The trouble with double-entry...

[Rod Engelsman]

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 
expenses.

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...

Rod