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! :-)
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...
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
> 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.
> 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".
> 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.
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.
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).
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.
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.
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.
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.
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.
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!
>* 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)
The author messed up by charactizing edges as one way transactions because in that moment he is only looking at the movement of cash. When he switches to edges being two transactions, he is now recognizing that the exchange of cash leads to the recognition of equities and liablities.
If you give your startup $5000 in cash, you expect to have $5000 in equity on the company books. When you charge to a credit card to buy food, you spend $13 buying food and paid $5 to your creditor so you still owe $-8 in liablities.
>Paying my landlord is "obviously" a transaction from my banking account (negative) into their banking account (positive). How it becomes four transaction is,the magic bit glossed over.
The magic of double entry is that you are only taking into account how your transaction affect your own balances. Thats why you need two entries, If you only debit your own account for rent, you would have a non-balanced set of books which would indicate that something is really wrong. So that why you have to credit Rent expense which is an account that doesnt track an actual balance in your bank account but a running total of all your rent expense for the year.
In the wikipedia example, you have your own set of accounting books and the landlord has his own set of books. That is how there are four entries, but you as an indivdual would only see and deal with your own double-entry.
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.
"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.
>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"
I think this is a perfectly succint explanation for people who have trouble grasping the double entry system.
Because they are usually stuck thinking in terms of "move 100 from X to Y". And its hard to get them to think in terms of "subtract 100 from X and add 100 to Y".
> 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.
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.
> 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.
> 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.
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.
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?
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.
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
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.
> I feel certain that if negative numbers where around when double entry book-keeping was first done
They were; one of negative numbers first documented uses in Europe after the Classical period was by Fibonacci in the specific context of financial calculations, around the turn of the 13th Century; the first evidence of the double entry bookkeeping is also in Italy, around the turn of the 14th Century.
I read this article on HN ten years ago and it has been very important to me in a career working on a special purpose accounting (for automated reconciliation of bank accounts of a payments processor).
The biggest shift from conventional accounting is the use of negative numbers instead of debit/credit.
I believe that accounting would have been a lot more accessible to professionals from science/math backgrounds if negative numbers had been used instead of debit/credit.
I think biggest challenge to introducing negative numbers in accounting now is that people don't like the look of an income account accumulating a negative balance and the expense account accumulating a positive balance. But once you bend your mind around that it makes perfect sense...expense is where the money "went" (positive), income is where the money "came from" (negative).
(The alternative sign convention would make cash on hand negative.)
That said: Credit/debit does carry an extra bit of information, because you can put negative numbers as credit/debit to convey flow going the opposite direction of the usual one. (This can also be inferred from the accounts being credit-normal or debit-normal, just wanted to note it is not 100% the same model.)
My Norwegian small business accounting system vendor (Fiken) has started to present data using +/- in addition to debit/credit columns, perhaps there is some adaption of signed numbers accounting happening..
That's cash bookkeeping, which is well defined.
The hard problems in accounting revolve around the time value of money and risk. Those are not as well defined. At best they are probability distributions.
I had independently invented diagrams like that many decades ago. I had also made up a "matrix accounting", which uses a new accounting equation:
<BAL|FSV> = 0
(It is assumed that <BAL| remains constant but |FSV> changes over time.)
However, I think that both the diagrams and the matrix accounting are not really practical compared with the double entry accounting, but that does not mean that they are not worth anything.
Double entry account is, in fact, what gave “transactional” databases their name: They were meant for financial transactions!
Nowadays TigerBeetle is a custom built financial database just for double entry accounting. The implementation is fascinating.
It's a good comment but I think to make something intuitive you really need to understand why something exists and I think for most people there just isn't in fact a good reason.
If you know it, it's easy to use, so why not? But if you don't, whatever method you come up with to track account balances and revenues vs. expenses is going to be useful enough. For individuals not accounting for receivables, debts, depreciation properly isn't likely to make a big difference.
That was my thinking reading this. You need the basics but I would assume the main motivation is to look at a company's financial statement and at least recognize a lot of the language and the significance of the relationships. Of course there are going to be a lot of subtleties but the statement shouldn't be seen as being written in an ancient language.
