[bregma]

Every time money is exchanged, it has to come from somewhere and it has to go somewhere -- that's two places it need to be recorded (or "entered in the books").

Money can not be created out of thin air, and it can not be destroyed. Every movement of money has to be accounted for, which is why it's called "accounting". Double-entry accounting means you have to account for where the money comes from, and you have to account for where it goes, and each of those is a separate entry and it all has to add up to zero.

Where it can become confusing is when money leaves you or comes in from an external source. There are still two entries, but one entry is in one party's books and the other entry is the other's. For example, I get a paycheque and I enter my income in a little book with green paper and DB/CR columns. At the same time, my employer has entered an expense in their book. Double entries.

[fauigerzigerk]

>Where it can become confusing is when money leaves you or comes in from an external source. There are still two entries, but one entry is in one party's books and the other entry is the other's. For example, I get a paycheque and I enter my income in a little book with green paper and DB/CR columns. At the same time, my employer has entered an expense in their book. Double entries.

I agree with your first two paragraphs but not with this last one. When money leaves you or comes in from an external source, there is always some proxy account for that external party in your own books. And the whole situation is mirrored in the accounting system of the external party (unless they are a consumer). Each party records two entries.

[bregma]

Yes. I have a proxy account with one entry (say, "expenses: bank fees"). They have a proxy account with one entry (say "income: bank fees"). Between the two proxy accounts there are two entries. Money can be neither created nor destroyed.

[zie]

> Where it can become confusing is when money leaves you or comes in from an external source. There are still two entries, but one entry is in one party's books and the other entry is the other's. For example, I get a paycheque and I enter my income in a little book with green paper and DB/CR columns. At the same time, my employer has entered an expense in their book. Double entries.

NO.

I mean your employer probably has a set of books, but that's not true in your own local set of books.

In your local set of books you would have something like:

    ACME, inc Employment Income  $100 DEBIT
    Bank Account                 $100 CREDIT

You are accounting for ACME, Inc's Employment expense in your set of books too.

When you send a payment to your Power Company:

    Power Company Expense: $100 CREDIT
    Bank Account:          $100 DEBIT

I mean if you are categorizing expenses you might do something like that. If you aren't, you might title one account "Expenses" and spend it all there, it doesn't really matter what you call the accounts, just that you are consistent.

[bregma]

Well, if I have a local entry

    ACME, inc Employment Income   $100 DEBIT

in my employment income account that money has not come out of thin air. Remember, money can not be created nor destroyed in this system. Somewhere there is a matching entry something like

    bregma, services rendered     $100 CREDIT

in my employer's books. And that money, in turn, was probably moved in from some other account internally. Mean time the only real movement of "money" was an electronic communication between two banks (my employers and mine), with a matching entry in an account in each.

Things like income accounts and expense accounts are not magic sources or sinks for money flows. They're just half of a double entry system with the other half somewhere else.

[zie]

I agree generally speaking, but what does that have to do with your local books? Nothing.

You almost certainly don't have access to your employer's books.

Also, the ledger entries for "bregma, services rendered" i.e. payroll will be much more complicated than that, there will be taxes, deductions, etc they have to account for as well.

[bregma]

> what does that have to do with your local books?

It's how double-entry bookkeeping works. Money can neither be created nor destroyed. On your local books you have an account where money goes and appears to be destroyed, but in reality there is a doubled entry in someone else's books. Just because you're unaware of it does not mean it does not exist.

And it's true that bookkeepers will have splits in their ledger in which one transaction consists of multiple entries, but that's a convenient shortcut for consolidating multiple items each of which is one half of a double entry. It has no bearing on how double-entry bookkeeping works and just needlessly complicates a description of the fundamentals. It has only to do with conventions for recording double-entry bookkeeping, just like using DB and CR to indicate whether entry is moving money into or out of an account.

[someguydave]

The fact that you have a counterparty with his own books has nothing to with the phrase “double-entry accounting”, it is a method of keeping your own books.

[zie]

> It's how double-entry bookkeeping works.

Sorry, but no. I have no idea why you think double entry means 1 of the entries is in some other persons books that you don't have access to is somehow useful. Double entry is 100% local to a singular set of books.

The point of double entry accounting is to avoid many simple mistakes. If you can't access a 3rd parties books to check, what is the point of double entry accounting, when you only hold a single entry?

I literally have no idea how you think this even remotely makes sense.

> Money can neither be created nor destroyed.

Totally as an aside, money can indeed be created and destroyed, the govt and even banks do it all the time[0]. But I agree practically speaking from an accounting perspective in a singular person/organizations books money isn't created or destroyed it's just moved around. But for double entry accounting, it's 100% not useful to talk about money in some other person's books, it's irrelevant.

0: BOE, Money Creation in the Modern economy an introduction: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

[Delk]

Might be the slight fever talking, but wouldn't the debit and credit be exactly the other way around? When you get paid by your employer, in your books the money enters your bank account ("debit") and is coming from an (abstract) employment income account ("credit").

When you pay your power company, the money leaves your bank account ("credit") and enters the (abstract) power company expenses, utilities expenses, or whatever account ("debit").

