does not move the needle much for me. * the article still loses me because it defines transactions one way (the edges) and then seems to make this big switch that each edge/transaction is really two transactions suddenly (one on each side of the edge) . Similarly the explanation In Wikipedia is completely contrary to my mental framework: "tenant who writes a rent cheque to a landlord would enter a credit for the bank account on which the cheque is drawn, and a debit in a rent expense account. Similarly, the landlord would enter a credit in the rent income account associated with the tenant and a debit for the bank account where the cheque is deposited." I cannot even begin to parse that, and I'm honestly reasonably bright :-). Paying my landlord is "obviously" a transaction from my banking account (negative) into their banking account (positive). How it becomes four transaction is, as ever, the magic bit glossed over. That landlord is entering "debit for the bank account where the cheque is deposited" just feels like someone is yanking my chain. Anyvoo! Like with French language, I'll try again one day :-). Merci!
  - jeremysalwen 10mo ago
    Double entry book keeping is just recording the "edge" in two places, once based on the source node, and once based on the target node. So you have a nice list of all edges coming from each node and a nice list of all edges going to each node. This was important before computers, since the process of looking up all edges going to/from a node would take real time and effort. For your example of the landlord and the tenant, think, what if the landlord wanted a list of all payments that went into a specific bank account, what if the tenant wanted a list of all rent payments, etc. It's basically a database index to speed up those queries, but for a written database that is updates by hand. The fact that there is redundancy is just a bonus because you can now notice if the two places a piece of information are written down don't match.
    - bc569a80a344f9c 10mo ago
      That’s a great way of explaining why this was historically done.
  - deleted 10mo ago
    [deleted]
  - sebastianmestre 10mo ago
    Fwiw, I think the four in the wikipedia comes from two people using the double entry system simultaneously. So it's two records in the landlord's own books which u dont necesarily know about, and two records in your books.
  - dagss 10mo ago
    "the article still loses me because it defines transactions one way (the edges) and then seems to make this big switch that each edge/transaction is really two transactions suddenly (one on each side of the edge)" Perhaps the word "transaction" should have been explained better. It doesn't mean an entry/record/action. It means a collection of several actions, all happening at the same time. Several actions that are interlinked and only can happen because of one another. For instance, if I buy a house. "Ensuring the transaction" would be to make sure that a) I get registered as owner to the house and b) that the sellers gets my money. Either a)+b) should both happen (and those two things both happening is ONE transaction), or neither happens. (If I only give the money but don't get the house the transaction didn't complete/is invalid, but incomplete transactions are sort of out of scope for accounting systems) Back to the article. An edge of 100 from X to Y means "move 100 from X to Y", which is the same as "subtract 100 from X and add 100 to Y, and those two entries belong together and should be done transactionally". How else would you move money between two accounts if you did not subtract from one and add to the other? Anyway: The edge is definitely not turned into 2 transactions. But, each edge causes two accounting entries, belonging to the same transaction.
V__ 10mo ago
Every time it comes up in my life, I search for an easy answer, yet I haven't found one yet. It reduces errors, makes it easy to track things and other reasons... all don't make sense to me if there is no physical bookkeeping involved. I am nearly convinced the reason is simply: It has been done like that for centuries. That's it.
adamcharnock 10mo ago
I wrote this a long time ago. It does tend to upset some people, but it did work as an accurate and testable mental model: https://django-hordak.readthedocs.io/en/latest/accounting-for-developers.html https://django-hordak.readthedocs.io/en/latest/accounting-fo...
- phil-martin 10mo ago
  Thank you for writing and sharing that. It's one of the simplest and sane explanations I've seen. How did discussions go with accountants separating the debits/credits into being a presentation issue?
  - adamcharnock 9mo ago
    Well, they didn’t like it! :) I considered just providing views onto the tables that would present the data in the way that made the accountants happy. But in the end we just ended up changing to using separate debit/credit columns. They managed to talk me around somehow, but I don’t remember the details any more. I think this was the relevant issue: https://github.com/adamcharnock/django-hordak/issues/59 https://github.com/adamcharnock/django-hordak/issues/59
- analog31 10mo ago
