Comment by hencq
2 years ago
> Money appeared. Lemonade disappeared. I want to see the corresponding +$5 and -$5.
If I understand your comment correctly, where you're getting confused is, you're reading Current Account (Assets) to mean your inventory of lemonade. What they actually mean in this case is money moved from Income to your Assets (e.g. your cash register). That's why assets went up in this example.
Of course for your lemonade business you might keep track of your lemonade as well (which I think is what you're talking about when you refer to assets). The lemonade sale would then lead to a decrease in your lemonade asset and and an increase in your expenses (cost of goods sold), so the right hand side of the equation balances.
So when selling lemonade there are actually 2 things happening:
1. Your income and your assets (your amount of cash) both increased. Income and Assets are on different sides of the =, so the equation still balances
2. Your lemonade assets decrease and you incurred the cost of that lemonade as an increase of your expenses. Those are both on the same side of the =, so the equation still balances.
Thanks for moving this along.
I knew beforehand that I will always get Credit and Debit wrong, but now I guess I can add Income and Assets to that.
> What they actually mean in this case is money moved from Income to your Assets (e.g. your cash register).
Usually when people say 'moved', it implies a decrease in one place and an increase elsewhere, and yet:
> 1. You got income and your assets (your amount of cash) both increased.
> Usually when people say 'moved', it implies a decrease in one place and an increase elsewhere, and yet
Yeah, I'm with you there. Personally I think this would be simpler if accounting just used negative numbers instead of a credit and debit side. That said, it's not super complicated. It's all derived from the accounting equation (explained well in this comment [1]):
Equity + Income + Liabilities = Assets + Expenses
Any transaction you do, needs to maintain that equation. That means that the changes either need to add to zero on one side or need to add to the same on both sides.
- E.g. in the example I'm selling lemonade: I'm increasing my cash (an asset, so on the right side) by $5, so I need to also increase the left side by the same, meaning an increase of $5 in the Income account.
- Or let's say I'm buying more lemons for my business. My cash (asset) goes down, but my inventory (also asset) goes up by the same amount.
- If I bought those lemons with my credit card instead, my inventory (asset) would go up and my liabilities would go up by the same amount.
In all cases the equation still holds after the transaction.
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NB
You could construct an alternative way of accounting where the equation looks like this: Equity + Income + Liabilities + Assets + Expenses = 0
In this world, moving money would indeed align better with your intuition. E.g. selling lemonade would be -5 Income and +5 Assets (going from income to assets). That's for instance how Beancount does it [2]. Note that that also means that Equity, Income and Liabilities will now (generally) be negative numbers.
[1] https://beancount.github.io/docs/the_double_entry_counting_m...