While money can’t be created or destroyed (unless you run a central bank…), value can be. Ledgers always have a specific perspective, and that perspective can assign a different value to something than someone else.
In the case of gifting something, from the perspective of the gifter, they destroyed some value they had on their books and got nothing of value in return. There’s an account type for tracking why your net worth decreased - Expense accounts. The giftee received value and they have an account to track why their net worth increased - Income accounts. If value was objective, then the net worth decrease on one side would exactly equal the net worth increase on the other.
With something like cash, the unit of account and the store of value are the same thing - so 100 USD objectively the same value in everyone’s ledger. But say you were gifted a painting. The gifter may have valued this painting at 100 USD, while the giftee actually thinks it’s worth 50 USD. If the gifter didn’t tell them the price, there would be no way of knowing they recorded different numbers. So in this transaction value was destroyed.
The same thing happens when you buy and sell things. Say the painting was sold instead of gifted, then the difference in what the buyer and seller thought the painting was worth is value that was created and destroyed. Each person’s net worth would go up or down depending on whether they thought the painting was a bargain or overpriced. When providing services, value is created at the moment of usage and a ledger will track the creation of value in your landscaping business.
> While money can’t be created or destroyed (unless you run a central bank…)
That's not the case. Money, of course, is just a promise to provide something of some defined value at some point in the future. Anyone can make such promises. Heck, that's why we invented accounting – to keep track of the promises outstanding and delivered!
If a bookkepper destroyed or created money they would be in a great deal of trouble and probably end up working for the state for two years less a day.
Money is just a promise. Anyone can create those. Which should be quite obvious. When you go to work to, as we literally say, make money, your employer is making a promise that in exchange for you work you can take something of some defined value later. Later, you will take that promise and turn it into something of value, such as food. Once spent, the money is destroyed. The promise is no longer valid. The deal is done.
Currency is a promise to a particular entity, such as a central bank. A central bank will loan you something of some value, you equally promise to give them something of equal value (we'll ignore interest for simplicity) back at a later date. Indeed, only the central bank can accept promises made to the central bank. If you accepted a promise on behalf of the central bank, without explicit authority, then you are quite right that trouble is coming your way.
Because there is a trust component required in promises, often promises made – such as the promise of your employer to feed you later – will be backed by a promise to the central bank. The central bank has a military to send if someone really tries to play nasty with promises made, so that carries a lot more trust than if you and I wrote up our own 'IOU'. This may be why you see money and currency as being one and the same. Often they are, but not necessarily so.
Accounting is simply for keeping track of promises. That's why we invented it. You don't need accounting for barter. It is the promises that necessitate accounting in order to keep track of what promises are outstanding and what are fulfilled. A bookkeeper doesn't create money per se, but they certainly account for money created and destroyed by the entity they are bookkeeping for.
I think you’re right that currency is technically what I meant by money in that sentence. Like you said most people equate the two, which is why I prefer to use the word “value” for the various promises we track in accounting. It just has less baggage with most people since it’s more abstract. Value can definitely be created or destroyed from the perspective of the entity whose net value we’re tracking.
AR and AP accounts track promises, and as you point out, bank accounts and cash are also conceptually no different than other AR account. I call these asset and liability accounts State accounts. They track the current state of your promises and expectations. Since a promise can be reneged or an expectation not met, we need accounts that balance changes in State accounts when value is created or destroyed. That’s what income and expense accounts do — which I call Change accounts [1]
> You don't need accounting for barter.
I get what you’re mean, but I think a good way to get your head around multi-currency accounting is to think of it as double-entry bartering. Each currency only has value because it can be swapped with another currency at a certain rate. Which is basically bartering. How many sheep for how much grain? How many USD for how many GBP?
The interesting part is bringing double-entry into this:
- how do you balance a transaction when the two sides are in different currencies?
- How do you track the exchange rate between currencies?
The answer to each question is the other question. You balance entries by adding two more lines that track gain/loss due to exchange rate fluctuations. I did a talk on this at Fintech Devcon [2] and we cover this in our docs [3]
> I prefer to use the word “value” for the various promises we track in accounting.
Value is the opposite side of the transaction, though. Money is the promise of value, not value itself.
> Which is basically bartering.
Yes, it most definitely is, but the difference with bartering, by definition, is that the value is always delivered immediately. As in, you give me grain and I give you sheep at the same time. We both have what we want, the deal is done, and there is no need for accounting as there is no reason to ever think about it again.
But if, instead, you give me grain and I give you nothing but agree to later give you sheep after they have been fed the grain and are ready for slaughter, then we have an unbalanced transaction. You gave me value, but I gave you nothing – just a promise.
Enter accounting. I record that you gave me grain and I record that I made you a promise (money created). You record that I gave you a promise and that you gave me grain. My books will show a loss (promises outstanding) and you will show a profit (promises yet to be delivered). This gives us both a reminder that the deal isn't yet done, which is useful because people are prone to forgetfulness. Also, perhaps even more significantly, you can pass on the promise. The person who finally receives the value in the future may not be the person who made the deal originally, so accounting is critical to settling the promises across a chain of trades.
In the case of gifting something, from the perspective of the gifter, they destroyed some value they had on their books and got nothing of value in return. There’s an account type for tracking why your net worth decreased - Expense accounts. The giftee received value and they have an account to track why their net worth increased - Income accounts. If value was objective, then the net worth decrease on one side would exactly equal the net worth increase on the other.
With something like cash, the unit of account and the store of value are the same thing - so 100 USD objectively the same value in everyone’s ledger. But say you were gifted a painting. The gifter may have valued this painting at 100 USD, while the giftee actually thinks it’s worth 50 USD. If the gifter didn’t tell them the price, there would be no way of knowing they recorded different numbers. So in this transaction value was destroyed.
The same thing happens when you buy and sell things. Say the painting was sold instead of gifted, then the difference in what the buyer and seller thought the painting was worth is value that was created and destroyed. Each person’s net worth would go up or down depending on whether they thought the painting was a bargain or overpriced. When providing services, value is created at the moment of usage and a ledger will track the creation of value in your landscaping business.