  I like that. The fourth rule, "flipped on display" makes it conceptually a lot easier than the lengthy table of sign rules for different accounts that my boss kept on his wall. A way I learned about it was that you want to be able to know the tangible cash value of your business at any given moment.
Havoc 10mo ago
>I never understood double entry bookkeeping It only makes sense in the context of a company. Yes you can shoehorn it into a personal context and/or treating it like some sort of database like hn's accounting posts love to do but that's not what the real accounting world looks like at all. An accountant armed with a low/no code solution isn't going to write great code. That I think is obvious to every hn reader. But somehow hn gang think they'll reinvent a system that has been in place for 100s of years because it's backed by a different DB tech that's better suited to double entry. I know a decent bit of both worlds so that disconnect in perceptions always amuses me. [As a side note I don't think the average tech guy gains much from learning "accounting". Even that is a complete misunderstanding of what it is. Unless you're dealing with cap tables and corporate structuring you're better off doubling down on personal finances & taxes and risk management...not double entry] edit: yes am accountant, yes can code..rust and python mostly, not amazing at either
- verbify 10mo ago
  > It only makes sense in the context of a company. Don't you think it can make sense in terms of pension contributions? I used to track my finances very carefully (but now I'm more lackadaisical). Double entry would've been helpful for "I'm taking money from this pocket and putting it in this pocket".
- TuringTest 9mo ago
  > I know a decent bit of both worlds so that disconnect in perceptions always amuses me. Double-entry bookkeeping was from its inception an error-correction code that could be calculated by hand. Modern databases contain much more powerful error correction methods in the form of transactional commits, so from a pure technical point, double-entry bookkeeping is no longer needed at all; that's why programmers have a hard time understanding why it's there: for us, when we store a value in the DB, we can trust that it's been recorded correctly and forever as soon as the transaction ends. The thing is, cultural accounting still relies on the concepts derived from double entry bookkeeping as described in the article; all those assets and debts and equity are still used by the finances people to make sense of the corporate world, so there's no chance that they'll fall out of use anytime, at least 'in the context of a company' as you out it. Now would it be possible to create a new accounting system from scratch that relied on DB transactions and didn't depend on double entry? Sure it can, in fact crypto coins is exactly what happens when computer engineers design a money system unrestricted from tradition. But in practical terms it still needs to relate to the traditional categories in order to be understood and used.
bc569a80a344f9c 10mo ago
> The previous diagram absolutely does not have positive and negative for each transaction! But it does. The $500 transaction for furniture is an edge from the bank to the furniture asset account. This edge is outgoing from the bank account (-$500) and incoming to the furniture asset account (+$500). That’s it, that’s double entry bookkeeping. Each edge represents both entries.
LV123 10mo ago
> I never understood double entry bookkeeping While I completely agree with you and have had the same experience, I'll try to phrase it in a way that might "click" for you: 1. An account is an abstract bucket that aggregates things of the same type. For example, the "Sales" account contains all the income from sales and the "Furniture" account represents the value of all the furniture. The "bank account" represents your dollars stored in the bank. 2. A transaction is an event where something of value is moved from one account to another. For example, when you buy furniture, money goes out of your bank account and is "transformed" into furniture. When you get paid, dollars go from an "Income" account to a "Bank account". 3. The goal of double-entry bookkeeping is to show both the source and destination of every transaction. For example, if you have furniture worth $375 in your possession, where did that value come from? Right, a transaction "debited" the furniture account by $375 and also "credited" the "bank account" with the same amount. I suspect the original article only makes sense if you already have a solid understanding of both graphs and double-entry bookkeeping though...
- yeahwhatever10 10mo ago
  Thanks, this was a good explanation.
- malwrar 9mo ago
  Thanks for this explanation, I see the “graph” now!
dragonwriter 10mo ago
> Early on after 4th diagram, author includes sentence : "Because every transaction appears twice, once positive and once negative" This isn't quite right, but it is a simplification that works here. > The previous diagram absolutely does not have positive and negative for each transaction! In fact, there is 5000 going into banking account and 500+5 coming out of it. Yes, those are two separate transactions. Each arrow is a transaction, and each of the accounts that it connects reflects the transaction (one as a positive, the other as a negative.) > Nothing in 4th diagram is obviously the negative of that 5k transaction, to me. The arrow with the $5000 has both the positive and the negative. Each arrow (each edge of the directed graph) represents a "negative" for the account at the tail and a "positive" for the account at the head.
