The argument to ABOLISH DOUBLE-ENTRY ACCOUNTING and ABOLISH THE ASSETS=LIABILITIES + OWNER'S EQUITY equation Accounting software, and all forms of business software, really may be viewed as a representation or a set of symbols, for some underlying reality. Obviously you have words like "customer ID", "supplier" and names of accounts throughout the system, for which meanings are not ambiguous. You also have a lot of structures representing relationships and hierarchies, which are more subtle. Like all systems of notation and semantics, double entry accounting can never be anything but a model. It is a map to a territory, whose validity may be evaluated by reference to that underlying reality in the "real world". The double-entry model is based on solid foundations mapping to the thought processes of business owners which were prevalent during the 20th century However, double-entry would never have happened, historically, in the presence of today's computer platforms and internet connectivity. Those who remember the discipline and procedures necessary to make a paper ledger balance at end of month will understand, the system of journals and ledgers primarily arose to improve mechanical accuracy-- a need which computers solved. The trial balance, double-entry, and current notions of GAAP reporting are obsolete and should be replaced. [with a network-centric model.] Systems for buying and selling (and all execution of business transactions) have profoundly different requirements and economic drivers. Because these are intrinsically shared events and data, they are being rapidly constructed in a variety of shared architectures on the internet in numerous vertical communities, SCM and B2B hubs, etc. Systems for accumulating historical audit trails and the associated entity financial reporting will necessarily take a different track from the shared execution platforms above, and there is little utility for double entry trial balance other than to the extent it maps to the human mind. To be complete and accurate, the accounting model would include the Subject and Object symettrically. But such models have never taken root even in distributed systems, because so many of the human actors is still dwelling in a self-centered model of thought--- they install software which is capable of modelling duality the way they think, rather than the way things really are. Todays accounting consumer wants software which depicts "My Assets minus My Liabilities equals my Equity." Nobody cares what the other guy's "view" of each transaction might be. Nobody is remotely interested in an accurate entity/relationship diagram of the whole system, yet. They cannot imagine drilling down into an expense to understand their supplier's costs and sources. Double entry accounting has certainly proven a durable metaphor for reflecting economic transactions. Perhaps this is somehow related to Karma. Nothing is free. The third law of thermodynamics states that every action has an equal and opposite reaction. Double entry accounting is Newtonian: you record an asset only if you can record the related liability. I suppose it is something of an achievement, actually, that so many people have risen from the relative ignorance of single-entry list software, to understand the usefulness of double-entry accounting products. Recording the obvious half of any transaction into a single-entry list is easy, for example, some cash has gone out the window. Double-entry forces the bookkeeper to record the other half of the story: the offsetting liability, asset, etc. connected with it. Taking the extra time to consider the offsetting entry leads naturally to improvement in accuracy of both the primary and offsetting entry. There are at least 10 million people using personal accounting software and most of those software are capable of use without taking the extra step of double entry. But I can testify very few of these people are still bringing incomplete single-entry Money or Quicken lists to their CPAs at year-end. Double- entry rules. You get correct bank and receivable balances. Let's look deeper. The balance sheet is intended to be a snapshot of the company's karmic balance in the marketplace, at a point in time. Every asset or liability that has been recorded must be balanced by identifying it with the other asset or liability or equity account representing that trading partner, owner, debtor or creditor with whom the business transaction was concluded. I believe that there is an entry for the "self", and an entry for the "other". Income and expenses are of course part of the balance sheet. They are an explosion of the detail of retained earnings. Accountants are well aware of this but it bears repeating: there is really no such thing as an income statement. It is a breakdown of the retained earnings account in the equity section, for a particular period. The balance sheet is really an income statement, and the income statement is a balance sheet. There is no such thing as a balance sheet or income statement. They are both artificial constructs. It is a myth, that the balance sheet represents a "State" and the income statement represents "Changes in State". This is one of the biggest psychological mistakes people make. You've just added up a diverse collection of events, which are apples and oranges, and added them up into totals. Displaying all these totals within a format such as a "balance sheet" and "income statement" provides no use at all. The entire edifice of financial reporting and audit of publicly listed companies is a pragmatic creation, born of political economy. It is a residual legal artifact of the historical opposition between corporations who do not want to disclose, and shareholders who require degrees of disclosure. As such, this statutory reporting edifice