The trouble with double-entry...
rodengelsman at ruraltel.net
Tue Feb 1 12:15:22 EST 2005
accounting is that it doesn't have the mechanisms to accurately and
easily deal with certain real-life situations. I know this is the kind
of statement that would make an accountant squeal, but it's the truth.
Let's take the whole issue of asset valuation, for instance.
Double-entry requires that any change in one account has to be balanced
by a change in another. So to reflect the fact that an asset has changed
value one has to make a corresponding entry somewhere else. So if I buy
100 shares of XYZ stock and the price subsequently doubles, where does
that extra value come from? Is that an income? Because you're worth
more, but the only way to make that happen is to have a higher income
while the expenses stay the same. But that's not real money, is it? You
can't buy groceries with it or pay the rent. And you don't pay taxes on
it. And just the reverse if the price goes down. Where did the money go?
Does it wreck your budget?
Another real-life situation: Suppose you strike ill and incur a large
medical bill. So large, in fact that you have to pay it over time.
Logically, that's a liability. So to create the liability you have to
incur a corresponding expense. Payments against the liability are
transfers that don't change your net worth. But medical expenses are
deductible. But you can only claim that part of the bill that you have
actually paid. So you're in a situation where it's damn difficult to
simultaneously track your net worth accurately (which is really the
whole point of traditional double-entry) and account for your deductible
The whole problem stems from the inability to distinguish between
"internal" and "external" liabilities. By that I mean internal
liabilities are things like loans and credit cards. While external would
be an outstanding bill -- an account payable, I guess. In the example
above, if you were to pay the medical bill with a credit card or take
out a bank loan, then you could easily and accurately account for the
expense for taxes.
Now here's where I screw with 700 years of accounting tradition. I think
it's just wrong to equate an account -- real physical account like a
bank account -- with a conceptual entity like an expense category. When
I pay the rent each month I'm not writing a check to "Rent", but rather
to my landlord -- another real palpable entity. In real accounting, who
you pay the money to doesn't matter; it's little more than a memo. It's
confusing a who or where or what with a why.
I have to get to class, but I'll have more on this later...
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