let me hear your voice tonight (![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
alexseanchai) wrote2014-06-23 11:30 am
alexseanchai) wrote2014-06-23 11:30 am
Entry tags:
double-entry bookkeeping, nutshell edition
randomling expressed a desire to know, so:Double-entry bookkeeping is the thing where any transaction is counted twice: once as an asset or liability, once as an income or expenditure, unless it is a transfer from one asset or liability to another in which case it is counted once for each of the two. This question came up in the context of GnuCash, which I use for personal finance, so personal finance is the context in which I will be explaining bookkeeping.
Assets are what you have. Money, car, house, yadda. Technically everything you own is an asset, but in practice I've found it's easier to count things like books and jewelry as expenses instead. Liabilities are what you owe. Credit cards, car loan, mortgage, student loans, yadda. Income is money coming in; expenses are money coming out. Equity is the number you get when you subtract liabilities from assets; that is, it is how much more you have than you owe, or how much more you owe than you have.
To do double-entry bookkeeping, you need a page for every asset account, a page for every liability account, a page for every income account, and a page for every expense account. (Fuck I'm glad I live in the computer age.) This is because every transaction will affect two such pages, and needs to be counted on each relevant page, and confusing the pages is bad.
Let's walk through a couple basic transactions. Meet Cahaya. Cahaya's assets consist of one checking account and one savings account; Cahaya's liabilities consist of one credit card and one student loan; it is the start of a new term. I'm formatting this as near to how GnuCash does it as I can without actually taking screenshots. We begin by looking at Cahaya's checking account page.
2014-06-23 transfer to savings Assets/Savings 10.00 Assets/Checking 10.00
Because the ten dollars is on the right side of column four (money), and column three (accounts) says that number corresponds to Assets/Checking, you know that money is going out of Checking. Every pair of lines must equal zero: the ten dollars on the right side of column four must be balanced by ten dollars on the left side, and that ten dollars here goes into Assets/Savings. The transaction is entered in exactly the same way on the savings account page, and in fact GnuCash will automatically do that for you.
Now let's look at Cahaya's credit card page.
2014-06-23 accounting text Expenses/Textbooks 100.00 Liabilities/Credit Card 100.00
Again, the right side of the money column indicates money flowing out of the account; Cahaya is increasing credit card debt by $100. The pair of lines must equal zero, and that hundred dollars must go somewhere. Technically a textbook is a depreciable asset (that means, it counts as a thing-you-have, and its value will go down over time), but I find it easier to count textbooks and such as expenses and then I don't have to deal with calculating depreciation (my calculations never come out to the actual resale value anyway) and also any textbooks I sell on are a nice little boost to my income instead of a trading one asset for another. Cahaya, due to being my fictional creation, has the same attitude, so the balancing $100 goes into Expenses/Textbooks.
2014-06-26 pay credit card Liabilities/Credit Card 100.00 Assets/Checking 100.00
Here Cahaya pays the credit card. Money is flowing out of Checking (right-hand side of money column) and into Credit Card, which reduces the balance in both accounts by that hundred dollars. What Cahaya has has gone down, and so has what Cahaya owes; the difference between the two has not changed.
Back to checking:
2014-06-27 paycheck Assets/Checking 500.00 Income/Paycheck 500.00
This time money is flowing into Checking, so the number goes on the left of the money column. The balancing $500 must of course go somewhere, so it goes into Income.
The crucial thing I find useful about double-entry bookkeeping for personal finance is the income summary. This might more accurately be titled an income-and-expenses summary. Let's assume Cahaya's only transactions for the month of June are those shown above.
2014-06-30 income summary Income/Paycheck 500.00 Equity/2014/06 500.00 2014-06-30 income summary Equity/2014/06 100.00 Expenses/Textbooks 100.00
This is basically entering negative income equal to the total of the month's income in each category (for instance, my income categories include Income/Salary/Base Pay and Income/Salary/Overtime among others) and negative expenses equal to the total of the month's expenses in each category (including but obviously not limited to Expenses/Textbooks), and balancing each of those lines with a line for Equity for that year and month. ('06' in the lines just above is a subaccount of '2014' which is a subaccount of 'Equity'. I repeat: thank fuck for computers. I'd hate to try this with paper.) The idea is to zero out each income and expense account, see what the total is for that $timeperiod (it doesn't have to be monthly, I just find that most effective for my personal finances), and see how much the equity changed and in what direction. Notice that the transactions from asset to asset and asset to liability (as well as any transactions from liability to asset or liability to liability) are not included in the income summary; if the checking and credit card accounts carry a balance month to month, the accounting pages need to reflect that, because what good are they if they don't tell you how much money is in the bank at any given moment?
In Cahaya's case, Equity/2014/06 increased $500 in the first transaction and decreased $100 in the second, for a total of a $400 increase. Yay Cahaya!
One more thing that makes double-entry bookkeeping work: there's two columns I omitted from the above. One obviously is the running total (omitted because lazy); the other is the c/n column. c for cleared, n for not. (Or one could do blank for not cleared, checkmark for has cleared. I'm describing how it works in GnuCash.) New transactions default to n on both lines. On the credit card payment above, Cahaya would change the n to a c on the Assets/Checking line of the transaction when the checking account online showed a deduction to the credit card company (or when the account statement came out showing same, but I find checking the financial institution website is quicker); the same goes for the Liabilities/Credit Card line when the transaction hits the credit card website slash statement. The total of cleared transactions on the bookkeeping page for the asset or liability account should always match the balance on the asset or liability account according to the financial institution in question.
Have I thoroughly confused you yet?
no subject
It's awesome that you're doing this, and doing it well enough to explain it. The asset-to-asset entry in particular is interesting.
Off to think about it. Double entry has always made my eyes cross, but this sounds a bit more accessible.
no subject
\o/
no subject
no subject
Expenses decrease equity. Income increases equity. Does that clarify it?
Eta: wait, I think I understand the confusion better. The income summary transfers totals from income and expense accounts to equity account. The income and expense accounts go from $X to $0 and the equity account increases by the total of income and decreases by the total of expenses. Am I making better sense now?
no subject
I guess we're supposed to just read the appropriate account things are going from and to and do the add/subtract ourselves?
no subject
no subject
...I think.
no subject
ETA: I think I must have explained something wrong or poorly, or forgotten to explain something, or something. Assets and liabilities react differently to debits and credits (which terms I did not use above because damned if I recall which is which). Look back at the credit card payment. The credit card balance decreases. Even though—scratch that; because—the left side of the money column has the number for the change in the credit card balance. Left column is not always addition, is what I'm saying here.
no subject
I hope I'm not being frustrating or obtuse.
no subject
I think I need to find my accounting textbook and refresh my memory on debits and credits, and then fix the post above to explain that.