- no company generates revenue in its first second. Even if you start a lemonade stand tomorrow, you'll have to buy some lemons first. The time-to-revenue might be very short, but it's never zero. Therefore, making no revenue for 1 day or for 10 years is not a step change, but simply a point on a curve.
- Capitalism is basically a long history of creating vehicles with increasing sophistication to bridge that gap: provide funding for ventures that have returns in the future. This is intrinsically difficult, and it's easy to waste money, but it can work immensely. This started with the Dutch inventing limited liability corporations to fund ship expeditions, and today's VC is essentially an extension of that.
- It has worked well in the past to bet on companies that don't optimize for time-to-revenue, but something else – famous examples being e.g. Amazon, Google, Meta, who all lost lots of money initially.
Hence there can be companies that make no money for quite a while. And it can even turn out that the vast majority of the companies that make no money for a while never make any money. Accepting this risk is a feature, not a bug.
>- no company generates revenue in its first second. Even if you start a lemonade stand tomorrow, you'll have to buy some lemons first. The time-to-revenue might be very short, but it's never zero. Therefore, making no revenue for 1 day or for 10 years is not a step change, but simply a point on a curve.
Yea, it's called investment. If you want to get rich overnight play lottery or start gambling.
I think what changed is that we at least can attempt to limit 'bad' things with technical measures. It was legitimately technically impossible 10 years ago to prevent Photoshop from designing propaganda posters. Of course today's 'LLM safety' features aren't watertight either, but with the combination of 'input is natural language' plus LLM-based safety measures, there are more options today to restrict what the software can do than in the past.
The example you gave about preventing money counterfeiting with technical measures also supports this, since this was an easier thing to detect technically, and so it was done.
Whether that's a good thing or bad thing everyone has to decide for themselves, but objectively I think this is the reason.
Apple has the technology to bias people towards cats instead of dogs but I find it very unlikely they will bother to do that. The missing ingredient is how it helps their bottom line, which, instead of technical feasibility, is the root reason they do things. For whatever reasons some people REALLY love Apple's default restrictions, most don't really give a damn one way or the other, and the smallest group seem to have problems with it. It's not that Apple can do this so they are, it's users want this and now it can be done.
Perhaps a much more bleak take, depending on one's views :).
It's valid to think of this as Microsoft sort of squandering a unique opportunity to become the ubiquitous video conferencing standard by not investing in Skype, back when it had a market-leading position. Another way to look at this is that even though they bungled this, they still managed to become that solution through Teams. Even though they failed to compete with Skype, got leapfrogged by Slack, and then again by Zoom, they still manage to come out on top, at least in corporate America.
You can argue that they could have been Zoom, too, but looking at Zoom's 22bn market capitalization I don't think Microsoft sheds many tears about that thought. It's more a testament to the incredible market power and distribution muscle Microsoft has, that they can afford this many bad decisions and still win in a way.
The way Microsoft “won” with Teams was through monopolistic bundling it into Windows and Office. To this day most people don’t like using Teams for chat, but because it’s there by default there’s not a good reason to go through the hassle of bringing on another product.
>> To this day most people don’t like using Teams for chat
People will say the same thing about Slack, email, and any other messaging system they are forced to use. People love to complain, especially if they're coming to a product after using a different one at a previous job.
They gained it back by basically giving Teams away for free and getting companies to say "we're already paying for this bundle, so let's stop paying for Zoom/Slack." They still missed out on billions which they'll try to claim back over years of slow price raises (until the competition lowers prices and/or becomes more competitive).
This really reads like a parody. Press release, “a consortium of 20 research institutions”, “awarded the STEP (Strategic Technologies for Europe Platform) seal”. Lots of grandiose self-congratulations. All with nothing to run, download or try of course.
It's normal to announce things long before they're actually available to end users. This is not some unique evil of the EU bureaucracy - if anything, it's very corporate of them.
You just don't get it. When it's announced by the EU, it's red tape PDF crunching soulless bureaucracy wasting our time. When it's said by a glorified CPA of an American unicorn startup it's the vision, innovation and triumph of entrepreneurial spirit.
What I am gonna say here is not a political point but I hope someone can point me the pattern (and some something to read about it) I have observed with for example the EU.
