Then why am I discussing them here? Because, some of you will
already know some of these terms and their wrong usage in the
Ledger manual may confuse you. If you are not confused, then this
page is not for you. Otherwise, read on.
Imagine a guy who has a job with low salary, and no other source
of income. He has not inherited
any considrable amount. Nor has he taken any substantal loan from
anybody. Yet he owns 10 expensive cars. Suspicious, huh?
Let's see why we find him so. We compare what he has with what
he should have. "What he has" is called
his asset. "What he should have" is split into two parts:
loans (that he has to repay)
anything that he has right to (salary, inheritance, gift etc)
The first one is called liability, the second
one equity. So we get the obvious equation:
$$
Asset = Equity + Liability
$$
This is called the balance sheet equation. Notice that
both the sides keep track of the same money: the left hand side
looks at the possesions of the guy, while the right hand side
looks at what he should posses. Ledger does not
use this approach at all.
You are free to sprinkle your jounral file with account names
like Liability:CreditCard etc, but they are just fancy names.
Ledger cannot create a balnce sheet for you, because that will
require you to track every transaction twice, once for each
side. Ledger does not do this.
This is actually two things bundled into one, and Ledger
implements only one of the two. Let us understand the two things
one by one:
Each flow of money involves two accounts, the source and the
destination. Double accounting system means recording the
transaction from the viewpoints of both these accounts. For
example, if 200 units of money goes from account A to account B,
we record that A now has 200 units less and that B has
200 units more.
The two ends of the same transactions may be recorded in a
number of ways, the most obvious being using the signs plus and
minus. For example, -200 means 200 units are subtracted from the
account, and +200 means the oppsite. However, standard accounting
convention does not use plus and minus. Instead, the terms
credit and debit are used, and they do not
correspond to plus and minus in a direct way.
Ledger does not require us to make a double entry. In the
following example Ledger can infer that Rs 200 is subtracted from A:
B Rs 200.00
A
Ledger does not require the terms credit and debit in the
journal files. Neither are these terms used in the output of
Ledger. This makes Ledger more accessible to lay persons. But
this also makes the output of Ledger not in a format accepted by
chartered accountants.