felipellrocha 10mo ago
Money must flow from a source to potentially multiple destination. Because of that previous fact, you must have at least two postings per transaction (the double in double entry). If you manage to move money correctly without any errors, those postings in that transaction will add up to zero, making it trivial to verify you've done everything correctly without any errors.
- lacunary 10mo ago
  can't two errors cancel each other out and you still wind up at zero?
  - TuringTest 10mo ago
    > can't two errors cancel each other out and you still wind up at zero? They can, but the probability of two opposite errors of exactly the same magnitude is much lower than of any individual random error. It's the same as with any other error-correction encoding. You don't have a guarantee that all errors will be caught by it, but most of them can be, so it's useful overall. https://en.wikipedia.org/wiki/Error_correction_code https://en.wikipedia.org/wiki/Error_correction_code
antonvs 10mo ago
Double entry bookkeeping is a view that was confused for a model centuries ago, and has persisted ever since. There have been attempts to correct this, such as the "Resources, Events, Agents" (REA) model[1], which according to the Wikipedia article "is a standard approach in teaching accounting information systems." But it doesn't really seem to have had a substantial impact on the practice of accounting. The bottom line from a modern system design perspective, is that double-entry accounting makes much more sense if you treat it as a view of some more fundamental underlying model. REA provides one example of such a model. [1] https://en.wikipedia.org/wiki/Resources,_Events,_Agents https://en.wikipedia.org/wiki/Resources,_Events,_Agents
ciju 10mo ago
We wrote about it here: https://finbodhi.com/docs/understanding-double-entry https://finbodhi.com/docs/understanding-double-entry It's just a convention to be able to capture the flow of money. Roughly, money comes in via Income, stays in Asset, goes to Expense (there is also Liability and Equity). Let's consider a home, as an asset. You could have got it with your own money (`Asset:Bank -> Asset:House`), or by taking a loan (`Liability:Home Loan -> Asset:House`). Both have very different implications. If you are just tracking current value of home, it won't capture the whole picture. E.g. if you want to sell the house, the price is going to be different in both cases. Double entry is just a way to track the flow of money from these different categories of account. Once you have that, you can do a lot over it, generate all kinds of report that companies can use to understand their operations (and to share with investors). There are even attempts to go beyond with triple-entry account, etc. I think the way to look at it is, companies need a way to understand and report the flow of money, the current state etc. Double entry helps with that. And they way it helps, it to keep track of both where money came from and where it went.
- fuzztester 9mo ago
  Hi, your compound interest article on ciju.in was good. Any way to contact you to talk?
  - ciju 9mo ago
    you can email me at ping@ciju.in, we can setup a call via email.
cryptonector 10mo ago
It's like Newton's third law of motion, that "every force has an equal and opposite reaction", which when I was a wee child made no sense to me because "surely then nothing would happen". The key was that the equal and opposite reactions are on different objects. It's the same thing with double entry accounting! The two entries are on different accounts.
- ErroneousBosh 9mo ago
  > which when I was a wee child made no sense to me because "surely then nothing would happen" I've literally just had this conversation today about jet aircraft with my 5-year-old, and how when you push air out of the jet engine really fast, that action pushes the nozzle forwards - it's not pushing against anything, it's like if you push against the sides of a box. But he's still not quite got it, so we're going to go to the workshop and play with a high-volume fire pump.
  - cryptonector 9mo ago
    > so we're going to go to the workshop and play with a high-volume fire pump. Sounds like a joke. Had me laughing. (I would not let a 5 y/o play with a fire pump!)
    - ErroneousBosh 9mo ago
      We let firefighters play with them, and they're basically 5-year-olds with access to powerful hydraulic cutting equipment. I love them all really.
gamblor956 10mo ago