Yes it sounds like a parody or an onion piece.
We know the European search engine, cloud, blockchain never got anywhere. I don't even believe that anybody ever really tried.
Now you have to put yourself in their head for 2 minutes and here is what I noticed by knowing a few of them (the "EU type").
In their perception of reality it seems they really believe that if they declare something it is real. This is why they get so deranged if you dare pointing to the facts or just asking questions.
It seems they really believe they succeeded in all those projects. I they say it, it exists.
I am not really satisfied by the explanations we usually hear: they are incompetent, it is corruption or even insanity (some sort of mass hysteria that would take root in some institutions).
What I am wondering is, is there a concept in philosophy or some similar pattern in previous civilisation that could help us understand what is going on with the EU?
Because Gaia-X or OpenEuroLLM is one thing, but it is worrisome they now believe they can raise an army and declare war on everybody.
As a European, the sad reality is that I see parallels with the late-stage Soviet Union and its satellite states.
NOT when it comes to the level of violence and repression or quality of living. Those two things are world-class.
But in the sense that there's a more or less unelected political establishment that's
a) Recursive: It does things only to show them off to itself.
b) Not exposed to real-world consequences.
c) Has a non-falsifiable pretense to validate whatever they do and caution against undoing whatever it is. For the soviets, it was anti-capitalism. For the EU it's some notion of safety or sustainability.
d) Inadvertently benefits itself and other elites and harms the people they pretend to protect.
My hope is that as a democratic institution, the EU is capable of reform.
Yeah you are right there is probably no need to look very far ...
Now what worry me is from I understand of the collapse of the Soviet Union (but I might be very wrong) is they kind let things happen and was less aggressive by the end.
On the contrary the EC is now consolidating power rapidly and are getting very aggressive.
It is not different from any corporate speech, except that this time is for public benefit rather than private, and will proceed much slower. And yes, I don't know why but apparently consortium are named quite often, I'm in compsci in italy and on hpc courses they get named a lot
They also lead in destroying your own country and science and tech industries. And soon they’ll be the number one authoritarian state too! And have biggest bestest king of them all lmao.
Every week new products are released from you guess where: the US. Products used by people all over the world. US is doing pretty great compared to for example Europe. The US is not becoming an authoritarian state. Its a country lead by companies and institutions. Its just a bit clearer now. But its nothing different than 10 years ago
European projects are often long and ponderous, but they do deliver. There's a long history of state-sponsored academic collaborations, like the venerable CERN.
It looks like it, but LLMs still lack critical reasoning by and large. So if a client tells them or asks for something nonsensical it won’t reason its way out of that.
I’m not worried about software as a profession yet, as first clients will need to know what they want much what they actually need.
Well I am a bit worried that many big businesses seem to think they can lay off most of their software devs because “AI” causing wage suppression and overwork.
It’ll come back to bite them IMHO. I’ve contemplated shorting Intuit stock because they did precisely that, which will almost certainly just end up with crap software, missed deadlines, etc.
True but I think Spolsky meant it more as a metaphor for understanding users' psychology. Knowledge workers need empathy and creativity to solve important problems.
And design, product intuition, contextual knowledge in addition to the marketing, sales, accounting, support and infrastructure required to sell software at scale.
LLMs can help but it remains to be seen how much they can create outside of the scope of the data they were trained on.
You should read the article in full, and/or learn the difference between a share and asset deal. Your link is about the former, the article about the latter.
"You can have the shares for €4m or the assets for €5m". Both sides have agency in a negotiation.
AIUI the .de rules are intended for a somewhat different situation, perhaps more common. The article describes a situation where almost all of the exit is profit. I'm happy for you if you're in that situation, but I'd guess that most people have costs. In that case .de lets you set costs from past years against the exit, and I've heard (hearsay alert!) that .de gives you more flexibility than most countries.
All that said: if you have high income and no costs, German taxes are hard on you, it's true.
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> Do you have any evidence that this is the case for everyone at every company no matter what?
Of course not, you are asking for the impossible.
But we have evidences that 4 day weeks boost productivity at least in some settings. If you are interested in the topic, look up "4 day week productivity" on a web search engine, or "4 day week" / "4 day workweek" on HN [1,2] if you want previous discussions about this. The topic is not new here. You'll find many posts where companies think it works.
