[Octokiddie]

Every explanation of double entry accounting seems to do the same thing. If I'm trying to understand the double part of double-entry bookkeeping, what exactly does the "double" refer to? What's being "doubled"?

How would you salvage the article to actually explain the "double" part in detail? Could you do it purely from Bob's (or Alice's) perspective?

[bluepencil123]

The 'double' in double entry book-keeping is related only to the book keepers own records/books. It has nothing to do with counter party's record keeping.

If Alice purchases a house worth $100,000 in cash, then 2 (double) accounts will get effected. Her cash account will decrease (Credit) by $100,100 and simultaneously her House equity account (or any other appropriate name such as immovable asset etc) will increase by $100,000 (Debit).

This can be recorded in a 3 column table as

  Credit account -- value -- Debit account
  Cash -- $100,000 -- House equity

In the above transaction, two accounts were effected. Hence the name double entry. This gives a truer picture of ones assets and liabilities.

Note: 1. Debit and credit dont have much to do with increase decrease. 2. A transaction can be modelled to have affect more than 2 account. For example if Alice were to make the purchase with $80,000 loan, then the book keeping could go like

  Credit Lender $80,000
  Credit Cash $20,000
  Debit House Equity $100,000

For the sake of better understanding, if one is uncomfortable with having one record affecting 3 accounts, one can be more robust and split the loan and the purchase into 2 transactions. After all, taking a loan and purchasing a house are 2 different events(transactions).

  Transaction one ->
  Credit Lender $80,000
  Debit Cash $80,000

  Transaction two ->
  Credit Cash $100,000
  Debit House equity $100,000

edit 1: attempt at better formatting

[datavirtue]

Don't forget the depreciation, interest, maintenance, and tax accounts if you want to track those against the real estate cost basis for various purposes. You also need to figure out how to create and map accounts to IRS rules or you could put yourself in a real bind when it comes to figuring out tax liabilities or deductions.

[theptip]

It’s a checksum; by decomposing every transaction into a double of (credit A, debit B) that must sum to zero, you catch random arithmetic errors.

You can think of it as “conservation of value”, so you can’t just create money out of thin air in your payment service (credit), without tying it to some account with a corresponding debit.

This originally was intended to protect against typos; eg write a 10 instead of 100, at the end of the day your ledger needs to balance. In software typos are less likely bit it still provides auditability to prevent a large class of bugs from wiping you out.

[dragonwriter]

> This originally was intended to protect against typos;

Double entry bookkeeping is much older than typing, but, yes, its a check against incorrect entries.

[test6554]

Bob and Alice each have a "money" account and a "books" account. Each money account tracks how much money they have on hand while each books account tracks the total value of their private libraries.

So to be clear, there are 4 accounts. Bob's Money, Bob's Books, Alice's Money, Alice's Books.

Because these two homeless librarians only have money and books, you can add the two balances together for each person to get their net worth.

If Alice owns 3 books worth $120, then the "Alice's Books" account would show a balance of $120. Meanwhile, Bob has 12 books worth $700.

When Alice buys the books, she -credits her bank account $20 and +debits her books account $20 (the value of the new book). Thus her net worth stays the same, but she has more books assets and fewer cash assets.

Similarly Bob -credits his books account $20 and +debits his bank account $20. His net worth also stays the same but he now has more cash than before.

On Alice's way back to the bridge she resides under, it starts to rain. Alice's new book is ruined. She -credit's her books account $20 and her net worth goes down by $20.

Life as a homeless librarian is harsh.

[BayesianDice]

And when the book is ruined, she credits her books account (an asset account) $20 and debits her "depreciation/impairment" account (an expense account) $20.

[victor106]

> She -credit's her books account $20 and her net worth goes down by $20.

Stupid question maybe.

Is net worth an account too? Where does the debit side of Alice’s credit go?

