[Help] Daily Life and Economics and Double-Entry Bookkeeping

[vicky_molokh]

Greetings, all!

A while ago, Double-Entry Accounting was mentioned as one of the whack-on-the-head great inventions. Now, I've been reading the wiki and some other sites, as well as the replies in the original thread, and I'm still unsure how and what good comes out of it. I'm trying to envision it based on a hypothetical spherical travelling merchant in a vacuum. For the sake of argument, he has cheap writing equipment for purposes of bookkeeping

Let's say our merchant has 100 $eashells/$kins/whatever GURP$ as initial cash.
He spends $50 to buy a cart to lug the goods around. Both cash and the cart are tangible goods, so he gets both -50 and +50 on the Real account, right?
Then he spends the other $40 in Settlement A to buy some obsidium chunks. That's tangible again, so it's -40 and +40 on the Real account again.
He goes to Settlement B, where he buys some food for $10. That's tangible again, so -10 +10 again.
He eats the food. That's -10 on the Real account. I suppose since the food is gone, this means -10 on the Nominal account ($10 of 'expense' in owned stuff).
He sells the obsidian chunks for $80. That's -40 on the Real account (obsidium is gone), and immediately +80 on the Real account again. The net difference is +40, so as far as I understood he should write +40 on the Nominal account (income of $40).

I don't get where Personal account ever figures, unless he wants to go to the risks of lending some more $kins from a friend or borrowing obsidium chunks to a customer in Settlement B without immediate payment. (Both not exactly safe things to do.)
I'm also puzzled that the most common operation - exchanging cash and goods in either direction - results in a +0 zero entry (unless selling produces an income). Furthermore, it is not clear how the value of non-cash assets is derived. If the situation changes and he has to buy the next batch of obsidium at $90 (for the same amount), would that be written as -90 +90, or as -90 on Real, then +40 on Real (one batch of obsidium chunks) and -50 on Nominal (loss?), only to be compensated by a gain once the demand for obsidium in Settlement B rises to allow selling it for $100?
Why are cash and stuff lumped together?

(Note: I'm actually GMing at TL9ish game, but I find the single-merchant example easier to work with.)

Thanks in advance to all the answers!

[fifiste]

I'm also puzzled that the most common operation - exchanging cash and goods in either direction - results in a +0 zero entry (unless selling produces an income)

As much/as little I understand this here is the core of the system. The double entry book keeping system carries with itself an easily checked error detection system If for some reason your credits and debits don't make up a zero you have messed something up. If you are just selling a few chunks of obsidian here and there then there's not much need to mess with keeping double entries. But if you do thousands of entries it pays to have extra error-detection.

That's the first and foremost boon and reason for the invention I guess.
There are probably other boons like better overview of your equity and assets and liabilities. Hmm I can see how with the invention of the term equity and realization that Equity=Assets-Liabilites - the double entry book keeping is somewhat bound to raise/or vice versa.

[whswhs]

Cash and stuff are lumped together because they are both things that you have in your possession.

fifiste is right that the fundamental logic of the system is error checking; having to make two balanced entries for every transaction means that you have an increased ability to spot mistakes. But the basic logic of the two entries is that you have a set that define "things" (cash, physical objects, real estate, and so on) and you have a set that define "rights" (owner equity, debts to other people). I think those are what you're calling Real and Nominal, but those are not terms I've ever seen used in any accounting text. Nor Personal, though I would suppose that Personal may be simply one subdivision of Nominal.

Bill Stoddard

[vicky_molokh]

I get the basic error-checking purpose, but it seems strange that the most common operation - buying stuff - results in a +0 change in a single column, as opposed to actually affecting two columns in a way that would make them match.

[Bruno]

Originally Posted by vicky_molokh

I'm trying to envision it based on a hypothetical spherical travelling merchant in a vacuum.

The problem with your example is that you're asking questions about an error detection system, and assuming that there are never any errors :D Your perfect spherical merchant is perfect, never looses any of his product, and never mis-notes something. :D

He's also operating a small enough operation that he's unlikely to forget what he's done and what he has, so the benefits of the error detection system to him are so minor that the cost in time spent on it mostly outweighs them. If he operates with more transactions in a shorter period of time (selling something popular in a market stall) and especially with one or more employees/partners (adding the potential for communication errors and bad actors) being able to validate his data becomes significantly more important.

[Ulzgoroth]

Assessing the value of 'stuff' at any given time is of course a bit of an imprecise science but you can always assess a perceived appreciation/depreciation as an appropriate 'transaction' involving the real and nominal accounts.

The personal account would be where the balance of what the firm owes and is owed is stored.

Everything generates a net zero because, in the event that a transaction makes the sum of real and personal accounts change, the nominal account changes in the opposite direction to absorb it.

[vicky_molokh]

Originally Posted by Bruno

The problem with your example is that you're asking questions about an error detection system, and assuming that there are never any errors :D Your perfect spherical merchant is perfect, never looses any of his product, and never mis-notes something. :D

I got the point that error detection is cool. I'm puzzled how it actually works, since it basically skips over the most common transaction - the Cash <-> Stuff exchange. Especially Cash->Stuff (which is bound to be slightly more than Stuff->Cash, since some stuff is bought to be used, while sold stuff was always bought somewhere - in case of a merchant, not craftsman, that is).

[Polydamas]

"Stuff <-> Cash" may not have been the most common. In many times and places, cash was scarce and in large denominations, so people kept track of credits and settled their accounts every so often on paper or with cash as needed. Eg. in high medieval Europe, in many places and times the smallest coin was a penny, and many people earned two to four pence a day. You could not buy one beer or one meal with the available coins ... so you could either buy in bulk, or run up a tab.

[whswhs]

Originally Posted by vicky_molokh

I got the point that error detection is cool. I'm puzzled how it actually works, since it basically skips over the most common transaction - the Cash <-> Stuff exchange. Especially Cash->Stuff (which is bound to be slightly more than Stuff->Cash, since some stuff is bought to be used, while sold stuff was always bought somewhere - in case of a merchant, not craftsman, that is).

No it doesn't. You don't have just one Assets account. You have multiple Assets accounts, each of which has a separate balance. In the balance sheet, you add up all the assets, and you add up all the equities, and you see if they match.

And there are multiple Stuff accounts. Goods are one type of stuff, roughly a current asset in most cases; Equipment is a capital asset, a different type of stuff.

Bill Stoddard

[jason taylor]

What alien race has spherical merchants?