This website is absolutely nonsensical and I would not recommend it to anyone to understand how GAAP or IFRS accounting works. It might be useful for someone wanting to learn unicorn fantasy land accounting. Double-entry accounting is basically checksum. For any transaction, the total in and out of all accounts involved in the transaction should be zero. If it's not, you have an error. Conceptually, one of the hard parts to grasp and what many accounting students struggle with in the beginning is that in accounting financials, asset accounts have the opposite polarity as revenue accounts. This is because revenue is treated as an item that flows into Equity (in the famous equation Assets = Liabilities + Equity). The cash earned from a revenue-generating transaction is a (positive) asset, and so to balance it you need that revenue amount to be a negative somewhere in the books. This just affects the accounting financial statements (like the income statement or balance sheet; in the books both numbers would be entered as positive amounts in a transaction known as a "journal entry" in which you report the increase to one account and the offsetting decrease to another account. Credit = money flowing out of an account or creating a new liability = decreases asset and expense accounts but increases liability and revenue accounts Debit = money flowing into an account or reducing a liability = increases assets and expense accounts but decreases liability and revenue accounts
- dagss 10mo ago
  This website that you call nonsensical was a huge help to me when starting to learn about accounting systems. And I have spent several years of my life working on a (special purpose, non-generalist) accounting system. The important thing is just a shift of perspective. It is just a different way of viewing the same system. The website doesn't contradict the things you write about at all. Saying "double entry book-keeping is basically a checksum" and "a transaction of two entries is basically an edge in a graph" is just two views into the same model. Like working in real space vs Fourier domain. You can move between the representations but they represent the same underlying thing. It seems your main gripe is the use of negative numbers instead of credit/debit. I feel certain that if negative numbers where around when double entry book-keeping was first done then credit/debit would not have been invented. Once you "grok" it, viewing an income account balance as a negative number and an expense account as a positive number makes so much sense. Yes, using credit/debit instead of +/- is more normal, and if you use +/- you have to be prepared to translate at the UI later to terms more commonly used in accounting. But is is the same thing. You can just translate between them. The article is not nonsensical at all. But perhaps it should have explained the regular use of debit/credit instead of negative numbers more explicitly. The words used doesn't change the concepts though.
wodenokoto 9mo ago
What made a lot of Econ and related stuff click for me is the idea that there is no such thing as a sale, only a purchase. When you buy a tv for $200, the electronics store buys $200 dollars of cash for $200 of TV. So the electronic store hasn’t made any money on the transaction. They lost $200 dollars of tv and received $200 of cash. So the tv account got deducted 200 and the cash account got increased 200.
- chronos00 9mo ago
  That is a bit of a over-simplification. Its true that there would be corresponding $200 entries that balance. But the store did make money on the transaction, and the journal entries would show it in a manner as shown below (assumption 50% margin on sales). (COGS is Cost of goods sold). Cash $200 - Debit COGS $100 - Debit Inventory $100 - Credit Revenue $200 - Credit Yes, the journal entries don't immediatly show the profit as an explicit line item. But once closing entries are done, an income statement can be created that essentially shows the change in value of all your accounts for a certain period. In the income statement, profits would be calculated.
chronos00 9mo ago
> the sum of the left two balances is minus five, and the sum of right three balances is 505. Recheck your math the left two balances is actually 505. 5,000 -4,495 ===== 0505 its (4,495) not (4,995) So it all balances out, which is what accountant actually do but intstead of choosing any two disjoint sets. Specific nodes are grouped into either Assets or Liablities+Equity. Essentially group all the accounts with negative balances and all the accounts with positive balances into another set. Which in this case is 5008 and -5008.
msaadat 9mo ago
The "double entry" stems from the fundamental accounting equation: assets = liabilities + equity. Whatever you have is either yours or borrowed. Change in one must have an equal change in the other to keep the equation balanced, otherwise you would lose track of how much you own and how much you owe. For example, you have £200 in cash. £100 was your own earnings, £100 your mum gave you to pass on to someone. In pure single entry system, Cash account would have £200, with no distinction between the two. Double entry tracks ownership explicitly: £100 would be recorded in Equity and £100 in Payables.
- tejohnso 9mo ago
  > Double entry tracks ownership explicitly: £100 would be recorded in Equity and £100 in Payables. Isn't it more about showing the -100 in the mum account and the -100 in the company account so that everything balances to zero?
- deleted 9mo ago
  [deleted]

