Wise Accounts Blog

Have you ever got your knickers in a knot about debit and credit? Which one is left and which one is right? Which one is positive and which one is negative? I'm not a qualified accountant so I won't try to answer those questions but it's remarkable that the profession has kept that confusion going for over 500 years.

Wise accounts is in the business of providing a web enabled bookkeeping system to whoever sees the benefits of updating their accounting information online. In that context I'll explain a few basic things.

In order to catch errors in the days before computers or calculators people had once the bright idea of recording accounting information twice. If the two sides didn't match then you knew an error was lurking there and you would go searching for it. (It's called balancing the books.)

Today we still follow that practice and the same amount is entered once where the money is coming from and twice where the money is going to. That's called a double-entry ledger but you won't get points bragging about that at dinner parties.

Where the money is coming from is a category, a grouping, a bucket - well the accounting term is - wait for it - an account! Those accounts are called income accounts. Where the money is siphoned out is called expenses. If on the other hand you store that money for a rainy day it's called an asset for instance a pension fund, an investment or your bank (account). If it's something that can be exchanged for cash over the counter it's called a liquid asset. If it's something that needs to be sold it's called a fixed asset like a car, a house, a painting, a stamp collection, some antique furniture, etc... If you are spending money you do not owe (credit card, loan) it's called a liability.

If you reduce each year the value of your possessions to reflect wear and tear it's called depreciation. If you increase the value of your possessions (shares, real-estate) to reflect market prices it's called capital gain. The taxman is lurking around to grab his share the moment you make the sale.

If you are a celebrity and sell your car with an autograph on the dashboard for a higher price than you bought it - that's called a capital gain. For the rest of us we always loose money when we sell our cars - that's why we depreciate them.

When money goes out of one account and into another it's called a transaction. It's simply a record with the date, the amount, an optional description and the names of the account-in and the account-out.

When you tally all the amounts in all the accounts even though some are positive and some are negative it does not come down to zero. The difference is your net-worth (also called your equity).

From year to year if your net-worth increases you have made a profit for the year. If it goes down you have made a loss. The trick is to be smart enough not to wait for the end of the year to find that out. If you are heading for a loss, pick that trend early enough to remedy the situation. Remember they are only 3 ways to get rich: 1- earn more, 2- spend less, 3- do both at the same time!

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