I love it when people post studies just because it agrees with their worldview. For full disclosure, I support the 4 day week but I know to be objective. None of those links contain references to proper RCT with control groups or a variety of office roles so there is really no evidence for it. Trial plus survey is a better term as it carries no scientific connotations.
You are not really going to get your average companies to participate in those kind of studies anyway. Those companies want warm bodies and it has nothing to do with empirical evidence
This hack seems to affect the Dropbox Sign application, which is based on HelloSign which they acquired a few years ago. It’s still running on the hellosign.com domain and seems mostly separate, so it wouldn’t surprise me if they also store passwords differently.
I find it a strange choice to explain double-entry bookkeeping with the example of "one entry for Alice, one entry for Bob". That's really not what it's about. It's obvious that a transaction with two parties could be recorded in two places, but to me the crucial point of double-entry bookkeeping is that it requires two entries for each party of the transaction. So if Alice buys book from Bob, four entries are made.
I get that this is supposed to be a simplification for educational purposes, but I find this is simplification is an oversimplification, since it omits the key point.
In all fairness, if you're trying to understand a piece of software like Quickbooks and are not coming from an accounting background, anthropomorphizing each "account" at your company as an individual actor with their own ledger can actually be a helpful mental model. Everything needs to be a dance between actors, and, for instance, when you make a vendor payment in cash, you can only do so as a message sent simultaneously to the Accounts Payable actor and the Cash actor, and each actor must accumulate the effects of that message/event in the way that makes sense. (Namely, each one will translate the event into credits/debits based on the characteristics of who they are, and maintain a balance accordingly. Double-entry, I suppose, means each event must be ingested exactly once by an even number of actors.)
If you're building payment rails, that event might itself be one of a pair of events, sourced from a meta-event tracking the transaction intent. (As a meta-point, I find it much more useful to think of the "graph" in accounting as having edges not made of money, but of data in a derived-event hierarchy.)
And a first step towards being able to have that mental model is ensuring that you have a good mental model of multiple physical-human actors accumulating events in a structured and atomic way.
But the OP doesn't actually make it clear that this is what the analogy is in service of! And I fear that the OP article will cause more confusion than it solves.
You're right - it was a silly thing for me to write! Something more accurate would be that because debits and credits must balance, there is no way to send a message that would only be seen by a single account (other than a no-op); thus, any meaningful transaction will have an impact on at least two accounts.
anthropomorphizing the accounts is not the problem. the problem is that in the example the two parts of the double-entry are the two partners of the transaction. to anthropomorphize properly alice and bob would be two employees of the company buying a book from a bookstore.
> if you're trying to understand a piece of software like Quickbooks and are not coming from an accounting background
Unfortunately, QuickBooks won't help you understand accounting. It's not a true double-entry accounting system, at least it wasn't the last time I touched it. That said, it still does its job and does it well enough, and real accountants are fine with dealing with it.
Simply Accounting is a better example of a true double-entry system.
> Unfortunately, QuickBooks won't help you understand accounting. It's not a true double-entry accounting system, at least it wasn't the last time I touched it.
QuickBooks absolutely is a double-entry accounting system. The "bookkeeper" mode abstracts away and hides what's going on under the hood, but if you enter "accountant" mode, you'll see the full ledger, and you can even make direct journal entries to modify it.
> I must have only ever encountered it in "bookkeeper mode". That abstraction is likely what threw me off!
I personally find the bookkeeper mode very confusing, and having observed others (non-accountants) using it to manage small businesses, I think that folks would be better off taking a one-day course in accounting and learning just enough to use it in accountant mode.
You don't have to be a CPA, just literally enough about A = L + E to follow the flow within Quickbooks and record one side of each entry.
i was about to write the same thing. knowing that double-entry is meant to apply to myself only, i actually found the example confusing, because well, of course bob is going to have an entry in his accounting book, but i don't care about bobs accounts, i don't want to track that. i only care about mine. i buy a book. how do i record this transaction using double entry bookkeeping in my accounting book?
and bob is not even doing any bookkeeping. he is bookselling ;-)
You gained $20 worth of assets, so the counterpart of the $20 leaving your bank account is countered by your assets-account gaining $20
Now each year your book loses 1/5th of its value, due to wear and tear (4$ disappearing from your assets-account), this is countered by your depreciation-account (4$ tax write off, every year!)