[insane_dreamer]

Because double-entry accounting requires two (thus "double") entries for each transaction (i.e., Alice buys a book)

- one for the assets/liabilities account involved in sending or receiving the money ($30 credit, bank account) - one for the income/expense account to which the transaction corresponds ($30 debit, "education" expense account)

one of the two entries is a credit and the other a debit

[atomicfiredoll]

Remember, this was all done on paper before software with tagging and such existed.

I'll give a description shot, since I've been doing finance work recently. Other people can feel free to correct.

A company using double entry (as opposed to single) has a "chart of accounts." This means they have a bunch of imaginary accounts for tracking everything, including:

- Assets (e.g. cash on hand.)

- Liabilities (e.g. loans)

- Equity (e.g. investments in the company from outside parties)

- Income/Revenue: (edit: as PopAlongKid kid mentioned, I forgot this one. This could include sales revenue, but also things like interest.)

- Expenses (e.g. team lunch or a flight cost)

Some of these "accounts" may map to actual bank accounts: there is likely a liability account for a credit card or an asset account for the company checking.

Knowing all that, every time money is deposited or withdrawn (a transaction) the "double" references the fact that it's recorded in the journal (a.k.a ledger) of two accounts. (Edit: As bregma mentioned, one records where money is coming from and the other where it's going.) Often, an expense is often recorded in the checking "account" and the and the corresponding expense "account." E.g. a flight may be recorded in a travel expense "account," but you also record that the money came from the checking account. Every transaction is recorded in two places.

Beyond just being more accurate than single entry, this helps with important finance reports like Profit & Loss, since you can now see how money is moving around.

Edit: Now that I'm back on my desktop, these are a couple of useful links for understanding basic double entry bookkeeping: Accounting for Computer Scientists [0] and Accounting for Developers, Part I | Modern Treasury Journal [1]. What is a Sample Chart of Accounts for SASS Companies [2] illustrates some charts, which may be helpful for some folks.

[0] https://martin.kleppmann.com/2011/03/07/accounting-for-compu...

[1] https://www.moderntreasury.com/journal/accounting-for-develo...

[2] https://kruzeconsulting.com/startup-chart-accounts/

[kqr]

> this helps with important finance reports [...] since you can now see how money is moving around.

This is the real benefit I've encountered. Any time I try to "simplify" financial recording for someone else and avoid double-entry, I inevitably end up wanting to perform a query that would be easy in a double-entry system but is not in any other system.

[PopAlongKid]

>A company using double entry (as opposed to single) has a "chart of accounts." This means they have a bunch of imaginary accounts for tracking everything, including:

   - Expenses (e.g. team lunch or a flight cost)
   - Liabilities (e.g. loans)
   - Equity (e.g. investments in the company from outside parties)
   - Assets (e.g. cash on hand.)

Not sure why you didn't complete your list by adding "Income".

[m3kw9]

So double entry is defeated if you uses a computer to enter the entries. For example if you brought a laptop for 1000, but you accidently wrote 2000 AND the computer automatically entered 2000 in the asset account it would still balance even though it was a mistake to enter 2000.

In addition, you can still make the same mistake by hand for both entries. So I’m still not getting how double entries catch mistakes

[Fire-Dragon-DoL]

How do you determine which thing goes in which account, is it subjective or there is a formal way with a definition

[bregma]

Every time money is exchanged, it has to come from somewhere and it has to go somewhere -- that's two places it need to be recorded (or "entered in the books").

Money can not be created out of thin air, and it can not be destroyed. Every movement of money has to be accounted for, which is why it's called "accounting". Double-entry accounting means you have to account for where the money comes from, and you have to account for where it goes, and each of those is a separate entry and it all has to add up to zero.

Where it can become confusing is when money leaves you or comes in from an external source. There are still two entries, but one entry is in one party's books and the other entry is the other's. For example, I get a paycheque and I enter my income in a little book with green paper and DB/CR columns. At the same time, my employer has entered an expense in their book. Double entries.

[fauigerzigerk]

>Where it can become confusing is when money leaves you or comes in from an external source. There are still two entries, but one entry is in one party's books and the other entry is the other's. For example, I get a paycheque and I enter my income in a little book with green paper and DB/CR columns. At the same time, my employer has entered an expense in their book. Double entries.

