The trouble with double-entry...

[Mark Eackloff]

Rod Engelsman wrote:
> 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
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There are different types of accounting.  Some don't even involve money. 
  Gnucash is a tool to assist keeping records, and reporting, according 
to the the financial accouting model, ie, ASSETS = EQUITIES.  This model 
has a particular purpose in mind and serves the purpose fairly well 
(when the record keepers and outside auditors are honest).  Different 
models may be more suitable for other purposes.  For example Cost 
Accounting, which is generally considered a sub-discipline of Financial 
Accounting, deals with planning, control, efficiency, waste, and "what 
if" scenarios.

Obviously you are free to use whatever model suits you.  And you may use 
whatever available tool that may help you with that model.  And if the 
tool doesn't help you, you can leave it in the toolbox.

Mark Eackloff