throwaway74848 10mo ago

Accounting generally wouldn't depict it this way, and it's quite confusing with the bubble diagram. I always found it easier when looking at things called "t accounts" [1] Anyway, for the example you mention, it's supposed to mean that it takes 5k from the bubble on the left (founder) and gives to next bubble (bank) Then each line again takes from left and gives to the new bubble on right. So each line is a transaction that balances out by adjusting both sides. [1] https://en.wikipedia.org/wiki/Debits_and_credits https://en.wikipedia.org/wiki/Debits_and_credits

NikolaNovak 10mo ago
Thanks, I appreciate your answer, though sadly it does not move the needle much for me. * the article still loses me because it defines transactions one way (the edges) and then seems to make this big switch that each edge/transaction is really two transactions suddenly (one on each side of the edge) . Similarly the explanation In Wikipedia is completely contrary to my mental framework: "tenant who writes a rent cheque to a landlord would enter a credit for the bank account on which the cheque is drawn, and a debit in a rent expense account. Similarly, the landlord would enter a credit in the rent income account associated with the tenant and a debit for the bank account where the cheque is deposited." I cannot even begin to parse that, and I'm honestly reasonably bright :-). Paying my landlord is "obviously" a transaction from my banking account (negative) into their banking account (positive). How it becomes four transaction is, as ever, the magic bit glossed over. That landlord is entering "debit for the bank account where the cheque is deposited" just feels like someone is yanking my chain. Anyvoo! Like with French language, I'll try again one day :-). Merci!
- jeremysalwen 10mo ago
  Double entry book keeping is just recording the "edge" in two places, once based on the source node, and once based on the target node. So you have a nice list of all edges coming from each node and a nice list of all edges going to each node. This was important before computers, since the process of looking up all edges going to/from a node would take real time and effort. For your example of the landlord and the tenant, think, what if the landlord wanted a list of all payments that went into a specific bank account, what if the tenant wanted a list of all rent payments, etc. It's basically a database index to speed up those queries, but for a written database that is updates by hand. The fact that there is redundancy is just a bonus because you can now notice if the two places a piece of information are written down don't match.
  - bc569a80a344f9c 10mo ago
    That’s a great way of explaining why this was historically done.
- deleted 10mo ago
  [deleted]
- sebastianmestre 10mo ago
  Fwiw, I think the four in the wikipedia comes from two people using the double entry system simultaneously. So it's two records in the landlord's own books which u dont necesarily know about, and two records in your books.
- dagss 10mo ago
  "the article still loses me because it defines transactions one way (the edges) and then seems to make this big switch that each edge/transaction is really two transactions suddenly (one on each side of the edge)" Perhaps the word "transaction" should have been explained better. It doesn't mean an entry/record/action. It means a collection of several actions, all happening at the same time. Several actions that are interlinked and only can happen because of one another. For instance, if I buy a house. "Ensuring the transaction" would be to make sure that a) I get registered as owner to the house and b) that the sellers gets my money. Either a)+b) should both happen (and those two things both happening is ONE transaction), or neither happens. (If I only give the money but don't get the house the transaction didn't complete/is invalid, but incomplete transactions are sort of out of scope for accounting systems) Back to the article. An edge of 100 from X to Y means "move 100 from X to Y", which is the same as "subtract 100 from X and add 100 to Y, and those two entries belong together and should be done transactionally". How else would you move money between two accounts if you did not subtract from one and add to the other? Anyway: The edge is definitely not turned into 2 transactions. But, each edge causes two accounting entries, belonging to the same transaction.

V__ 10mo ago

Every time it comes up in my life, I search for an easy answer, yet I haven't found one yet. It reduces errors, makes it easy to track things and other reasons... all don't make sense to me if there is no physical bookkeeping involved. I am nearly convinced the reason is simply: It has been done like that for centuries. That's it.

adamcharnock 10mo ago

I wrote this a long time ago. It does tend to upset some people, but it did work as an accurate and testable mental model: https://django-hordak.readthedocs.io/en/latest/accounting-for-developers.html https://django-hordak.readthedocs.io/en/latest/accounting-fo...

phil-martin 10mo ago
Thank you for writing and sharing that. It's one of the simplest and sane explanations I've seen. How did discussions go with accountants separating the debits/credits into being a presentation issue?
- adamcharnock 9mo ago
  Well, they didn’t like it! :) I considered just providing views onto the tables that would present the data in the way that made the accountants happy. But in the end we just ended up changing to using separate debit/credit columns. They managed to talk me around somehow, but I don’t remember the details any more. I think this was the relevant issue: https://github.com/adamcharnock/django-hordak/issues/59 https://github.com/adamcharnock/django-hordak/issues/59
analog31 10mo ago
I like that. The fourth rule, "flipped on display" makes it conceptually a lot easier than the lengthy table of sign rules for different accounts that my boss kept on his wall. A way I learned about it was that you want to be able to know the tangible cash value of your business at any given moment.

