[atomicfiredoll]

Remember, this was all done on paper before software with tagging and such existed.

I'll give a description shot, since I've been doing finance work recently. Other people can feel free to correct.

A company using double entry (as opposed to single) has a "chart of accounts." This means they have a bunch of imaginary accounts for tracking everything, including:

- Assets (e.g. cash on hand.)

- Liabilities (e.g. loans)

- Equity (e.g. investments in the company from outside parties)

- Income/Revenue: (edit: as PopAlongKid kid mentioned, I forgot this one. This could include sales revenue, but also things like interest.)

- Expenses (e.g. team lunch or a flight cost)

Some of these "accounts" may map to actual bank accounts: there is likely a liability account for a credit card or an asset account for the company checking.

Knowing all that, every time money is deposited or withdrawn (a transaction) the "double" references the fact that it's recorded in the journal (a.k.a ledger) of two accounts. (Edit: As bregma mentioned, one records where money is coming from and the other where it's going.) Often, an expense is often recorded in the checking "account" and the and the corresponding expense "account." E.g. a flight may be recorded in a travel expense "account," but you also record that the money came from the checking account. Every transaction is recorded in two places.

Beyond just being more accurate than single entry, this helps with important finance reports like Profit & Loss, since you can now see how money is moving around.

Edit: Now that I'm back on my desktop, these are a couple of useful links for understanding basic double entry bookkeeping: Accounting for Computer Scientists [0] and Accounting for Developers, Part I | Modern Treasury Journal [1]. What is a Sample Chart of Accounts for SASS Companies [2] illustrates some charts, which may be helpful for some folks.

[0] https://martin.kleppmann.com/2011/03/07/accounting-for-compu...

[1] https://www.moderntreasury.com/journal/accounting-for-develo...

[2] https://kruzeconsulting.com/startup-chart-accounts/

[kqr]

> this helps with important finance reports [...] since you can now see how money is moving around.

This is the real benefit I've encountered. Any time I try to "simplify" financial recording for someone else and avoid double-entry, I inevitably end up wanting to perform a query that would be easy in a double-entry system but is not in any other system.

[atomicfiredoll]

Right. I didn't mention that a chart of accounts can look different in different companies/sectors. Some accounts may be considered nested (software may even show them as nested.) Then you can roll the totals for all accounts of a type into a general category account like "Assets" or "Expenses." That makes it easier to answer questions like, "how much have we spent in total?"

[PopAlongKid]

>A company using double entry (as opposed to single) has a "chart of accounts." This means they have a bunch of imaginary accounts for tracking everything, including:

   - Expenses (e.g. team lunch or a flight cost)
   - Liabilities (e.g. loans)
   - Equity (e.g. investments in the company from outside parties)
   - Assets (e.g. cash on hand.)

Not sure why you didn't complete your list by adding "Income".

[atomicfiredoll]

Thanks, I was sure I was missing something obvious like that when trying to simplify the explanation.

[m3kw9]

So double entry is defeated if you uses a computer to enter the entries. For example if you brought a laptop for 1000, but you accidently wrote 2000 AND the computer automatically entered 2000 in the asset account it would still balance even though it was a mistake to enter 2000.

In addition, you can still make the same mistake by hand for both entries. So I’m still not getting how double entries catch mistakes

[JetSetIlly]

There are several categories of mistake that you can make when bookkeeping. Some are caught by the double-entry system when a trial balance is prepared.

The error you've described is an "error of original entry" and will be invisible if you only look at the trial balance. It can ultimately be caught when you compare the banking ledger with what's actually in the bank.

Other errors that don't appear in the trial balance can be incredibly hard to detect and in fact, may never be noticed. This is where the real art of bookkeeping is IMO.

The types of errors that do affect the trial balance are things like forgetting to enter a purchase in the purchase ledger but entering the transaction into the banking ledger correctly. Silly errors really, but we can all need help to stop us making those.

[jsty]

When you reconciled the balance in your bank account / credit card statement against that in your set of accounts, you'd notice the error as the statement balance would be 1000 higher than reflected in your accounts.

[Fire-Dragon-DoL]

How do you determine which thing goes in which account, is it subjective or there is a formal way with a definition

[zie]

In a general sense, it really doesn't matter, as long as you are consistent.

That said, there are accounting standards that define the general set of accounts for a particular industry, etc.

But every person having a set of books will want to customize it to some degree.

For instance in a personal set of books, if you want to track every person you pay, you might have accounts, 1 for every single person you have ever paid, ever.

That obviously can get pretty big! Others might not care that their electricity provider changed from Tootie inc. to Turtle inc, so they just have Utilities:Electricity as their account name.

Others might not care at all, and just have a very general "Expenses" account for things like that.

Make sense?

The important part is consistency of using the same accounts for the same transactions.

[Fire-Dragon-DoL]

OK So it is somewhat open but you could use a set of standard accounts, I see.

Makes sense. Probably it's important to keep somewhat of a registers of accounts available to avoid making mistakes and to write directions on where things should go

[tomnipotent]

There's also GAAP in the US and IFRS in Europe, which are standards for how certain things need to be done to be compliant. It's not specific about things like account names or how your ledger should be structured, but outlines many expectations and rules/constraints that build confidence in the resulting numbers.

[zie]

Agreed, but every industry/sector might have their own set of standards that usually are overlays on top of GAAP/etc. For example in the US for state and local governments there is GASB: https://gasb.org

[zie]

Of course! There is a standard term for that: Chart of Accounts

If you search for example chart of accounts <INDUSTRY YOU CARE ABOUT> you can probably get a sample set to work from.

[atomicfiredoll]

The chart can differ in different companies or sectors. In my mind, it comes back to what you want to be able to report on.

Some companies may have a larger and more detailed chart of accounts so that they can have very specific breakdowns of things. I've heard of big charts where each of a company's departments have specific accounts and all departmental transactions go there while the rest are lumped into a "Sales, General, and Admin" bucket. (Although I think it's more common to tag transactions with a department code these days?)

That said, categories can be broken down into sub-types beyond Assets/Liabilities/Equity/Income/Expenses. For example, assets are categorized based on how quickly they can be converted to liquid money and if they physically exist. So, under the assets account you may have accounts for current, fixed, and intangible (e.g. trademark or domain name) assets and you would record those appropriately.

Edit: To answer the question more directly, it depends on the company and how they've customized their accounts or guidelines. But, there are general accounting practices that mandate the need for specific things and common questions to be answered, so a lot similar structures and guidance emerge that a company's finance team could use to tell you where something belongs.