| I don't understand your point. But instead of rationalizing with words, let's put it into practice. - I receive my paycheck in my bank account. - I want to budget $800 for groceries every month. - I have a credit card with a balance of $250. - I want to know how much I have left; we will have an account named Left to Budget (LTB). Let's outline them as accounts: - Bank Account. It's an Asset and has a balance of $0. - Groceries "category" Account. It's a Liability and has a balance of $0. - AMEX Account. It's a Liability and has a balance of $250. - LTB is my income account. It's a Liability (yeah, I know, but stay with me). When I receive my $1,000.00 paycheck. - Debits Bank (ASSET) for $1,000.00 - Credits LTB (LIABILITY) for $1,000.00 Balances: - Bank (ASSET) $1,000.00 - Groceries (LIABILITY) $0.00 - AMEX (LIABILITY) $250.00 - LTB (LIABILITY) $1,000.00 I budget $800 for Groceries for this month. - Debits LTB (LIABILITY) for $800. - Credits Groceries (LIABILITY) for $800. Balances: - Bank (ASSET) $1,000.00 - Groceries (LIABILITY) $800.00 - AMEX (LIABILITY) $250.00 - LTB (LIABILITY) $200.00 I go to the grocery store and buy Milk for $50 and Bread for $10. - Credits Bank (ASSET) for $60.00 - Debits Groceries (LIABILITY) for $60.00 Balances: - Bank (ASSET) $940.00 - Groceries (LIABILITY) $740.00 - AMEX (LIABILITY) $250.00 - LTB (LIABILITY) $200.00 As of now, I effectively know that: - I have $940 in my bank, but I only have $200 available to spend (LTB). - I have $740.00 left to spend on Groceries in my Bank. - If I wanted to pay my Credit Card (AMEX) in full, I couldn't. Even though I have enough money in my Bank, most of it is already allocated to Groceries. BUT I could adjust my budget, like so: Adjust my Groceries budget by moving $50 back to my LTB, so I can pay my Credit Card in full this month. - Debit Groceries (LIABILITY) for $50 - Credit LTB (LIABILITY) for $50 Balances: - Bank (ASSET) $940.00 - Groceries (LIABILITY) $690.00 - AMEX (LIABILITY) $250.00 - LTB (LIABILITY) $250.00 OK, so now I know that: - I still have $940.00 in my bank. - If I wanted to pay my Credit Card I can because I have enough in my LTB category. - I have $690.00 available to spend in Groceries, because I moved $50.00 away. Now, let's pay my Credit Card. - Credit Bank (ASSET) $250.00 - Debit AMEX (LIABILITY) $250.00 Balances: - Bank (ASSET) $690 - Groceries (LIABILITY) $690.00 - AMEX (LIABILITY) $0.00 - LTB (LIABILITY) $0.00 Now the money I have left in the Bank is for Groceries only. If I wanted to spend on something else, I'd have to either: - Create a new Category and transfer an amount from Groceries, or - wait for my next paycheck. -- We were able to manage all this information with only one bank account, but we successfully managed a small budget. Double-entry is a concept that's not necessarily applied directly to "physical" accounts. We transfer values between accounts even when the money stays where it is. > - Zero liabilities is not a reasonable goal for most people. Zero liabilities is not a goal; it's the direction on whether money balance increases or decreases; it's not tied to the money you have or owe. It's a concept or formula rather than a reality. > - There's an equity account type also. (Also income and expense accounts.) Equity and expenses are Assets. Income can be an Asset or a Liability, depending on how you want to represent it. For me, it is a liability because I want it to be 0. Even tho, my income account will have money, its representation of Money Left to Budget will be zero because the accounts that transfer value from it will include savings or investing accounts. |