Havoc 10mo ago

>I never understood double entry bookkeeping It only makes sense in the context of a company. Yes you can shoehorn it into a personal context and/or treating it like some sort of database like hn's accounting posts love to do but that's not what the real accounting world looks like at all. An accountant armed with a low/no code solution isn't going to write great code. That I think is obvious to every hn reader. But somehow hn gang think they'll reinvent a system that has been in place for 100s of years because it's backed by a different DB tech that's better suited to double entry. I know a decent bit of both worlds so that disconnect in perceptions always amuses me. [As a side note I don't think the average tech guy gains much from learning "accounting". Even that is a complete misunderstanding of what it is. Unless you're dealing with cap tables and corporate structuring you're better off doubling down on personal finances & taxes and risk management...not double entry] edit: yes am accountant, yes can code..rust and python mostly, not amazing at either

verbify 10mo ago
> It only makes sense in the context of a company. Don't you think it can make sense in terms of pension contributions? I used to track my finances very carefully (but now I'm more lackadaisical). Double entry would've been helpful for "I'm taking money from this pocket and putting it in this pocket".
TuringTest 9mo ago
> I know a decent bit of both worlds so that disconnect in perceptions always amuses me. Double-entry bookkeeping was from its inception an error-correction code that could be calculated by hand. Modern databases contain much more powerful error correction methods in the form of transactional commits, so from a pure technical point, double-entry bookkeeping is no longer needed at all; that's why programmers have a hard time understanding why it's there: for us, when we store a value in the DB, we can trust that it's been recorded correctly and forever as soon as the transaction ends. The thing is, cultural accounting still relies on the concepts derived from double entry bookkeeping as described in the article; all those assets and debts and equity are still used by the finances people to make sense of the corporate world, so there's no chance that they'll fall out of use anytime, at least 'in the context of a company' as you out it. Now would it be possible to create a new accounting system from scratch that relied on DB transactions and didn't depend on double entry? Sure it can, in fact crypto coins is exactly what happens when computer engineers design a money system unrestricted from tradition. But in practical terms it still needs to relate to the traditional categories in order to be understood and used.

bc569a80a344f9c 10mo ago

> The previous diagram absolutely does not have positive and negative for each transaction! But it does. The $500 transaction for furniture is an edge from the bank to the furniture asset account. This edge is outgoing from the bank account (-$500) and incoming to the furniture asset account (+$500). That’s it, that’s double entry bookkeeping. Each edge represents both entries.

LV123 10mo ago

> I never understood double entry bookkeeping While I completely agree with you and have had the same experience, I'll try to phrase it in a way that might "click" for you: 1. An account is an abstract bucket that aggregates things of the same type. For example, the "Sales" account contains all the income from sales and the "Furniture" account represents the value of all the furniture. The "bank account" represents your dollars stored in the bank. 2. A transaction is an event where something of value is moved from one account to another. For example, when you buy furniture, money goes out of your bank account and is "transformed" into furniture. When you get paid, dollars go from an "Income" account to a "Bank account". 3. The goal of double-entry bookkeeping is to show both the source and destination of every transaction. For example, if you have furniture worth $375 in your possession, where did that value come from? Right, a transaction "debited" the furniture account by $375 and also "credited" the "bank account" with the same amount. I suspect the original article only makes sense if you already have a solid understanding of both graphs and double-entry bookkeeping though...

yeahwhatever10 10mo ago
Thanks, this was a good explanation.
malwrar 9mo ago
Thanks for this explanation, I see the “graph” now!