After 5 years, it is worth $0 according to your books, but you manage to sell it again for $10: your bank account gets debited for $10, while your capital-gains-account gets credited for $10
> And how about food? I can understand a book having a resale value I keep in my books, but once I've eaten the hot-dog I bought it is gone forever.
Perishable and consumable food wouldn't be counted as an asset in the first place. You spend the money - it's credited to your asset account (reducing the value of your cash-in-hand) and then debited from your expense account (reducing the value of your equity - or, in more layperson's lingo, increasing the total sum of the expenses you incurred during that period).
Of course it would be, asset is anything of value, you're confusing with subtypes of assets. Just mujhe liability is anything you owe regardless of for how long
> Of course it would be, asset is anything of value, you're confusing with subtypes of assets. Just mujhe liability is anything you owe regardless of for how long
If an office buys snacks on Monday for the office party on Friday, they're not counting it as an asset and depreciating it on their books.
If food production or delivery were part of the core business, it would be one thing, but in the context that OP's talking about, it would be overkill at best (and fraudulent, in extreme cases) to try and count a transient consumable as an asset on their books.
Depreciation isn't relevant here, again, you're confused in the types of assets, not all of them are depreciated, only some with some specific properties like time of expected user. Just read the definition of assets in any (accounting) dictionary, or try to record your snack purchase in real accounts and see which side of the balance sheet this account end up in (hint: inventories, assets).
Do you actually do that? When people are working late at the office and you order pizzas you put that into your inventory and then remove it as people consume the pizzas? I record that into a separate operating expenses account meant for this kind of fringe benefit, not into inventory.
Pretty small so I do the accounting as well, but I think I'd lose my mind if I had to record them into inventory. Then when they leave half the pizzas for the next day, I record that? No way.
No, nobody does this. GP is engaging in an exercise in pedantry, under the guise that it serves some pedagogical purpose. Personally, I don't think it's particularly useful to teach people about how things could theoretically be done, when it's much easier to show then how things actually are, but I'm sure there is some accountant nerd out there who is extremely meticulously tracking the total value of the gumballs on the secretary's desk as they are consumed.
you don't need to record the halves, nothing stops your pizza order to be automatically recordered as
-A_cash +A_inventory
-A_inventory + L_expenses
Sure, if your pizza is frozen and consumed in another period, your books will not reflect reality, but so what, when talking about the very basics of accounting you offset that misrepresentation of a simple example by gaining an important pedagogic benefit! Which one, though? What do you gain by denying that pizza is an asset, going so far as calling recognition of an asset as an asset a fraud (but only in extreme cases of 5 pizzas!) and bringing depreciation/core business in?
Perhaps this is obvious to you, but I don't see what I'm gaining by doing this. My inventory management system will have different things unless I'm also recording these pizzas in there for the day. And it will show my inventory valuation as fluctuating when I do things like lunch or dinner for the team. It really seems useless to me when running the business.
That's fine, many accounting practices eschew precision for simplicity, you don't mark-to-market everything, depreciation is linear, etc, so if you don't see any value in this, but only troubles with integration with other systems etc, then it's useless to you. But then the article wasn't about running a real business
The person you're replying to is confused, but that's because accounting can be confusing.
An account is fundamentally either an asset or a liability. When you buy something with a credit card, you've incurred a liability, and gained an asset, no matter what you've purchased. If you use a debit card or cash, you're trading one asset for another.
One of the basic asset categories is expenses. That's the confusing part! When you acquire an asset, which is consumed or otherwise has no book value, that's an expense.
So when you buy groceries with a debit card for a hundred bucks, that's a +100 in Expenses:Groceries, and a -100 in Assets:Checking. If you buy the same groceries with a credit card, it's +100 in Expenses:Groceries, and -100 in Liabilities:CreditCard. When you pay off the credit card, that's -100 Assets:Checking, and +100 in Liabilities:CreditCard.
Asset is overloaded here, because Expenses are not included in calculating net assets. It's confusing! I find it even more confusing that Income is a liability, which always gets lower. That's because whoever paid you had a liability to do so, which they met out of assets.
