Part 3 Truckers Accounting
We left off with one piece to the accounting puzzle left to solve and that was understanding the account types and why a particular type of account must always be one type of account. You cannot enter Income against an Expense account and you cannot enter an Expense against an Income account. These two types of entries require accounts that match them in order to work. This issue arises because an Expense is a negative value account and an Income account is a positive value account. So when you try to enter income (a refund for example) against an Expense to reverse the amount you spent for the item you returned you are trying to enter a positive value to an account which requires a negative value.
The easy way to look at account is that things you own are a plus value and things you owe are a negative value. So things that add to your net worth are plus value items. These are things like your CASH accounts. In accounting, checking, savings & cash are all CASH accounts. Credit Cards are liabilities and in order to simplify accounting we record liabilities as positive numbers. This simplifies account for computer systems because then you are using a single entry system and pay a credit card the cash is a minus and that same minus can be used without modifying it to reduce the balance of the liability. Not all systems function this way, some represent everything as positives and you never see the minus sign. Everything is then handled in the background which I believe makes it harder for the average person to understand it. This is why accounting type people often refer to debits and credits rather than just showing and using positive and negative numbers.
In a debit/credit system you will always see a check shown as $200 or you’ll see things in columns, but generally the amounts listed in the columns do not have signs, they are simply listed as debits or credits. In a single column system the amounts are often shown with either a negative sign or brackets (000) to indicate a negative number. Personally I prefer to show the signs as I believe it’s easier for the average person to understand the 100 -100 = 0 than the visualize that debit 100 and credit 100 = 0. The effect of these two ways of saying the same thing is that they do say the same thing. So how you say it is simply a matter of personal preference. So if you represent CASH as a positive value then money you have is a + and when you spend it the expense will be a negative.
With a credit card purchase you have gained something in the form of an expense. So you ADD to the EXPENSE account. An expense is a negative account therefore the credit card (Liability) which you incur when you pay for that expense with a credit card must be a positive to balance the transaction. When you then pay the credit card that payment is from a cash account and therefore the negative (spending cash to make the payment) will reduce both the CASH account and the LIABILITY.