double entry and accounting equation

[Dr. Robert J. Meier]

Robert,

	Double entry accounting as we know it today, was defined
in the 15th century by Italian writer, Paciolli.  I understand
the underlying engine supports double entry ("strict double
entry compile option").  Unfortunately the gnucash gui
support for double entry is sharply limited.

	The advantages of double entry include
	+ any single math error in a period is identifiable (and correctible)
	o nearly all multiple math errors are identifiable (and correctible)
	+ any tracked item is traceable back to its sources
	+ any source is traceable forward to its effect on tracked items

	The computer makes fewer math errors than a  human and has less (or
no) preference for unsigned numbers, but disk and network failure still
cause errors that are difficult or impossible to trace and correct with
a single entry system.  As the computer reduces math effort, and tax
code becomes more complicated, detection and tracing of missing
entries becomes a more significant benefit of double entry.

	The following is a short accounting glossary.

double entry -
	Every datum is entered twice, first as a line in a transaction
	in a journal and then as a line in a ledger.

journal -
	A list of transactions usually identified by source and date.
	A checkbook is an example of a journal.  A business or household
	usually has a journal for each of the common sources of data,
	e.g. each checkbook, each sales voucher book, ...

ledger -
	A list of lines usually keyed by tracked value, and date.
	A bank statement is a ledger.  A business or household
	usually has a ledger for each budget item, groceries, utilities,
	inventory, ...

asset -
	A ledger whose value persists across periods and is good for the
	business or household.  A savings account is a household asset.

liability -
	A ledger whose value persists across periods and is bad for the
	business or household.  A car loan is a household liability.

equity -
	A ledger whose value persists across periods and represents the
	profit (or loss) resulting from the organization effort.  Different
	accounting styles are characterized by the precise meaning of
	equity.

revenue -
	A ledger whose value is zeroed (closed) every period (month) and
	represents the rate of income for the business or household.
	Salary is a household revenue.

expense -
	A ledger whose value is zeroed (closed) every period (month) and
	represents the rate of spending for the business or household. 
	Taxes paid are a household expense.

credit -
	A credit is a positive value.  Paciolli wrote his textbook before
	the zero was popular in Europe.  Even after introduction of
	zero and sign, most bookkeepers through the centuries found it
	easier and less error-prone to total all unsigned numbers rather
	than mixed sign numbers.

debit -
	A debit is a negative value.  (see credit)

balance -
	A set balances if its sum is zero, the credit total is equal to
	the debit total.
		0 = asset + liability + equity + revenue + expense
		liability(credit) + equity (credit) + revenue(credit)
		= asset (debit) + expense (debit)

transaction -
	A set of 2 or more data define a financial event.
		Checking
		           Debit  Credit
		vvvvvvvvvvvvvvvvvvvvvvvv
		2000.09.27	   
		Groceries  $57.32
		Sales Tax  $ 4.01
		Checking	  $61.33
		^^^^^^^^^^^^^^^^^^^^^^^^
	The sum of every transaction is zero (balanced).
	Each transaction is recorded in a single journal.

split -
	Most accounting systems (not yet gnucash) allow the user to
	define "splits" and automatically calculate the division
	of a given value.
		Split			Debit  Credit
		WeeklyGroceries
			Checking	       100%
			Sales Tax	6.54%
			Groceries	(remainder)

line -
	A line is the unit of data in a ledger.
		Expenses/Tax	      Debit  Credit Balance
		2000.09.26 Postage    $  .33        $153.60
		vvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvv
		2000.09.27 Sales Tax  $ 4.01        $157.61
		^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
		2000.09.28 Auto Tag   $88.00        $245.61

post -
	Posting is the act of copying each line from a transaction
	into the respective ledgers.  The transaction key, journal
	and date(?), is recorded on each ledger line.  A check
	on each transaction line in the journal indicates successful
	posting.

period -
	At intervals (usually each month), the balance of the ledgers
	is verified (, any errors found and corrected), and the revenue
	and expense accounts are zeroed (closed).

trial balance -
	Each period, after all transactions have been posted (from the
	journals to the ledgers), each ledger value is listed.  The
	sum of all ledger values should be zero (balanced).  Any math
	errors or missing entries imply a nonzero sum and are traced
	from here back to the cause for correction.

income statement -
	After the trial balance demonstrates that all the ledgers balance,
	all the ledgers are listed in an arrangement that emphasizes
	the revenues and expenses.  This is "The Progress of the Organization".

balance sheet -
	Each period, after the revenue and expense accounts are zeroed,
	the ledger values are listed.  This is "The State of the
	Organization".

	There are many more details and variations that fit the above
principles to specific situations, but they are the subject of an
accounting degree.

Summarizing accounting 101,
-- 
Dr. Robert J. Meier                               FANUC Robotics North America
tel:+1.248.377.7469                      mailto:robert.meier@fanucrobotics.com