Summary of Rationale and Technical Introduction
Other articles on Domestic Well-Being Accounting (DWBA) have hinted about the new ideas upon which this new domestic accounting model is based. In this article, the rationale, ideas and concepts are summarised, based on the coverage in a new book ‘Accounting for a Better Life’.
At its simplest, an account is just a list of transactions relating to some area of financial activity or interest. The most familiar form of account is the bank statement that customers periodically receive from their bank.
The first important thing to appreciate is that accounts are for accumulating information about value. We are so used to bank and credit card accounts which are all about currency that people sometimes do not realise that accounts are equally useful for accumulating transaction details relating to, for example, our home, our car(s) – one account for each car – our investments, etc.
Accounts will usually have two columns, one for increasing (+) amounts and the other for decreasing (-) amounts.
The next important concept is to appreciate that there are two distinct, overarching types of accounts that we can use in our sets or books of accounts. One is called an asset account and the other is a liability account.
The asset type account as its name infers, typically relates to storing transactions for assets such as bank accounts, houses, cars, etc. The idea behind this is that positive amounts entered into the + column of an asset account signify increasing value; so £500 entered into the + column of an asset account implies an increase in value of £500. However accountants will also have in their business accounts, what I call working accounts for home accounting, as other accounts of the asset type which are not strictly for an asset such as a car or home. Examples include accounts for asset acquisitions and for depreciation.
That other overall type of account is a liability account. It is used for accumulating debts and/or liability. Now we have the reverse concept in that increasing amounts e.g. £300 in the + column of these types of accounts imply more debt or more liability, whilst a decrease of £200 represents less of a debt. You might think more debt means less value but it all depends on the purpose for which a liability account is being used. Again, accountants mostly use liability type accounts for holding true debt amounts but again, have a need for other accounts of the liability type to mediate certain transactions. I refer to these as working accounts in home accounting as they do not relate to any true debts of a person or household; examples of these are for accumulating temporary information about asset acquisitions and growth in the value of a home.
Another area for confusion here relates to the names for column headings used in the different software packages available to support accounting; in business, the convention is that debits (the + column for asset accounts and the – column for liability accounts) are traditionally in the left-hand column of each account, with the credits on the right (the – column of asset accounts and the + column of liability accounts). This convention is not always adhered to in some software packages, together with not always using the headings, debit and credit.
Double Entry and the Accounting Equation
The last bit of theory to mention which lies at the heart of DWBA accounting is so-called, double entry. This concept appears confusing to people because it has two aspects. First, it is an accounting concept which relates to an approach for taking into account (there’s an appropriate phrase!) all the financial aspects of some financial entity. In business, an entity might be a department or a division, a sole-trader or even a whole plc. For domestic accounting, such an entity would most often be an individual or a household. The point is that the accounts supporting any of these entities consider or model the totality of the financial aspects of the entity. As such, the accounts will be able to capture and make visible both the static and dynamic aspects of the entity finances. The practical effect is that a set of double entry accounts (the books) requires an account to store the total financial value of the entity as well as usually, some accounts for accumulating periodic changes in terms of increases and decreases to this overall value. The result is what is termed a balanced set of accounts, related to an accounting equation.
The other common use of the word double entry is related to the bookkeeping techniques for implementing this form of accounting which requires two (double) entries in the accounts for each new transaction, in order to maintain the required balance.
What do we mean by balance? Well balance is the key to double entry and it comes from balances in accounts, as maybe related in some way in this equation; the so called accounting equation.