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accounting standard credits and debits for README

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dos 2004-07-29 12:51:40 -04:00
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README
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@ -64,15 +64,15 @@ The entry might look like this:
Checking $-23.00 $77.00
</example>
The first line shows a credit (or payment) to Pacific Bell for $23.00.
Because there is no "balance" in a general ledger -- it's always zero
-- we write in the total balance of all payments to "Pacific Bell",
which now is $223.00 (previously the balance was $200.00). This is
done by looking at the last entry for "Pacific Bell" in the ledger,
adding $23.00 to that amount, and writing the total in the balance
column. And the money came from "Checking" -- a debit (or withdrawal)
of $23.00 -- which leaves the ending balance in "Checking" at $77.00.
This is a very manual procedure; but that's where computers come in...
The first line shows a payment to Pacific Bell for $23.00. Because
there is no "balance" in a general ledger -- it's always zero -- we
write in the total balance of all payments to "Pacific Bell", which
now is $223.00 (previously the balance was $200.00). This is done by
looking at the last entry for "Pacific Bell" in the ledger, adding
$23.00 to that amount, and writing the total in the balance column.
And the money came from "Checking" -- a withdrawal of $23.00 -- which
leaves the ending balance in "Checking" at $77.00. This is a very
manual procedure; but that's where computers come in...
The transaction must balance to $0: $23 went to Pacific Bell, $23 came
from Checking. There is nothing left over to be accounted for, since
@ -82,17 +82,17 @@ existence; it is always a transaction from one account to another.
Keeping a general ledger is the same as keeping two separate ledgers:
One for Pacific Bell and one for Checking. In that case, each time a
credit is written into one, you write a corresponding debit into the
other. This makes it easier to write in a "running balance", since
you don't have to look back at the last time the account was
payment is written into one, you write a corresponding withdrawal into
the other. This makes it easier to write in a "running balance",
since you don't have to look back at the last time the account was
referenced -- but it also means having a lot of ledger books, if you
deal with multiple accounts.
Enter the beauty of computerized accounting. The purpose of the
Ledger program is to make general ledger accounting simple, by keeping
track of the balances for you. Your only job is to enter the
credit/debit transactions. If a transaction does not balance, Ledger
will display an error and indicate which transaction is wrong.[1]
transactions. If a transaction does not balance, Ledger will display
an error and indicate which transaction is wrong.[1]
In summary, there are two aspects of Ledger use: updating the ledger
data file, and using the Ledger tool to view the summarized result of
@ -170,7 +170,7 @@ automagically determining as much information as possible based on the
nature of your entries.
For example, you do not need to tell Ledger about the accounts you
use. Any time Ledger sees a debit or a credit to an account it knows
use. Any time Ledger sees a transaction involving an account it knows
nothing about, it will create it. If you use a commodity that is new
to Ledger, it will create that commodity, and determine its display
characteristics (placement of the symbol before or after the amount,
@ -201,28 +201,23 @@ amount, if it is the same as the first line:
For this entry, Ledger will figure out that $-23.00 must come from
"Assets:Checking" in order to balance the entry.
** Credits and Debits
** Transactions: Additions and Subtractions
Credit and debit are simple enough terms in themselves, but the usages
of the modern world have made them very hard to puzzle out.
Accountants will talk of `credits' and `debits', but their meaning is
often different from the layman's definitions. To avoid this semantic
overloading, we will refer to subtractions and additions. See
[[README#DtAC]["Differences to Accounting Conventions"]] for how to
reconcile the two systems.
Basically, a credit means you add something to an account, and a debit
means you take away. A debit card is correctly name: From your point
of view, it debits your checking account every time you use it.
Recall that every transaction will involve two or more accounts.
Money is transferred from one group of accounts to another group. To
record the transaction, *subtract* an amount from the source
accounts, and *add* the same amount to the target accounts.
The credit card is strangely named, because you have to look at it
from the merchant's point of view: Every time you use it, it credit's
*his* account right away. This was a giant leap from the days of cash
and checks, when the only other way to supply immediate credit was by
a wire transfer. But a credit card does not credit you anything at
all. In fact, from your point of view, it should be called a
liability card, since it increases your liability to the issuing bank
every time you use it.
In Ledger, credits and debits are given as they are, which means that
sometimes you will see a minus sign where you don't expect one. For
example, when you get paid, in order to credit your bank account, you
need to debit an income account:
In order to write the Ledger entry correctly, you must determine where
the money comes from, and where it goes to. For example, when you are
paid, in order to add to your bank account, you must subtract from an
income account:
<example>
9/29 My Employer
@ -236,22 +231,21 @@ surprised to see Expenses as a positive figure, and Income as a
negative figure. Isn't that the opposite of how it should look?