has no reliable compass and is arbitrary. Nobody is going around deconstructing the two-column trial balance, or questioning its metaphysical accuracy as a model of commerce. DOUBLE-ENTRY IS WRONG AND OBSOLETE: What we are really modelling in the classic notion of an accounting system is a sequence of transactions. That's all it is. A historical trail of events, which were real enough, but recorded in a particular, peculiar way. You begin with zero of anything. You start the model at a point in time. You begin conducting business, and make a notation for cash in the bank (whatever THAT is-- a subject for another day.) The totals on your balance sheet begin to increase and decrease. Those are not real things in any sense; rather they are just running totals of how much water is in each of the buckets. Look at the typical SME (small/midsized enterprise) income statement for example: SENDING RECEIVING REVENUE PURCHASE ORDER INVOICE SETTLEMT OF INVOICE CASH/ONETIME PAYMENTS EXPENSE SALES ORDERS BILLS SETTLEMENT OF BILLS CASH/ONETIME PAYMENTS PAYROLL This really should be an N-dimensional grid since everything on the revenue side is really somebody else's expenses, and vice versa. You would need to have a sheet for each party in the global economy. Whenever you are forced to put a 3-dimension cube on a 2-dimension paper, you have to use recurring bands of rows, and that is exactly what we have in every accounting system in the world: first you iterate thru the incomes, then you iterate thru the same exact transactions as expenditures. The recurring rows are natures' way of saying, something's wrong. Accounting is such a hall of mirrors. Luci Pacioli didn't have any three dimensional software so he built it on 2-dimensional repeating list. he didn't have any network so he built a model of the reciprocal entry of his trading partner into his own general ledger. The whole thing is stupid. HOW TO FIX IT 1. The world's accounting infrastructure needs to move out to a shared architecture on the internet, because all transactions are inherently interconnected and shared with trading partners. The access security will be solved. Don't talk to me about it. The execution systems are already moving to the internet. If the internet architecture is secure enough for actual execution of orders, deliveries and payment it is certainly secure enough to provide views of those transactions to their historical owners and block them from the view of everybody else. 2. The historical reports and views of transactions have to be redesigned to support their multidimensional nature. It is a requirement, that we escape from the limitations of the "income statement" and "balance sheet" which are riddled with denormalized views, repeating rows such as described above. The user should be able to navigate (drill down) from their root ledger or interface, into totals such as money balances and types of transactions, in their native hierarchies that really exist, to get views by date, by supplier or customer, by various categories of goods and services, and other attributes as they so desire. The root ledger interface would have a single, top level node called "Me", analogous to the root node in an XML document. There are hierarchies of subtotals that would appear when you drill down, would be the native characteristics and attributes of the transactions that you have executed, in accordance with the terms of those deals with your trading partner agreed at the moment of the transaction. There would be one primary record of the transaction on a shared host someplace. You would only have indexes to the real entry. You could maintain your own additional labels and attributes privately. But the application of later judgment to recharacterize and re-label things would be reduced. Some people would be systematic. Businesses would subscribe to a shared ontology such as the XBRL taxonomy and agree to label everything that way. Easy solution. Other people would leave the descriptors blank. Who cares. When they drill down into the "unclassified" row, they would get the native listing, just like you see in your personal checkbook. That works just fine for most people in the US. The whole assemblage of your transactions on diverse shared hosts on internet would be no more, and no less, auditable by governments than today's paper and cash obsolete systems. Your transactions would be on numerous hosts all over the internet, maintained in encrypted form not even accessible to the sysadmins in most cases; the owner would have the encryption key. You lose the key, effectively you erase the audit trail. Giving your key to a sysadmin is infantile anyway. It is the original mistake that causes all the bad outcomes and scenarios. Why do we beg, and kiss the asses of regulators, to control invasions of our privacy? This is a real head-scratcher, to me. We can control all those things, unilaterally. The overall income statement or balance sheet would cease to exist, it is simply irrelevant and a fiction. It doesn't exist. The periodicity of one year doesn't exist. All periodicity is an arbitrary construct. These arbitrary labels and structures cause more harm than good. The world is immediate and spatial. It is not a two-dimensional static report. What businesses need are tools for efficiently conducting business. Tools to answer specific questions about liquidity and receivables and so forth. The tools and reports for those needs lie completely outside the financial statements of course, and have nothing to do with double entry. http://www.gldialtone.com/endredundancy.htm and http://www.gldialtone.com/exploration.htm . * Todd F. Boyle CPA http://www.GLDialtone.com/webledger.htm * tboyle@rosehill.net Kirkland WA (425) 827-3107 * XML accounting, WebLedgers, ASPs, GL dialtone, whatever it takes