Accounting movements on Bytestone Blog

Trading oranges as money - Credits and Debits

Wed, 08 Jan 2025 00:00:00 +0000

Now it is time to connect the directed graph to conventional accounting. We will follow the same sequence with the direction of the graph in the most normal way.

Trading

So to recap the scenario is:

invest in your business.
buy oranges from an orange farmer
sell them at a profit at market

Investment

We start from nothing. The first step is an injection of cash from an external investor.

Trading oranges as money - accounting conventions

Tue, 07 Jan 2025 00:00:00 +0000

So we rework the previous example and treat the oranges as a money equivalent stock item. This allows complete accounts to be done.

Converting stock purchase as money

The conversion of amounts of things to their monetary value is a key element of accounting records. This makes it possible to create accounts So we are going to represent the stock as money and at the cost price. This is not present in the original stock taking accounting of the Sumerians where each type of item eg barley or malt was shown on the transaction.

Trading oranges as money - new conventions

Tue, 07 Jan 2025 00:00:00 +0000

The first time through I tried using the conventional accounting conventions but the overall result was unsatisfactory so that here I have reverted to something that makes more sense and show how the accounting conventions are built from it.

So we rework the previous example and treat the oranges as a money equivalent stock item. This allows complete accounts to be done. In order to make clear the sign difference between a node in graph terminology and an account in accounting terminology I will refer to nodes in a graph sense (with positive and negative balances) and accounts in a conventional accounting sense (credits and debits).

Accounting sign conventions

Sun, 05 Jan 2025 00:00:00 +0000

There are at least two of ways of modelling the account movements. The notation of Kleppmann 2011 chooses the opposite notation although slightly more obvious is the opposite of accounting notation as published by Pacioli.

This is the overall position for an investor transferring £5 to a business for investment:

flowchart LR classDef classAssets fill:#CDA; classDef classBusiness fill:#FFFFDE; classDef classEquity fill:#EEB,stroke-width:4px; classDef classExpense fill:#FCC,stroke-width:4px; classDef classIncome fill:#BCE,stroke-width:4px; classDef classInvestor fill:#ECECFF,stroke-width:4px; classDef classLiabilities fill:#DDD; class I classInvestor; I([Investor]) subgraph Business B([...Accounts...]) class B classAssets; end I -- £5 --> Business

and if you had a single entry accounting system you might represent this as a positive balance. For a double entry accounting system you are representing not just the value but a movement from one account to another.

Accounting transactions as graph theory

Sun, 05 Jan 2025 00:00:00 +0000

A transaction represents a transfer of value, eg investing in a business, the transaction consists of an amount, a source and a destination. The transaction is a transfer from the source to the destination.

Each node is an account and has a balance. Each node must represent the same type of stuff in it, eg money or oranges etc. The value of a balance at a node is determined by simple rules:

Boundaries

Sun, 05 Jan 2025 00:00:00 +0000

Entity and the boundary of the entity

One of the principles of accounting is that is done from the point of view of single entity. Here we have two, the investor and the business. If the investor is self employed and investing in their own business then the boundaries between the two get blurred. In the UK the tax authority HMRC will normally require a self employed person to complete a tax return on behalf of you and your business, ie as a single entity.

Accounting movements - trading oranges

Wed, 01 Jan 2025 00:00:00 +0000

Using the convention developed in Accounting Conventions and looking solely at the accounts with a start from nothing.

The trading

invest in your business.
buy oranges from an orange farmer
sell them at a profit at market

Investment

So reusing the diagram above you the reader as entrepreneur invests in your own business:

flowchart LR classDef classAssets fill:#CDA; classDef classBusiness fill:#FFFFDE; classDef classEquity fill:#EEB,stroke-width:4px; classDef classExpense fill:#FCC,stroke-width:4px; classDef classIncome fill:#BCE,stroke-width:4px; classDef classInvestor fill:#ECECFF,stroke-width:4px; classDef classLiabilities fill:#DDD; I([Investor]) class I classInvestor; subgraph Business direction LR E([Equity Input **£25**]) class E classEquity; B([Cash Assets **£-25**]) class B classAssets; end I -- £25 --> Business B -- £25 --> E

Buying stock / inventory

I have used the term stock as it is a British English term Wikipedia has inventory as the American synonym.