From 78273a3fc80db5bf0cc27a2eed8c38b741818bf1 Mon Sep 17 00:00:00 2001 From: Simon Michael Date: Thu, 11 Apr 2024 09:38:35 -1000 Subject: [PATCH] faq: updates --- src/FAQ.md | 126 ++++++++++++++++++++++++++++++++++++++++++----------- 1 file changed, 101 insertions(+), 25 deletions(-) diff --git a/src/FAQ.md b/src/FAQ.md index a79edf8..f6745c1 100644 --- a/src/FAQ.md +++ b/src/FAQ.md @@ -40,30 +40,6 @@ SM on new user experience (2023): https://fosstodon.org/@simonmic/11012092250155 See [[Organising files]]. -### How should I choose account names ? - -See [[Choosing accounts]]. - -### Where are debits and credits ? Why are some balances negative ? - -Many plain text accounting tools use negative and positive numbers in place of the traditional *credit* and *debit* terminology. -Of course the credits and debits are still there; in this system, whenever you see a negative amount being posted in an account, it is a credit, and when you see a positive amount posted, it is a debit. -This is just a different surface presentation, which most newcomers find more intuitive and easier to learn. - -Because of this, PTA tools often show liability, equity, and revenue account balances as negative numbers. -So eg when a liability becomes larger (more debt!), the balance becomes a larger negative number (more negative). - -Similarly, when equity or revenues increase, their numbers get more negative. -You'll get used to reading these kind of reports in a day or two. -Some PTA tools also give the option of flipping these negative signs, or showing traditional credit and debit terminology. - -More discussion: - -- [reddit: Is there any plain text accounting software which uses standard debits and credits?](https://www.reddit.com/r/plaintextaccounting/comments/18sbmsx/is_there_any_plain_text_accounting_software_which/) -- [hledger FAQ: Why are my revenue (income), liability, and equity balances negative ?](https://hledger.org/faq.html#why-are-my-revenue-income-liability-and-equity-balances-negative-) - -## General usage - ### How big is your ledger/journal file ? For individual accounting, somewhere between 500-1500 transactions and 100-400 Kb of journal file per year seems typical. @@ -71,5 +47,105 @@ For individual accounting, somewhere between 500-1500 transactions and 100-400 K - https://www.reddit.com/r/plaintextaccounting/comments/ay8ec0/limits_on_ledger_cli_file_size/ (2019) - https://www.reddit.com/r/plaintextaccounting/comments/dbjizl/how_big_is_your_ledgerjournal_file/ (2019) -## Accounting situations +### How should I choose account names ? +See [[Choosing accounts]]. + +### Why are some balances negative ? + +See [[#where-are-debits-and-credits|Where are debits and credits ?]] + +## Accounting + +### What are the three top level accounts ? + +In english, they are **Assets** (things you own), **Liabilities** (things you owe), **Equity** (your/owners' investment or stake or "overall wealth"). + +### What are the five top level accounts ? + +In practice, two more top level accounts are used, making five. +In english: **Assets**, **Liabilities**, **Equity**, **Revenues** (or **Income**), **Expenses**. +Sometimes abbreviated to single letters; hledger uses A, L, E, R, X. + +Revenues and Expenses are essentially inflows and outflows during some period; +technically they are changes in Equity, reported separately for clarity. +Businesses usually merge Revenues and Expenses into their Equity balance at the end of each accounting period. + +More: [hledger: Accounting Basics](https://hledger.org/accounting.html#debits-and-credits) + +### What is the accounting equation ? + +It is a simple formula that always holds true when bookkeeping is correct. +You'll see it written in different ways, eg: + +**Equity = Assets - Liabilities** + +**Assets + Liabilities + Equity = 0** (using PTA's sign convention) + +**Equity = Assets - Liabilities** + +**Assets = Liabilities + Equity + Revenue − Expenses** + +[Wikipedia](https://en.wikipedia.org/wiki/Accounting_equation), +[Investopedia](https://www.investopedia.com/terms/a/accounting-equation.asp) + +### In english, should I call it Revenue or Income ? + +"Revenue" is more often used in business, and more precise; +it implies "gross income", ie total proceeds before taxes and certain costs, +whereas "Income" implies "net income", ie profit after taxes and costs. +Eg the report showing profit is called "Income Statement" in the US. + +"Income" is very commonly used in personal finance and more familiar to non-accountants. + +So, use the one you prefer. + +### What is Equity really ? + +Equity is more abstract than the other top level accounts, can be described in different ways, and takes a bit longer to feel intuitive. +It is best understood with repeated exposure. +Two useful rules of thumb: + +- Equity represents "ownership" in business or "wealth" in personal finance. +- If something doesn't belong to the other four top level accounts, it's equity. + +When multiple owners/investors have contributed funding to set up a business, each of them owns a portion of the business, which is tracked as equity. +And if the business is dissolved, they would each have their share returned to them (ideally). + +In personal accounting, your finances are "the business" and you are the only investor. +When you start tracking your finances, whatever wealth you have accumulated up to this point is your initial "contribution to the business", ie your equity, which funds your starting balances. +Practically speaking, in personal accounting you'll never use equity except + +- when setting up starting balances in a new file +- when converting between currencies (optional, if you want to be [really correct](https://hledger.org/dev/hledger.html#equity-conversion-postings)) + +### Where are debits and credits ? Why do some balances look negative ? + +Many plain text accounting tools use **signed numbers** in place of the traditional terms **debit** and **credit**. +Of course the credits and debits are still there; in this system, whenever you see a negative amount being posted in an account, it is a credit, and when you see a positive amount posted, it is a debit. +Newcomers to accounting find this much more intuitive and easier to learn. (Some experienced accountants find otherwise.) + +As a result of this convention, PTA apps and examples often show equity, liability, and revenue account balances as negative numbers. +You can get used to reading these signed-number reports in a day or two. +Just remember this to avoid a common confusion: + +- When equity increases (more wealth!) or liability increases (more debt!) or revenue increases (more income!), +their balance is shown as a larger negative number (more negative). + +Some PTA tools allow flipping the minus signs, or showing traditional debit and credit terminology instead of signed numbers. + +More discussion: + +- [reddit: Is there any plain text accounting software which uses standard debits and credits?](https://www.reddit.com/r/plaintextaccounting/comments/18sbmsx/is_there_any_plain_text_accounting_software_which/) +- [hledger FAQ: Why are my revenue (income), liability, and equity balances negative ?](https://hledger.org/faq.html#why-are-my-revenue-income-liability-and-equity-balances-negative-) +- [Hacker News: Double-entry bookkeeping as a directed graph](https://news.ycombinator.com/item?id=39988993) + +### Which kind of account are loans ? + +If you are the lender, in your ledger it's an asset. Eg assets:loans:PERSON or assets:receivable:BORROWER. + +If you are the borrower, in your ledger it's a liability. Eg liabilities:debts:PERSON or liabilities:payable:LENDER. + +If the loan is terminated without being fully repaid, eg by being forgiven, the remaining amount due becomes an expense or revenue. + +More: [[Borrowing and Lending]]