This is also why, when you pull a CSV of a checking account, purchases are positive numbers, and income is negative. A CSV of a credit card will have purchases as negative, and payments as positive. It's the difference between an asset account and a liability account. Again, not to be confused with net liabilities: Income is a liability, but not one you owe anyone, rather the contrary, Income just gets smaller and smaller (ideally! If it isn't getting smaller then your net assets will be shrinking, most of us can't afford that for long).
The main thing is that an account which fluctuates from zero to positive, or accumulates, is an asset account. One which fluctuates from zero to negative, or accumulates negatively, is a liability account. There are times when this matters, notably when you can take a tax deduction for expenses, that's a good example of why they're on the asset side of the books.
These are the sorts of comments that make accounting and bookkeeping more difficult for people who are learning it. It helps no-one to try to think of income and expenses as equivalent to liabilites and credits. They are merely on the same sides of the accounting equation.
Assets + Expenses = Liabilities + Equity + Income
Expenses are not assets. For example, depreciation is not an asset. It is the representation of the life of the asset getting used up. It is an expense, a pure expense. Interest paid on a debt is not an asset. It is a pure expense. There are no word games that turn these into assets, like you might have for a software subscription or a gas bill.
Expenses diminish the business. Unlike assets, they do not represent anything that can be liquidated. Income increases the business. Unlike a liability, it does not represent a claim against the business.
Why aren't expenses and income on the balance sheet? Because they are netted out into retained earnings for the period. Imagine a business that cannot have a liability. Its accounting equation would simplify to:
Assets = Equity.
Income increases equity, expenses decrease it. Is equity a liability? NO. It is a separate account category with a credit balance. Want to look silly? Do as I did when I was a young programmer who knew everything and confuse the two.
People not learning bookkeeping before writing accounting software (which is a lot more software than people expect) make many dumb errors that frustrate users, bookkeepers and accountants. A decent bookkeeping book (e.g. Bookkeeping for Dummies) goes a long way to familiarizing someone with how to handle double entry accounting.
> or try to record your snack purchase in real accounts and see which side of the balance sheet this account end up in (hint: inventories, assets).
Yeah, and as I said, this makes sense for a company for which food is a relevant part of their business, but in the context OP is asking about, nobody is tracking it this way.
It’s been 15 years since I took an accounting course. Why would my bank account be debited when the balance went up? Is a debit not negative? Is the cash balance presented as a negative?
Indeed this is confusing to most people (myself included the first time I dealt with it), since if your phone company says they’re giving you a credit, you're getting money.
Your bank account is an asset for you, so debits increase the balance while credits decrease it. This is also called a "debit normal" account.
Liability accounts are tracked in reverse and are "credit normal". You increase the value (how much you owe) with a credit to the account and decrease the value (payments you receive) with a debit.
One way to think about is you always "credit" the source of the money.
If you get money from somebody you "credit" them for giving you the money. You say "I must give you credit for having done this".
If money goes into your bank-account you don't credit your bank-account because money didn't come from there it went there. If you don't credit the bank account you must be doing something else and that is called "debit". When money goes to your bank-account you "debit" it because now the bank-account is more "indebted" to you. You don't have the cash in your wallet but the bank-account is indebted to you by that amount.
From the view-point of the bank-manager things are of course reverse. When you put money into your bank-account the bank-manager "credits" you-the-account (in their books) for having done so.
I guess a crucial thing to realize is that your bank-account in your books is a different thing from your bank-account in the books of the bank. It seems like there is only one bank-account, but two different parties (you and the bank) each have their own version of that "account" in their book-keeping system.
A double-entry book-keeping system is "subjective" in that it always describes things only from the viewpoint of whoever it is who is doing the book-keeping.
Yes! Because you can remove your deposits from the bank and they also have to pay you interest on that balance. Your mortgage is an asset to the bank for the opposite reasons.
In your books, your bank account is an asset, and therefore an increase in the balance is recorded with a debit. In the bank's books, it's the other way around.
In a nutshell, double-entry bookkeeping is tracking all your money in two ways:
- where has it come from/has it forever gone?
- where is it now?
