I'm eternally interested in learning more about accounting, but I think this is missing crucial information to actually explain what "accounting" is while laying on this patronizing anti-intellectual "accountants use hard words" writing style.
1. What are you trying to solve by "doing accounting"? After reading this article, it seems like it's some sort of arbitrary aesthetic, like people who think the point of organizing is to have no more papers on your desk.
2. How do the actions in this guide solve those questions? Why make a graph? Why make extra buckets? Why color them? Relatedly, I couldn't find an answer to "why is double entry bookkeeping revolutionary" despite spending a fair amount of time searching. I think it's either related to manual accounting (i.e. not relevant to computers) or is directly related to this question.
I appreciate the mapping of accounting terms to graph features, but the title is way too grand for the contents. I just noticed another commenter who seems to know a lot more than me says roughly the same (although much more negatively).
In addition, here are some things I'd like to know (in addition to the above, although I have guesses to the answers to some):
1. How to deal with accounting over time? When received payments and made payments are at different dates, amortization, etc. If you're trying to identify missed payments, time disconnects create permanent gaps which may or may not be an issue.
2. How to deal with multiple currencies. Related to variance over time: exchange rates, balance calculation, etc.
I feel like "make a graph" is the easy 5m answer and the first thing you arrive at if you look up double entry bookkeeping.
Lastly, I agree that accounting is a fundamental skill, but before you can do accounting you need _data_. All transactions, categorized, all accounts, all balances. This is the hard part. If you're an accountant and this is your job, okay. If I need to manage N accounts in my time after work, well that's a significant chunk of my non-work time.
Mint doesn't work well outside major western spheres. For a while I maintained my own scrapers, but I've fallen back to "just spend as little as possible and you'll avoid going negative" which is not where I want to be but until there's open banking here I don't see many options.
I'll try to answer some of your questions, but I'm not an accountant.
1. You're trying to understand the money coming in and going out of a business. The organization of this information can make certain events more apparent, like whether you're actually making or losing money (this is not necessarily obvious!) how much 'runway' a company has, roughly how valuable it is (a bit nebulous because a lot more goes into it, but "doing accounting" is the starting point), whether inventory is being stolen more than might be normal, etc.
2. No idea about this guide or the coloring. TBH a spreadsheet conveys the data better than a graph. Double entry bookkeeping was a revolutionary idea though. I think it's fairly easy to forget the full effect of a transaction. I buy a $500 chair for my business, this isn't just $500 less in cash, it's $500 more in some 'furniture' asset. This accounting for every minute detail of what your business owns or owes across even dozens of transactions becomes difficult to track.
1. Look up cash vs. accrual accounting. I think I learned most of this on Khan Academy the first time, but there must be dozens of YouTube videos on it. Basically w/ accounting over time you start adding deferred accounts of different sorts like payables and receivables.
2. No idea. I think when you start getting into these topics there is either just some software solution that follows some standard or allows you to make a choice about how to use the exchange rate, or there is some specific standard set by FASB saying how to do it. But I don't know.
As a simple example of something else, with inventory, businesses can value it a few different ways including FIFO and LIFO (where they value inventory based on the price they paid least or most recently) among others. These choices are often just a preference for the business, or perhaps common for a business' industry. I suspect there might be similar methods of valuation for accounts denominated in different currency, where you could take the amount by exchange rate either on the first or last of the month or by its average rate over the month.
I appreciate the help, but I think the goal of understanding the money coming in and going out is too abstract - what does it mean to understand, and at what level is understanding achieved?
The point I want to make is that all the things described in the article should be described in terms of their relation to the problems being solved. Because the article failed to establish this connection you can say "a spreadsheet conveys the data better than a graph", or vice versa, and there's no way to decide whether that's true or not.
For instance, being able to answer the following questions:
- Do I have enough money to continue operating?
- Are there any unexpected losses?
- If there are unexpected losses, where are they?
- Are there unexpected gains? And where are they?
- If I want to spend more, how much can I safely spend?
- How are accounts likely to change in the future, and can the above questions be answered then?
Maybe there are others. Questions an exec, or a spouse, or the tax office might ask. The goal needs to have that level of specificity. When an accountant "balances the books" it's not an arbitrary exercise, it's trying to answer one of those questions above.
For the record, I absolutely want an accounting for computer scientists guide. I'm not exactly interested in wrestling with and mapping the concepts myself, at least with the free time I have right now.
Hi rendaw, I made an account just to reply to you because I think your questions are excellent ones.
I am a CPA by background. While much of my professional work today involves programming and working with data, I continue to work primarily in accounting and finance contexts because it is the type of work that I find most interesting.
I don't have a ton of time right now but let me at least answer your first question "what are you trying to solve by doing accounting?". At its core double-entry accounting is a control system (e.g. safeguarding the resources / assets of a corporation by tracking their use). The most important control is that debits must always equal credits. You might understand that in the context of a balance sheet, however it's important to recognize that double-entry accounting systems record business events by way of journal entries. A valid journal entry must include two or more accounts where the sum of debited amounts always equals the sum of credited amounts (if you want to understand why that is a rule I can talk about that in another post). It is a simple & rigid rule, however it still affords enormous flexibility in terms of being able to precisely express business events.
All financial statements are derivative of a series of time ordered journal entries. This series of entries is known as the general journal (not the general ledger which is more often talked about). The general journal is basically just a log of business events. Business events recorded in the form of journal entries are discretely understandable, although you often need the context of other entries to be sure about what's actually occuring.
It's also very important to recognize that this log of journal entries is append-only and immutable. If a mistake is made you never go back a delete an old journal entry, you just make a new one to correct it (sometimes called an adjusting entry). This preserves the ability to review journal entries and intuitively understand what a business is doing over time.
For example, when a company makes a sale you might see a journal entry where accounts receivable is debited and the sales account is credited. A week later you might see a journal entry where cash is debited and accounts receivable is credited, reflecting that the amount for the sale made a week earlier was collected.
This concept of an immutable time-ordered log of events is / was a powerful and useful idea for some obvious and not so obvious reasons that I could talk about for days.
1. What are you trying to solve by "doing accounting"? After reading this article, it seems like it's some sort of arbitrary aesthetic, like people who think the point of organizing is to have no more papers on your desk.
2. How do the actions in this guide solve those questions? Why make a graph? Why make extra buckets? Why color them? Relatedly, I couldn't find an answer to "why is double entry bookkeeping revolutionary" despite spending a fair amount of time searching. I think it's either related to manual accounting (i.e. not relevant to computers) or is directly related to this question.
I appreciate the mapping of accounting terms to graph features, but the title is way too grand for the contents. I just noticed another commenter who seems to know a lot more than me says roughly the same (although much more negatively).
In addition, here are some things I'd like to know (in addition to the above, although I have guesses to the answers to some):
1. How to deal with accounting over time? When received payments and made payments are at different dates, amortization, etc. If you're trying to identify missed payments, time disconnects create permanent gaps which may or may not be an issue.
2. How to deal with multiple currencies. Related to variance over time: exchange rates, balance calculation, etc.
I feel like "make a graph" is the easy 5m answer and the first thing you arrive at if you look up double entry bookkeeping.
Lastly, I agree that accounting is a fundamental skill, but before you can do accounting you need _data_. All transactions, categorized, all accounts, all balances. This is the hard part. If you're an accountant and this is your job, okay. If I need to manage N accounts in my time after work, well that's a significant chunk of my non-work time.
Mint doesn't work well outside major western spheres. For a while I maintained my own scrapers, but I've fallen back to "just spend as little as possible and you'll avoid going negative" which is not where I want to be but until there's open banking here I don't see many options.