As a student, I really started to grokk accounting when I started thinking of double-entry accounting as the business application of Newton's law "For every action, there is an equal and opposite reaction." Whenever a change happens to one side of the financial statements, an exact and simultaneous change happens to the other side. Aggregated over a period of time, the financial statements both categorize and summarize these various changes.
The rule that Assets = Liabilities + Equity is important because Liabilities and Equity can be viewed as opposing forces. Notwithstanding the financial engineering and nuance around debt, liabilities in their purest sense are a balance of how much you've taken beyond what you've earned, while equity is a measurement of how much you've earned beyond what you've taken. The assets show what you have, but L&E show how everything was acquired.
As I get older, I've come to appreciate how accounting also serves as a prism through which to view the world, because the financial concepts that apply to billion dollar businesses also apply to small mom-and-pops and individuals. One can think of themselves as a company, of which they are the CEO and sole employee. They earn revenue (from a job), incur expenses, and may have physical assets (homes, cars, computers) or liabilities (student/car/home loans). Every decision that's made is financial in nature, and thinking about decisions as an exchange of money or time helps me prioritize what I do personally and professionally.
Accounting is a wonderfully beautiful system and I hope it becomes more common knowledge because it is absolutely fundamental to living in our modern time. The largest governments and businesses are bound by the same rules of accounting, and so are we -- whether we are aware of it or not.
The accounting equation and therefore the double-entry system, once fully appreciated, probably ranks high up there in the pantheons of Humanity's achievements right alongside E=mc2.
The non-"scientist" may scoff at that but A=O+L is as sacronsanct as the laws of conservation of energy.
Classical economics is based on a false analogy with Newtonian physics. - George Soros (paraphrased)
Double entry bookkeeping is nothing but an inefficient process hack for poor historic record keeping systems. I would argue that double entry bookkeeping has been significantly responsible for setting back popular fiscal literacy.
What other accounting frameworks exist, that are better than double-entry bookkeeping at promoting fiscal literacy? Or perhaps easier to deal with or understand for a layman?
For reference, I don't understand double-entry bookkeeping.
In the programming world typically we would use a signed value[0] instead of separate ledgers[1] for debit and credit (ie. +$12 and -$11.50 within one ledger, resulting balance +$0.50).
Whereas, in the traditional double entry world, you have two ledgers, one called 'credit' and one called 'debit', BOTH with POSITIVE balances. You don't know where you stand until you look at both and apply appropriate signs, then make a total. This obviously can function and does make sense if you are used to it, but is an artifact of ancient book-keeping practices and a perfect basis for confusion in many cases. Especially since, on different days, you might be the person on either side of the equation (ie. then credit becomes your debit and debit becomes your credit, should you - for example - acquire a competitor).
You could of course store things in any way you like and present them differently, but there's no need to TALK and THINK about them jumping through such pointless logical hoops. (Many philosophers, writers, linguists, mathematicians and programmers have explained the value of concise and explicit language as a boon for clarity of thinking.)
You can model transactions between entities as a directed graph[2], allocating each transaction a unique identifier. In this way, the 'credit' or 'debit' nature of each transaction is no longer the property of "where you are looking from" (subjective property), but rather objectively associated with the source and destination nodes for that transaction in the directed graph.
I believe these approaches promote fiscal literacy because: (A) Everyone with basic mathematical comprehension understands the meaning of + and -. (B) Using common language instead of professional vocabulary reduces the chances for misunderstanding and thus fraud. (C) Maintaining a common ledger for credit and debit (positive and negative value) transactions means they are always sorted through time which is probably our most basic intuitive sense of record as humans. (D) We should always be suspicious of appeals to authority, and the professional vocabularies and self-auditing professional societies in which they congregate, which generally turn out to be the inertia-driven self-interest groups of dynastic rent seeking. (E) Objective and explicit record keeping is good practice. (F) The "whole picture" (all transactions) is a clearer and more logical default intellectual scope than the "half picture" (only credit, or only debit transactions).
Using these tools you can model transactions in any economy, whereas using double entry bookkeeping you will encounter increasing issues when modeling multi-party transactions, multi-hop transactions, multicurrency transactions (traditional double entry book keeping systems utilize a single currency per ledger), etc.
For further observations and thoughts along these lines see IFEX.[3]
I thought a major argument for double-entry bookkeeping was for error detection and correction/auditing. Was I mistaken? It was sold to me like that many years ago.
We have technology that will help with that (signing, hashes, parity bits, blockchain, etc) but none of that matches the simplicity of a notepad in a desk at a local takeaway store.
Yes, that's the classic argument. However, it is quite irrelevant today, where human error and time are both stupendously more expensive than precise record keeping executed by software in the first place.
The tools you mention are tangential to this: signatures are for non-repudiation and authenticity, hashes are for checksums, parity is for self-repair in bad checksum cases (rarely used in application level software today), and blockchains are for distributed trust (eg. distributed ledgers), essentially providing the combined properties of signatures and hashes to a shared database in a distributed system over time.
Note that all depend on the input of valid data in the first place, and none can be efficiently applied to a manually written notepad.
Hah! The classic refrain of the self-styled expert!
How about instead of being dismissive you explain: (a) Why you believe double entry bookkeeping has modern value. (b) How you believe double entry bookkeeping enhances rather than inhibits fiscal literacy.
None of these are covered in the grandparent post, and I am genuinely curious to hear your answers.
The rule that Assets = Liabilities + Equity is important because Liabilities and Equity can be viewed as opposing forces. Notwithstanding the financial engineering and nuance around debt, liabilities in their purest sense are a balance of how much you've taken beyond what you've earned, while equity is a measurement of how much you've earned beyond what you've taken. The assets show what you have, but L&E show how everything was acquired.
As I get older, I've come to appreciate how accounting also serves as a prism through which to view the world, because the financial concepts that apply to billion dollar businesses also apply to small mom-and-pops and individuals. One can think of themselves as a company, of which they are the CEO and sole employee. They earn revenue (from a job), incur expenses, and may have physical assets (homes, cars, computers) or liabilities (student/car/home loans). Every decision that's made is financial in nature, and thinking about decisions as an exchange of money or time helps me prioritize what I do personally and professionally.
Accounting is a wonderfully beautiful system and I hope it becomes more common knowledge because it is absolutely fundamental to living in our modern time. The largest governments and businesses are bound by the same rules of accounting, and so are we -- whether we are aware of it or not.