dragonwriter 10mo ago

> Early on after 4th diagram, author includes sentence : "Because every transaction appears twice, once positive and once negative" This isn't quite right, but it is a simplification that works here. > The previous diagram absolutely does not have positive and negative for each transaction! In fact, there is 5000 going into banking account and 500+5 coming out of it. Yes, those are two separate transactions. Each arrow is a transaction, and each of the accounts that it connects reflects the transaction (one as a positive, the other as a negative.) > Nothing in 4th diagram is obviously the negative of that 5k transaction, to me. The arrow with the $5000 has both the positive and the negative. Each arrow (each edge of the directed graph) represents a "negative" for the account at the tail and a "positive" for the account at the head.

felipellrocha 10mo ago

Money must flow from a source to potentially multiple destination. Because of that previous fact, you must have at least two postings per transaction (the double in double entry). If you manage to move money correctly without any errors, those postings in that transaction will add up to zero, making it trivial to verify you've done everything correctly without any errors.

lacunary 10mo ago
can't two errors cancel each other out and you still wind up at zero?
- TuringTest 10mo ago
  > can't two errors cancel each other out and you still wind up at zero? They can, but the probability of two opposite errors of exactly the same magnitude is much lower than of any individual random error. It's the same as with any other error-correction encoding. You don't have a guarantee that all errors will be caught by it, but most of them can be, so it's useful overall. https://en.wikipedia.org/wiki/Error_correction_code https://en.wikipedia.org/wiki/Error_correction_code

antonvs 10mo ago

Double entry bookkeeping is a view that was confused for a model centuries ago, and has persisted ever since. There have been attempts to correct this, such as the "Resources, Events, Agents" (REA) model[1], which according to the Wikipedia article "is a standard approach in teaching accounting information systems." But it doesn't really seem to have had a substantial impact on the practice of accounting. The bottom line from a modern system design perspective, is that double-entry accounting makes much more sense if you treat it as a view of some more fundamental underlying model. REA provides one example of such a model. [1] https://en.wikipedia.org/wiki/Resources,_Events,_Agents https://en.wikipedia.org/wiki/Resources,_Events,_Agents

ciju 10mo ago

We wrote about it here: https://finbodhi.com/docs/understanding-double-entry https://finbodhi.com/docs/understanding-double-entry It's just a convention to be able to capture the flow of money. Roughly, money comes in via Income, stays in Asset, goes to Expense (there is also Liability and Equity). Let's consider a home, as an asset. You could have got it with your own money (`Asset:Bank -> Asset:House`), or by taking a loan (`Liability:Home Loan -> Asset:House`). Both have very different implications. If you are just tracking current value of home, it won't capture the whole picture. E.g. if you want to sell the house, the price is going to be different in both cases. Double entry is just a way to track the flow of money from these different categories of account. Once you have that, you can do a lot over it, generate all kinds of report that companies can use to understand their operations (and to share with investors). There are even attempts to go beyond with triple-entry account, etc. I think the way to look at it is, companies need a way to understand and report the flow of money, the current state etc. Double entry helps with that. And they way it helps, it to keep track of both where money came from and where it went.

fuzztester 9mo ago
Hi, your compound interest article on ciju.in was good. Any way to contact you to talk?
- ciju 9mo ago
  you can email me at ping@ciju.in, we can setup a call via email.

cryptonector 10mo ago

It's like Newton's third law of motion, that "every force has an equal and opposite reaction", which when I was a wee child made no sense to me because "surely then nothing would happen". The key was that the equal and opposite reactions are on different objects. It's the same thing with double entry accounting! The two entries are on different accounts.

ErroneousBosh 9mo ago
> which when I was a wee child made no sense to me because "surely then nothing would happen" I've literally just had this conversation today about jet aircraft with my 5-year-old, and how when you push air out of the jet engine really fast, that action pushes the nozzle forwards - it's not pushing against anything, it's like if you push against the sides of a box. But he's still not quite got it, so we're going to go to the workshop and play with a high-volume fire pump.
- cryptonector 9mo ago
  > so we're going to go to the workshop and play with a high-volume fire pump. Sounds like a joke. Had me laughing. (I would not let a 5 y/o play with a fire pump!)
  - ErroneousBosh 9mo ago
    We let firefighters play with them, and they're basically 5-year-olds with access to powerful hydraulic cutting equipment. I love them all really.