So, you start a simple ledger of having $100 in cash with a transaction like this:
Dr "cash" Cr "original funds" $100
Then you spend some of it on food and loan some to Bob:
Dr "food expenses" Cr "cash" $25
Dr "loan to Bob" Cr "cash" $20
Bob pays you back $22:
Dr "cash" Cr "loan to Bob" $20
Dr "cash" Cr "interest income" $2
You can't write 'Cr "Bob" $22', because... I don't want to get into the principles of accounting, but basically all asset accounts only go one way. You can't have minus two dollars in your pocket, and Bob can't owe you minus two dollars either.
Some of the accounts, like "original funds", aren't very useful by themselves, but they are the only way to make sure "money I literally have in my account/pocket", "money I owe people" and "money that people owe me" can all be counted together: if you tally up both kinds of the accounts, the total sum should be the same, just with the opposite "sign".
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?
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
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.
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.
Speaking of history, I learned that the word "control" comes from contra rotulus -- roughly "checking against the wheel", which was apparently from an early medieval device for keeping tallies. The second meaning of "domination" came later.
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.
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.
Cash might be an account, and a bank account might be another one. So if Alice buys with cash, it'd be $20 debit in the books account [1] and $20 credit in the cash account. Or if she paid for the book with something that directly takes the money from the bank account, the credit would be to the bank account.
Note that "credit" in double-entry bookkeeping means a transfer from that account and debit means a transfer to that account. So the debit side of buying the book goes into the books account. The credit entry is for whatever account value is transferred from in the transaction.
I'm not sure I'd say that Alice's net worth goes down by $20 when she buys the book since the financial value of the book would technically also be part of her net worth.
I also wouldn't consider "net worth" to be a single account.
Technically net worth would be the sum of all of Alice's assets in cash, bank accounts, real estate, books and other non-financial assets etc., minus all her liabilities. Each of those might be a separate account in the bookkeeping.
Disclaimer: I'm not an accountant.
[1] There might not be a separate account for books unless Alice is a real books aficionado and a meticulous bookkeeper, so the account might also be "books, movies & music", "entertainment & culture", or just "personal items" depending on what granularity is desired/needed.
It might also be that such items are not considered to have financial value in the system (which would probably be the correct unless Alice collects books) and the debit ("to") would actually go in some kind of an (abstract) expenses account instead. Either way, both the value leaving cash/bank and the value "entering" some other account would be entered.
In a real world example you would be correct. This would fall under the “equity” of the accounting equation assets = liabilities + equity. The equity part can be confusing but is where many of the non obvious second entries end up.
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
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.
> 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.
Right. I didn't mention that a chart of accounts can look different in different companies/sectors. Some accounts may be considered nested (software may even show them as nested.) Then you can roll the totals for all accounts of a type into a general category account like "Assets" or "Expenses." That makes it easier to answer questions like, "how much have we spent in total?"
>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".
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
There are several categories of mistake that you can make when bookkeeping. Some are caught by the double-entry system when a trial balance is prepared.
The error you've described is an "error of original entry" and will be invisible if you only look at the trial balance. It can ultimately be caught when you compare the banking ledger with what's actually in the bank.
Other errors that don't appear in the trial balance can be incredibly hard to detect and in fact, may never be noticed. This is where the real art of bookkeeping is IMO.
The types of errors that do affect the trial balance are things like forgetting to enter a purchase in the purchase ledger but entering the transaction into the banking ledger correctly. Silly errors really, but we can all need help to stop us making those.
When you reconciled the balance in your bank account / credit card statement against that in your set of accounts, you'd notice the error as the statement balance would be 1000 higher than reflected in your accounts.
In a general sense, it really doesn't matter, as long as you are consistent.
That said, there are accounting standards that define the general set of accounts for a particular industry, etc.
But every person having a set of books will want to customize it to some degree.
For instance in a personal set of books, if you want to track every person you pay, you might have accounts, 1 for every single person you have ever paid, ever.
That obviously can get pretty big! Others might not care that their electricity provider changed from Tootie inc. to Turtle inc, so they just have Utilities:Electricity as their account name.
Others might not care at all, and just have a very general "Expenses" account for things like that.
Make sense?
