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<!doctype html>
<html>
<head>
<title>Double Entry Bookkeeping</title>
<script src="lib/loader.js"></script>
</head>
<body onload="init()">
<div id="bgpage" class="background">
<canvas id="canvas"></canvas>
</div>
<div class="header">
<div id="follow" style="display:none">follow</div>
</div>
<div id="footer" class="footer">
<div id="navigator" class="large"></div>
</div>
<!-- div id="log">[log]</div -->
<div id="slides" class="slides">
<div class="slide title"
style="background-color:black; padding:5vw"
onshow="d0('navigator','footer');v0('bgpage')"
onhide="d1('navigator','footer');v1('bgpage')">
<div style="height: 15%"></div>
<h1 style="color:#ffa540">Double Entry Bookkeeping</h1>
<h1 style="color:#ffffff">From Scratch</h1>
<h1 style="color:#808080">Mesch</h1>
<h2 style="position:absolute; bottom:5%; padding-left:0.1vw; color:red">Arbo Works, 2022</h2>
</div>
<div class="slide build-focus-visible" group="intro">
<h1>Imagine a lemonade stand</h1>
<div>My daughter has a lemonade stand and sells lemonade on the weekends
on our street.</div>
<div>My neighbor's son wants to set up a lemonade stand too. He could
set up his own. But my daughter has a lot of homework and doesn't want
her stand anymore.</div>
<div>So we could sell our lemonade stand to the neighbor. Question is,
how much should he pay?</div>
</div>
<div class="slide build-focus-visible" group="intro">
<h1>What's a lemonade stand worth?</h1>
<div>Let's see what there is about a lemonade stand:</div>
<ul>
<li>We have <b>equipment</b>:
<ul>
<li>A <b>folding table</b>: $20
<li>A <b>jug</b>: $10
<li>A <b>lemon press</b>: $15
</ul>
<li>We have <b>supplies</b>:
<ul>
<li>5 <b>lemons</b> for $1 each: $5
<li>Squeezed lemonade from 3 lemons: $3
</ul>
<li>We have <b>cash</b>
<ul>
<li>in the <b>change</b> jar: $4.50
</ul>
<li>We have <b>borrowed</b> from dad:
<ul>
<li>to buy the <b>folding table</b>: $10
</ul>
</ul>
<div>The things we have are the <b>assets</b> of the buisiness.</div>
<div>What we have borrowed are the <b>liabilities</b>.</div>
<div>If we subtract the liabilities from the assets, what's left is
the <b>equity</b> of the business. We could sell the business at that
price.</div>
<div>Another way of writing it is to say that <b>assets</b>
equal <b>equity</b> plus <b>liabilities</b>. This always holds
true. The corresponding numbers are called the <b>balance sheet</b> of
the business.</div>
<div>We also write them in columns on the balance sheet: On the left are
the assets, on the top right equity, and the bottom right the
liabilities.</div>
<div>Thus, our equity is $47.50.</div>
<div>Here is our balance sheet. We group the items by category:
<table>
<tr>
<th>Assets
<th>Equity and Liabilities
</tr>
<tr>
<td>
Equipment: $45
<br>Supplies: $8
<br>Cash: $4.50
<td>
Equity: $47.50
<br>Borrowed: $10
</tr>
<tr>
<td>
Total Assets: $57.50
<td>
Total Equity and Liabilities: $57.50
</tr>
</table>
</div>
</div>
<div>
<h1>Time passes ...</h1>
<div>The neighbor is undecided and doesn't want to buy just yet.</div>
<div>Next day, however, he has made up his mind and wants to buy.</div>
<div>Question is, what should he pay now? Some things may have changed
after all ...</div>
<div>We could compute two ways: Either, we redo yesterday's equity
computation from scratch again. Or, we find out what has happened
since yesterday, and how each change has changed the equity.</div>
<div>Let's see ...</div>
</div>
<div>
<h1>Journaling the business</h1>
<div>Here is what happened since yesterday. For each event, we say
whether it affects the equity:</div>
<ul>
<li>We squeezed some more lemonade from 3 lemons. We have $3 worth
fewer lemons, but $3 more lemonade supply. Equity is unchanged.
<li>We sold one lemonade for $2. We now have $1 less lemonade supply,
but $2 more in the change jar. This has increased our equity by $1,
because one of the two dollars is profit.</li>
<li>The jug broke. We have $10 less equipment now, and we lost the
lemonade in the jar, less $5. This is a loss of equity of $15.</li>
</ul>
<div>The record of such events that change the balance sheet is called
the journal.</div>
<div>In each journal entry, we write down how it affects the positions
on the balance sheet.</div>
<div>There is a trick here: We know that the balance sheet reflects the
equity of our business if it balances, i.e. if the left and right side
are equal. We can write the journal entries also in two columns: on
the left we write the changes to the left side of the balance sheet,
on the right we write the changes to the right side of the balance
sheet. If the two sides balance, then we know that the changes leave
the balance sheet balanced, and thus that they properly capture the
effect of the change to the equity.</div>
<div>A second trick: Instead of writing negative numbers, we write equal
sized positive numbers on the other side of the entry. The balancing
of the entry is not affected by this. Thus, a reduction of a left hand
side position of the balance sheet is written on the right hand side,
and a reduction of a right hand side position on the balance sheet is
written on the left side of the entry.</div>
<div>With this, our Journal describes the evolution of the equity of the
business turn by turn. Indeed, it does not just describe the evolution
of equity, but also of every other position on the balance sheet. This
brings us to accounts ...</div>
</div>
<div>
<h1>Accounts</h1>
<div>We can write up how each position of the balance sheet changes
under the effect of the journal entry. Not every position is affected
by every journal entry. Such a writeup is called an <b>account</b>,
and it's written on one page in a second book kept next to the
journal, called the <b>ledger</b>.</div>
<div>An account page captures the change of a position using the same
convention as the journal entries: entries that increase the position
are written on one side, those that decrease the position are written
on the other side.</div>
<div>Which side has the increases depends on what side of the balance
sheet the position is on that the account tracks. An account that
tracks equity or liabilities increases with entries on the right side
and decreases on the left side. An account that tracks asset positions
increases with entries on the left side and decreases with entries on
the right side.</div>
<div>Regardless, however, the left hand side of journal entries and
accounts are called <b>debit</b> and the right hand side is
called <b>credit</b>.</div>
</div>
<div>
<h1>Double Double</h1>
<div>We now have two explanations of the <b>double</b> in double entry
bookkeeping.</div>
<div>Every business event is recorded in two books, first in the
journal, then again in the ledger.</div>
<div>Every business event always affects at least two accounts: At least
one account is debited, and at least one other account is
credited.</div>
</div>
</div>
</body>
</html>