gamblor956 10mo ago

This website is absolutely nonsensical and I would not recommend it to anyone to understand how GAAP or IFRS accounting works. It might be useful for someone wanting to learn unicorn fantasy land accounting. Double-entry accounting is basically checksum. For any transaction, the total in and out of all accounts involved in the transaction should be zero. If it's not, you have an error. Conceptually, one of the hard parts to grasp and what many accounting students struggle with in the beginning is that in accounting financials, asset accounts have the opposite polarity as revenue accounts. This is because revenue is treated as an item that flows into Equity (in the famous equation Assets = Liabilities + Equity). The cash earned from a revenue-generating transaction is a (positive) asset, and so to balance it you need that revenue amount to be a negative somewhere in the books. This just affects the accounting financial statements (like the income statement or balance sheet; in the books both numbers would be entered as positive amounts in a transaction known as a "journal entry" in which you report the increase to one account and the offsetting decrease to another account. Credit = money flowing out of an account or creating a new liability = decreases asset and expense accounts but increases liability and revenue accounts Debit = money flowing into an account or reducing a liability = increases assets and expense accounts but decreases liability and revenue accounts

dagss 10mo ago
This website that you call nonsensical was a huge help to me when starting to learn about accounting systems. And I have spent several years of my life working on a (special purpose, non-generalist) accounting system. The important thing is just a shift of perspective. It is just a different way of viewing the same system. The website doesn't contradict the things you write about at all. Saying "double entry book-keeping is basically a checksum" and "a transaction of two entries is basically an edge in a graph" is just two views into the same model. Like working in real space vs Fourier domain. You can move between the representations but they represent the same underlying thing. It seems your main gripe is the use of negative numbers instead of credit/debit. I feel certain that if negative numbers where around when double entry book-keeping was first done then credit/debit would not have been invented. Once you "grok" it, viewing an income account balance as a negative number and an expense account as a positive number makes so much sense. Yes, using credit/debit instead of +/- is more normal, and if you use +/- you have to be prepared to translate at the UI later to terms more commonly used in accounting. But is is the same thing. You can just translate between them. The article is not nonsensical at all. But perhaps it should have explained the regular use of debit/credit instead of negative numbers more explicitly. The words used doesn't change the concepts though.

wodenokoto 9mo ago

What made a lot of Econ and related stuff click for me is the idea that there is no such thing as a sale, only a purchase. When you buy a tv for $200, the electronics store buys $200 dollars of cash for $200 of TV. So the electronic store hasn’t made any money on the transaction. They lost $200 dollars of tv and received $200 of cash. So the tv account got deducted 200 and the cash account got increased 200.

chronos00 9mo ago
That is a bit of a over-simplification. Its true that there would be corresponding $200 entries that balance. But the store did make money on the transaction, and the journal entries would show it in a manner as shown below (assumption 50% margin on sales). (COGS is Cost of goods sold). Cash $200 - Debit COGS $100 - Debit Inventory $100 - Credit Revenue $200 - Credit Yes, the journal entries don't immediatly show the profit as an explicit line item. But once closing entries are done, an income statement can be created that essentially shows the change in value of all your accounts for a certain period. In the income statement, profits would be calculated.

chronos00 9mo ago

> the sum of the left two balances is minus five, and the sum of right three balances is 505. Recheck your math the left two balances is actually 505. 5,000 -4,495 ===== 0505 its (4,495) not (4,995) So it all balances out, which is what accountant actually do but intstead of choosing any two disjoint sets. Specific nodes are grouped into either Assets or Liablities+Equity. Essentially group all the accounts with negative balances and all the accounts with positive balances into another set. Which in this case is 5008 and -5008.

msaadat 9mo ago

The "double entry" stems from the fundamental accounting equation: assets = liabilities + equity. Whatever you have is either yours or borrowed. Change in one must have an equal change in the other to keep the equation balanced, otherwise you would lose track of how much you own and how much you owe. For example, you have £200 in cash. £100 was your own earnings, £100 your mum gave you to pass on to someone. In pure single entry system, Cash account would have £200, with no distinction between the two. Double entry tracks ownership explicitly: £100 would be recorded in Equity and £100 in Payables.

tejohnso 9mo ago
> Double entry tracks ownership explicitly: £100 would be recorded in Equity and £100 in Payables. Isn't it more about showing the -100 in the mum account and the -100 in the company account so that everything balances to zero?
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