This is so nicely presented it’s tempting me to have Claude whip up an implementation.
Just need aome form of graphic persistence then ways of summing across partitions of nodes to generate reports. And some convenience methods for adding transactions.
Final step would be to slap a CLI or UI on top of everything.
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! :-)
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...
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
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.
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".
Recheck your math the left two balances is actually 505.
5,000
-4,495
=====
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.
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.
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.
It's the same thing with double entry accounting! The two entries are on different accounts.
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
* 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!
The author messed up by charactizing edges as one way transactions because in that moment he is only looking at the movement of cash. When he switches to edges being two transactions, he is now recognizing that the exchange of cash leads to the recognition of equities and liablities.
If you give your startup $5000 in cash, you expect to have $5000 in equity on the company books. When you charge to a credit card to buy food, you spend $13 buying food and paid $5 to your creditor so you still owe $-8 in liablities.
>Paying my landlord is "obviously" a transaction from my banking account (negative) into their banking account (positive). How it becomes four transaction is,the magic bit glossed over.
The magic of double entry is that you are only taking into account how your transaction affect your own balances. Thats why you need two entries, If you only debit your own account for rent, you would have a non-balanced set of books which would indicate that something is really wrong. So that why you have to credit Rent expense which is an account that doesnt track an actual balance in your bank account but a running total of all your rent expense for the year.
In the wikipedia example, you have your own set of accounting books and the landlord has his own set of books. That is how there are four entries, but you as an indivdual would only see and deal with your own double-entry.
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.
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.
I think this is a perfectly succint explanation for people who have trouble grasping the double entry system. Because they are usually stuck thinking in terms of "move 100 from X to Y". And its hard to get them to think in terms of "subtract 100 from X and add 100 to Y".
So it's two records in the landlord's own books which u dont necesarily know about, and two records in your books.
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.
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
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.
https://django-hordak.readthedocs.io/en/latest/accounting-fo...
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.
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
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
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.
They were; one of negative numbers first documented uses in Europe after the Classical period was by Fibonacci in the specific context of financial calculations, around the turn of the 13th Century; the first evidence of the double entry bookkeeping is also in Italy, around the turn of the 14th Century.
But probably they were not as widespread and natural to people as today?
Perhaps though things like income account balance being a negative number would have made credit/debit invented anyway.
The biggest shift from conventional accounting is the use of negative numbers instead of debit/credit.
I believe that accounting would have been a lot more accessible to professionals from science/math backgrounds if negative numbers had been used instead of debit/credit.
I think biggest challenge to introducing negative numbers in accounting now is that people don't like the look of an income account accumulating a negative balance and the expense account accumulating a positive balance. But once you bend your mind around that it makes perfect sense...expense is where the money "went" (positive), income is where the money "came from" (negative).
(The alternative sign convention would make cash on hand negative.)
That said: Credit/debit does carry an extra bit of information, because you can put negative numbers as credit/debit to convey flow going the opposite direction of the usual one. (This can also be inferred from the accounts being credit-normal or debit-normal, just wanted to note it is not 100% the same model.)
My Norwegian small business accounting system vendor (Fiken) has started to present data using +/- in addition to debit/credit columns, perhaps there is some adaption of signed numbers accounting happening..
Accounting for computer scientists (2011) - https://news.ycombinator.com/item?id=37940973 - Oct 2023 (50 comments)
Accounting for Computer Scientists - https://news.ycombinator.com/item?id=15446202 - Oct 2017 (1 comment)
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However, I think that both the diagrams and the matrix accounting are not really practical compared with the double entry accounting, but that does not mean that they are not worth anything.
https://news.ycombinator.com/item?id=37951781
If you know it, it's easy to use, so why not? But if you don't, whatever method you come up with to track account balances and revenues vs. expenses is going to be useful enough. For individuals not accounting for receivables, debts, depreciation properly isn't likely to make a big difference.
I take it for granted that people want to be able to read a balance sheet and an income statement.
But most people don't.
That's actually what's missing in this presentation: how do you deal with time?
Just need aome form of graphic persistence then ways of summing across partitions of nodes to generate reports. And some convenience methods for adding transactions.
Final step would be to slap a CLI or UI on top of everything.