Most accounting tutorials bound off with jargon
that should be deferred until much later.
This is different: just the essence.
If you or your dev team need to track money, then
these are the essentials. You don’t need hundreds
of objects and thousands of columns.
#1 – There is no ‘good’ (or ‘bad’)
Snowboarding – absolute beginners lean away from the slope as this is the intuitive reaction when looking down a steep drop below.
As it turns out, this is the worst thing you could do – instead, control is regained by doing the opposite: leaning into the drop and cutting ‘an edge’.
When starting out in accounting, avoid the inclination to create ‘rules’ based on your intuition. Ascribing ‘good’ to positive amounts and ‘bad’ to negative amounts is a fatal mistake.
#2 – Conservation of Energy Law
The Conservation of Energy law states:
Within a closed system, energy is neither created nor destroyed – rather, Energy moves from Form to Form.
This law also applies to accounting.
Instead of energy, you can assume that value is never created or destroyed within a closed system – Value simply moves from Bucket to Bucket.
#3 – Balance
Given that value is never created or destroyed, one can conclude that the sum of all movements in any given accounting system will always remain at zero.
Now you know what accountants really mean when they say ‘the books balance’ … to zero.
#4 – The ‘Ledger’
The ledger is simply a record of all value movements between buckets – for example, here is one such movement:
|Customer → 200 → Bank|
Here is the general form:
|Bucket-A → Value → Bucket-B|
#5 – Columns Not Rows
Computers work best when data is arranged in rows instead of columns. It is easier to sum values in a single column than it is to combine values across multiple columns from a single row.
Given the above, this movement:
|Customer → 200 → Bank|
is better represented in a table:
- The customer bucket lost value so the movement from Customer has a negative sign.
- The bank bucket gained value so the movement into Bank has a positive sign.
- The net value of the ledger is zero
(-200 + 200 = 0)as per our Conservation of Value rule.
#6 – Journals are Business Events with Value
A business event’s description and its tabular valuation combine to form a journal – from our example above:
- the event description is ‘Take deposit from Customer’ -and-
- the event valuation is:
#7 – The Definition of Accounting
Accounting is simply the recording of value movements between buckets and the reporting of these movements in useful ways.
If the above makes sense, you are on your way to mastering something that just isn’t that complicated.
We covered seven essential concepts. For the dimensions that make up a bare bones accounting system, continue to Part 2.