The important part is consistency of using the same accounts for the same transactions.
OK So it is somewhat open but you could use a set of standard accounts, I see.
Makes sense. Probably it's important to keep somewhat of a registers of accounts available to avoid making mistakes and to write directions on where things should go
There's also GAAP in the US and IFRS in Europe, which are standards for how certain things need to be done to be compliant. It's not specific about things like account names or how your ledger should be structured, but outlines many expectations and rules/constraints that build confidence in the resulting numbers.
Agreed, but every industry/sector might have their own set of standards that usually are overlays on top of GAAP/etc. For example in the US for state and local governments there is GASB: https://gasb.org
The chart can differ in different companies or sectors. In my mind, it comes back to what you want to be able to report on.
Some companies may have a larger and more detailed chart of accounts so that they can have very specific breakdowns of things. I've heard of big charts where each of a company's departments have specific accounts and all departmental transactions go there while the rest are lumped into a "Sales, General, and Admin" bucket. (Although I think it's more common to tag transactions with a department code these days?)
That said, categories can be broken down into sub-types beyond Assets/Liabilities/Equity/Income/Expenses. For example, assets are categorized based on how quickly they can be converted to liquid money and if they physically exist. So, under the assets account you may have accounts for current, fixed, and intangible (e.g. trademark or domain name) assets and you would record those appropriately.
Edit: To answer the question more directly, it depends on the company and how they've customized their accounts or guidelines. But, there are general accounting practices that mandate the need for specific things and common questions to be answered, so a lot similar structures and guidance emerge that a company's finance team could use to tell you where something belongs.
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.
>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.
Yes. I have a proxy account with one entry (say, "expenses: bank fees"). They have a proxy account with one entry (say "income: bank fees"). Between the two proxy accounts there are two entries. Money can be neither created nor destroyed.
> 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.
in my employment income account that money has not come out of thin air. Remember, money can not be created nor destroyed in this system. Somewhere there is a matching entry something like
bregma, services rendered $100 CREDIT
in my employer's books. And that money, in turn, was probably moved in from some other account internally. Mean time the only real movement of "money" was an electronic communication between two banks (my employers and mine), with a matching entry in an account in each.
Things like income accounts and expense accounts are not magic sources or sinks for money flows. They're just half of a double entry system with the other half somewhere else.
I agree generally speaking, but what does that have to do with your local books? Nothing.
You almost certainly don't have access to your employer's books.
Also, the ledger entries for "bregma, services rendered" i.e. payroll will be much more complicated than that, there will be taxes, deductions, etc they have to account for as well.
> what does that have to do with your local books?
It's how double-entry bookkeeping works. Money can neither be created nor destroyed. On your local books you have an account where money goes and appears to be destroyed, but in reality there is a doubled entry in someone else's books. Just because you're unaware of it does not mean it does not exist.
And it's true that bookkeepers will have splits in their ledger in which one transaction consists of multiple entries, but that's a convenient shortcut for consolidating multiple items each of which is one half of a double entry. It has no bearing on how double-entry bookkeeping works and just needlessly complicates a description of the fundamentals. It has only to do with conventions for recording double-entry bookkeeping, just like using DB and CR to indicate whether entry is moving money into or out of an account.
The fact that you have a counterparty with his own books has nothing to with the phrase “double-entry accounting”, it is a method of keeping your own books.
Sorry, but no. I have no idea why you think double entry means 1 of the entries is in some other persons books that you don't have access to is somehow useful. Double entry is 100% local to a singular set of books.
The point of double entry accounting is to avoid many simple mistakes. If you can't access a 3rd parties books to check, what is the point of double entry accounting, when you only hold a single entry?
I literally have no idea how you think this even remotely makes sense.
> Money can neither be created nor destroyed.
Totally as an aside, money can indeed be created and destroyed, the govt and even banks do it all the time[0]. But I agree practically speaking from an accounting perspective in a singular person/organizations books money isn't created or destroyed it's just moved around. But for double entry accounting, it's 100% not useful to talk about money in some other person's books, it's irrelevant.
Might be the slight fever talking, but wouldn't the debit and credit be exactly the other way around? When you get paid by your employer, in your books the money enters your bank account ("debit") and is coming from an (abstract) employment income account ("credit").