It may take getting used to, but to properly use a general ledger you
will need to think in terms of correct debits and credits. Rather
than Ledger "fixing" the minus signs, let's understand why they are
there.
will need to think in terms of money flows. Rather than Ledger
"fixing" the minus signs, let's understand why they are there.
When you earn money, the money has to come from somewhere. Let's call
that somewhere "society". In order for society to give you an income,
you must take money away from society (debit) in order to put it into
your bank (credit). When you then spend that money, it leaves your
bank account (debit) and goes back to society (credit). This is why
Income will appear negative -- it reflects the money you have drawn
from society -- and why Expenses will be positive -- it is the amount
you've given back. These credits and debits will always cancel each
other out in the end, because you don't have the ability to create new
money: It must always come from somewhere, and in the end must always
leave. This is the beginning of economy, after which the explanation
gets terribly difficult.
you must take money away (withdraw) from society in order to put it
into (make a payment to) your bank. When you then spend that money,
it leaves your bank account (a withdrawal) and goes back to society (a
payment). This is why Income will appear negative -- it reflects the
money you have drawn from society -- and why Expenses will be positive
-- it is the amount you've given back. These additions and
subtractions will always cancel each other out in the end, because you
don't have the ability to create new money: it must always come from
somewhere, and in the end must always leave. This is the beginning of
economy, after which the explanation gets terribly difficult.
Based on that explanation, here's another way to look at your balance
report: every negative figure means that that account or person or
@ -259,11 +253,6 @@ place has less money now than when you started your ledger; and every
positive figure means that that account or person or place has more
money now that when you started your ledger. Make sense?
Also, credit cards will have a negative value, because you are
spending *from* them (debit) in order pay someone else (credit). They
are called credit cards because you are able to instantly credit that
other person, by simply waving a card.
** Assets and Liabilities
Assets are money that you have, and Liabilities are money that you
@ -304,7 +293,7 @@ $ ledger balance ^assets ^liabilities
</example>
Relatedly, your Income accounts will show up negative, because they
transfer money *from* an account in order to credit your assets. Your
transfer money *from* an account in order to increase your assets. Your
Expenses accounts will show up positive, because that is where the
money went. The combined total your Income and Expenses is your cash
flow. A negative cash flow means that you are spending more money
@ -676,7 +665,7 @@ EverQuest account:
Now your EverQuest:Inventory has 3 apples and 5 steaks in it. The
amounts are negative, because you are taking *from* Black's Tavern in
order to credit your Inventory account. Note that you don't have to
order to add to your Inventory account. Note that you don't have to
use "Places:Black's Tavern" as the source account. You could use
"EverQuest:System" to represent the fact that you acquired them
online. The only purpose for choosing one kind of source account over
@ -918,6 +907,58 @@ ledger balance Liabilities:Huq
</example>
** Differences to Accounting Conventions
#DtAC
If you are an accountant, or you are familiar with accounting
terminology, then you might be tearing your hair out after reading the
above. Please don't!
Ledger is a lightweight tool that gets people comfortable with their
finances. Contemporary accounting practices will often seem
counter-intuitive and confusing to the layman. To make Ledger more
accessible, it deviates from the accounting conventions and
terminology. However, Ledger is flexible enough that you can
interpret your transactions however you wish.
Most probably, the following section will confuse you, and you should
skip it if you've managed to understand everything so far. However,
if you intend to communicate your accounting practices to a
professional accountant, the following explanations may be useful.
The entity ::
The individual or organisation under consideration: the someone or
something on whose behalf you are accounting. Probably you.
Assets ::
Future economic benefits controlled by the entity as a result of a
past transaction or event.
Liabilities ::
Future sacrifices of economic benefits that the entity is obliged to
make as a result of a past transaction or event.
The format of the data files used by Ledger is more akin to a general
journal than a ledger. In an accounting ledger, transactions are
grouped by account. In a general journal, transactions are commonly
listed in chronological order.
In general, an "addition" in Ledger is an accounting debit, and a
"subtraction" in Ledger is an accounting credit. The following table
shows the "normal" balances for the different types of accounts.
Accountants avoid using negative balances where possible, instead
prefering a positive amount in "credit" balance.
System || Asset || Liability || Income || Expense
**Accounting** | debit | credit | credit | debit
**Ledger** | positive | negative | negative | positive
That's correct: accountants call an addition to their cash a debit!
However, from the bank's perspective it is a credit: the accountant's
cash is a liability for the bank. Consequently, payments to the
account will show up as credits on his bank statement.
** Using Emacs to Keep Your Ledger
In the Ledger tarball is an Emacs module, =ledger.el=. This module