Question about double-entry accounting [closed]

Question

Here's a typical statement on the subject from this SO post:

The logic, for those not familiar with accounting, is: money is not created nor destroyed, it is only transferred from account to another. Each transaction has a Debit side, and a Credit side. A few examples:

1. Salary from your employer: Credit Salary, Debit Bank Account - the money came from your salary, and went to your bank account.

2. Pay of rent: Credit Bank Account, Debit Rent - the money came from your bank account and went to your rent account.

The thing I don't understand the point of having a "salary account" or "rent account". Sure, it's a way to make sure that every transaction formally goes from one account to another, but your salary isn't really an account showing an amount of money that is here and then it's there, it's an injection of money from someone else's account, so it's a fiction to view that as one of your accounts.

How is this fiction useful?

Answer 1

I wonder if you're confusing "account" as meaning a bank account. An account, in accounting terms, is merely a ledger or list of transactions.

Say that you receive some cash. Where did that cash come from? Is it salary for work you performed, is it a gift from your parents, did you sell some of your possessions? Or if you spent some cash; did you pay rent, did you buy groceries, or did you donate to charity?

You would record that you received or spent cash, and you would make a corresponding entry to the appropriate account to keep track of its source. Doing this allows you to easily see where your cash is coming from and going to.

Answer 2

Part of the reason that double-entry bookkeeping works the way it does is to provide error-checking (remember: it originated when everything was written by hand in large ledger books and added-up manually). As the Wikipedia entry for Double-entry bookkeeping system says in its introduction:

The accounting equation is an error detection tool; if at any point the sum of debits for all accounts does not equal the corresponding sum of credits for all accounts, an error has occurred.

while noting that passing this test doesn't guarantee there are no errors: it's just one way to detect some of the more common ones. Later, it expands on this point:

Accounting entries

Recording of a debit amount to one or more accounts and an equal credit amount to one or more accounts results in total debits being equal to total credits when considering all accounts in the general ledger. If the accounting entries are recorded without error, the aggregate balance of all accounts having Debit balances will be equal to the aggregate balance of all accounts having Credit balances.

The point is that if you record that your salary came from somewhere (before arriving in your bank account), then at any point, you can "add everything up" and you should get to zero (if you regard either debits or credits as negative): if you don't get to zero, then there definitely is an error somewhere in the accounts.

If you didn't bother to record that your salary "came from somewhere", then the books will never balance, even if everything else is correctly recorded. But that also means you cannot tell if things have been incorrectly recorded.

For personal finances, if you don't want to be bothered keeping a detailed account of where money came from (salary, gifts, etc.), nor specifically where your money went (clothes, food, rent, etc.) then you could simply have a single "World" account: anytime you spend or receive money, you make a balancing entry against it. It will keep the overall figures in agreement without having to track every little detail.

Answer 3

Despite the claim "no money is created or destroyed", that's exactly what accounts like your salary and your rent represent, with regard to your personal finances.

From your point of view, money is created when you get paid, and destroyed when you buy something or pay for a service.

Your employer pays your salary, but it simply isn't relevant to your finances how they got the money to do so; your salary account thus represents the source of the money entering your bank account.

Likewise, it isn't relevant to your finances what your landlord does with your rent; it suffices to record that you no longer have the money by transferring it to an account you cannot withdraw from.

Answer 4

but your salary isn't really an account showing an amount of money that is here and then it's there, it's an injection of money from someone else's account, so it's a fiction to view that as one of your accounts.

How is this fiction useful?

The accounts are usually grouped into 4 categories:

• assets, i.e. money/value you have,
• liabilities (value/money you owe),
• expenses, i.e. where to money (value) goes that leaves your ownership and
• income or sources of money/value.
  This is where your salary shows up.

For you, salary may be the only source of income, but in general there could be many different ones: capital gains and dividends/interest or rent or several jobs, freelancing, sales of goods you produce etc. And in that case, one may want to know how much income is generated by which activity - just as one may want to know what the money that went away (expenses) was spent for.

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Income accounts have the same (mirror symmetric) use that expense accounts have. If you say that the income wasn't your money and thus shouldn't be your account, you should also say that expenses are not your accounts because that money isn't yours any more.