When you pay your power company, the money leaves your bank account ("credit") and enters the (abstract) power company expenses, utilities expenses, or whatever account ("debit").
That method only works if money can be created out of thin air, and also destroyed. The grandparent comment was pretty clear that money cannot be created out of thin air, nor can it be destroyed.
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.
No money was created or destroyed. The "cash gifted" account would have a corresponding entry in the recipients books reflecting the cash received. Unless he's delinquent about updating his books in which case it's implied but not realized. Few (unmedicated) individuals are going to track every transaction to that level though.
If it was important to account for the cash donation, the company would require a receipt in exchange. If it's part of a coverup the receipt may be for something unrelated but at least the books are in good order.
Cash went out. One half of the double entry is correct. But nothing came back in return. There is no corresponding element of trade to account for. The transaction doesn't balance. Which is obvious in human terms. That's the point of a gift – the transaction isn't supposed to balance! But formal accounting methods are not as fluid as people are.
So, of course, in reality money was created (and then destroyed, it being a gift) in order to make the transaction whole. But as far as this magical fairytale land where money can't be created the entry doesn't work. You can't account for nothing.
Let's say it's not a gift. Let's say someone is borrowing $1,000 cash instead. The same applies. There is no corresponding element in trade to account for. It doesn’t balance. Thus, when the cash goes out you need to create money out of thin air to satisfy the other side of the transaction, which is later destroyed when the cash is returned.
You're misunderstanding double-entry bookkeeping. Something does not have to come into the company got every transaction moving something out of the company. If your company gives $1000 to Billy, you document a $1000 debit from your gift account and a $1000 to Billy's account payable. The goal isn't to get any one account to zero but to get a source and destination recorded separately for every movement of funds.
Lending would be at least two sets of doubly-recorded transactions.
> The goal isn't to get any one account to zero but to get a source and destination recorded separately
Right, because transactions are actually two-sided. I give you something, you give me something in return. That's how people work with each other. And, as such, we account for a source and destination because that matches what actually happens.
But often times you only offer a promise. For example, I write some software for you, and in return you offer me food. But I'm not hungry right now, and I certainly don't want food that is going to spoil before I get around to eating it, so instead you promise to give me fresh food sometime in the future when I am hungry.
How do you account for that? You received software services, but gave nothing back in return other than a promise. Well, what if you recorded the promise? Software services in, promise out. You got your software, I get my food, the credit and debit accounts match. Everyone is happy.
Congratulations, you just created money out of thin air! -- And now, later on, I am feeling hungry and am ready to take you up on your food offer. You give me the food, I give back the promise, food out, promise in, I'm fed, debits match credits, and the money is destroyed.
That's exactly why we invented accounting: To keep track of the money being created and destroyed. You wouldn't need accounting if promises never needed to be made. Without promises, you'd have the software services, I'd have the food, and we'd have no reason to think about the transaction ever again. It is the promise that has us wanting to look back to make sure that promises outstanding are made good.
> 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.
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.
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.
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.
$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.
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.
For example, a bank might decide you likely can't pay your loan and write it down to zero. You might still have the liability on your books because you plan to repay it. They'll make the relevant entries in their system (and the debits and credits will balance) and you'll do nothing (which balances).
Double entry bookkeeping has zero to do with other entities. It's solely about your own books.
- no company generates revenue in its first second. Even if you start a lemonade stand tomorrow, you'll have to buy some lemons first. The time-to-revenue might be very short, but it's never zero. Therefore, making no revenue for 1 day or for 10 years is not a step change, but simply a point on a curve.
- Capitalism is basically a long history of creating vehicles with increasing sophistication to bridge that gap: provide funding for ventures that have returns in the future. This is intrinsically difficult, and it's easy to waste money, but it can work immensely. This started with the Dutch inventing limited liability corporations to fund ship expeditions, and today's VC is essentially an extension of that.
- It has worked well in the past to bet on companies that don't optimize for time-to-revenue, but something else – famous examples being e.g. Amazon, Google, Meta, who all lost lots of money initially.
Hence there can be companies that make no money for quite a while. And it can even turn out that the vast majority of the companies that make no money for a while never make any money. Accepting this risk is a feature, not a bug.
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