I agree with your first two paragraphs but not with this last one. When money leaves you or comes in from an external source, there is always some proxy account for that external party in your own books. And the whole situation is mirrored in the accounting system of the external party (unless they are a consumer). Each party records two entries.

[zie]

> Where it can become confusing is when money leaves you or comes in from an external source. There are still two entries, but one entry is in one party's books and the other entry is the other's. For example, I get a paycheque and I enter my income in a little book with green paper and DB/CR columns. At the same time, my employer has entered an expense in their book. Double entries.

NO.

I mean your employer probably has a set of books, but that's not true in your own local set of books.

In your local set of books you would have something like:

    ACME, inc Employment Income  $100 DEBIT
    Bank Account                 $100 CREDIT

You are accounting for ACME, Inc's Employment expense in your set of books too.

When you send a payment to your Power Company:

    Power Company Expense: $100 CREDIT
    Bank Account:          $100 DEBIT

I mean if you are categorizing expenses you might do something like that. If you aren't, you might title one account "Expenses" and spend it all there, it doesn't really matter what you call the accounts, just that you are consistent.

[m3kw9]

What if your company decides to be generous and just gave 1000 to random Joe, what is the double entry for that?

[randomdata]

> Money can not be created out of thin air, and it can not be destroyed.

Yet accounting is necessary because money is created out of thin air. Money is just the representation of debt, an IOU. There needs to be a record of it in order to know that a debt was created and that a debt was destroyed.

More practically, let's say you give me corn today, and I promise to deliver some of the chickens fed that corn to you after it is ready to for slaughter. Money keeps track of the promise outstanding. We record that promise, or account for it if you will, so that we remember that there is a promise and so that we can later ensure that the promise was delivered upon as agreed. Something that becomes especially important when you realize that promises can be traded on to other people who weren't party to the initial deal. Perhaps you don't really want chicken, but would prefer a watch instead. Luckily the watch maker would like to eat chicken for dinner down the line, so you give him the promise of chicken in exchange for the watch. So on, and so on.

Realistically, double-entry accounting is really quadruple-entry accounting. You record that something was received and you record that a promise was made, then, later on, you record that something was delivered as promised and also record that the promise is no longer outstanding (or in reverse if you are on the opposite end of the transaction). A profit indicates that people still owe you things that you haven't collected upon. A loss indicates that you still owe people things that you haven't yet delivered.

[alexambarch]

From what I got out of the article and my own limited understanding of double entry bookkeeping, the "double" seems to be referring to the part where we split a transaction into credits and debits as opposed to a transaction with positive or negative balance. The doubling is happening with the labels we use to describe what's happening with the money.

From an individual account perspective, there's a doubling of the number of columns you could enter a transaction's amount into.

[gorjusborg]

The core innovation of 'double entry' is that you can see the flow of money between accounts for every transaction.

This is possible because you (the accountant) are always adding a back-reference from the other account (hence the 'double' in 'double entry').

There's really not much to it. It throws people that are new to it for a loop, I think, because it is a strange way of behaving, and it isn't obvious why you're doing it until you have to track down something that doesn't balance. It's just a disciplined behavior that accountants started using because it allows one to track things that were difficult without it.

[vpribish]

this is probably not true, but I heard that this stuff predates the idea of negative numbers so you have db and cr accounts that offset each other without negatives.

[Linosaurus]

> actually explain the "double" part in detail?

$100 appears in your account. That’s one part. The other part depends on why.

* you moved money from another account, the double is -100 in that account.

* you sold stuff, +100 in income.

* you borrowed some money, +100 in ‘debt’.

In a physical book each of these categories would have a left and right column, and each transaction has numbers in one left and one right column. Or in many columns but the sums of left vs right columns must be the same.

[conductr]

Always needs two entries to keep assets equaling liabilities plus equity. If you do anything it effects both sides of the equation, thus “double entry” is required to keep this relationship. It’s the accounting equation.

https://www.investopedia.com/terms/a/accounting-equation.asp