[zie]

Just depends on which perspective you are looking at the books from.

From my perspective as the bank account holder and the person managing my own books, no.

[m3kw9]

What if your company decides to be generous and just gave 1000 to random Joe, what is the double entry for that?

[tromp]

Cash account is credited $1000, and Gifted (or Cash_Gifted) account is debited $1000.

[randomdata]

That method only works if money can be created out of thin air, and also destroyed. The grandparent comment was pretty clear that money cannot be created out of thin air, nor can it be destroyed.

A curious contradiction. How do we resolve it?

[omichowdhury]

While money can’t be created or destroyed (unless you run a central bank…), value can be. Ledgers always have a specific perspective, and that perspective can assign a different value to something than someone else.

In the case of gifting something, from the perspective of the gifter, they destroyed some value they had on their books and got nothing of value in return. There’s an account type for tracking why your net worth decreased - Expense accounts. The giftee received value and they have an account to track why their net worth increased - Income accounts. If value was objective, then the net worth decrease on one side would exactly equal the net worth increase on the other.

With something like cash, the unit of account and the store of value are the same thing - so 100 USD objectively the same value in everyone’s ledger. But say you were gifted a painting. The gifter may have valued this painting at 100 USD, while the giftee actually thinks it’s worth 50 USD. If the gifter didn’t tell them the price, there would be no way of knowing they recorded different numbers. So in this transaction value was destroyed.

The same thing happens when you buy and sell things. Say the painting was sold instead of gifted, then the difference in what the buyer and seller thought the painting was worth is value that was created and destroyed. Each person’s net worth would go up or down depending on whether they thought the painting was a bargain or overpriced. When providing services, value is created at the moment of usage and a ledger will track the creation of value in your landscaping business.

[randomdata]

> While money can’t be created or destroyed (unless you run a central bank…)

That's not the case. Money, of course, is just a promise to provide something of some defined value at some point in the future. Anyone can make such promises. Heck, that's why we invented accounting – to keep track of the promises outstanding and delivered!

[dragonwriter]

> While money can’t be created or destroyed (unless you run a central bank…), value can be.

Money is created and destroyed by extending and resolving credit. central banks do it, but so do regular banks and non-bank institutions.

[bregma]

Macroeconomics is not bookeeping.

If a bookkepper destroyed or created money they would be in a great deal of trouble and probably end up working for the state for two years less a day.

[bregma]

No money was created or destroyed. The "cash gifted" account would have a corresponding entry in the recipients books reflecting the cash received. Unless he's delinquent about updating his books in which case it's implied but not realized. Few (unmedicated) individuals are going to track every transaction to that level though.

If it was important to account for the cash donation, the company would require a receipt in exchange. If it's part of a coverup the receipt may be for something unrelated but at least the books are in good order.

[randomdata]

Cash went out. One half of the double entry is correct. But nothing came back in return. There is no corresponding element of trade to account for. The transaction doesn't balance. Which is obvious in human terms. That's the point of a gift – the transaction isn't supposed to balance! But formal accounting methods are not as fluid as people are.

So, of course, in reality money was created (and then destroyed, it being a gift) in order to make the transaction whole. But as far as this magical fairytale land where money can't be created the entry doesn't work. You can't account for nothing.

Let's say it's not a gift. Let's say someone is borrowing $1,000 cash instead. The same applies. There is no corresponding element in trade to account for. It doesn’t balance. Thus, when the cash goes out you need to create money out of thin air to satisfy the other side of the transaction, which is later destroyed when the cash is returned.

[thereticent]

You're misunderstanding double-entry bookkeeping. Something does not have to come into the company got every transaction moving something out of the company. If your company gives $1000 to Billy, you document a $1000 debit from your gift account and a $1000 to Billy's account payable. The goal isn't to get any one account to zero but to get a source and destination recorded separately for every movement of funds.

Lending would be at least two sets of doubly-recorded transactions.

[someguydave]

Gifted is an Income or Revenue account

[randomdata]

> Money can not be created out of thin air, and it can not be destroyed.

Yet accounting is necessary because money is created out of thin air. Money is just the representation of debt, an IOU. There needs to be a record of it in order to know that a debt was created and that a debt was destroyed.

More practically, let's say you give me corn today, and I promise to deliver some of the chickens fed that corn to you after it is ready to for slaughter. Money keeps track of the promise outstanding. We record that promise, or account for it if you will, so that we remember that there is a promise and so that we can later ensure that the promise was delivered upon as agreed. Something that becomes especially important when you realize that promises can be traded on to other people who weren't party to the initial deal. Perhaps you don't really want chicken, but would prefer a watch instead. Luckily the watch maker would like to eat chicken for dinner down the line, so you give him the promise of chicken in exchange for the watch. So on, and so on.

Realistically, double-entry accounting is really quadruple-entry accounting. You record that something was received and you record that a promise was made, then, later on, you record that something was delivered as promised and also record that the promise is no longer outstanding (or in reverse if you are on the opposite end of the transaction). A profit indicates that people still owe you things that you haven't collected upon. A loss indicates that you still owe people things that you haven't yet delivered.