Today and maybe for the next couple of Wednesdays, I want to talk about accounting. I want to pull back the curtain a little bit and explain some of the changes that are coming with the software.
There was an Italian guy from the fifteenth century that came up with double entry accounting. And the idea is that any assets you have must always equal any liabilities you have, plus any equity that you have. And this is the underlying equation that YNAB adheres to in all things.
We want to make sure that we follow the cash. Now, we keep the system pretty simple and it’s not actually double entry. But behind the scenes, we have all sorts of checks to make sure things balance. So, sometimes in the release notes, you’ll see something like, “We fixed this calculation error,” because we’re constantly adding tests and scenarios and “what ifs” to make sure that anything we release, everything stays in balance. And what we’re really keeping in balance is assets = liabilities + owner’s equity—that is the fundamental equation.
Now, in YNAB, when you actually record a transaction, you’re just doing it from both sides. You’re saying, “Hey, I had an expense of $20,” and it hit the account and went down by $20—that’s the key. What was happening with the old YNAB, YNAB 4, is in the liabilities part we were treating credit (aka liabilities) as if it was cash. So when the liability would increase, we would say that cash had gone out—and that throws this out of balance because cash didn’t go out. And this is why you’ll see big changes with the new YNAB and how we enter credit cards. I know some of you are thinking, “But it’s not debt to me, because I have the money to pay for it.” And it’s fine if you think of it that way. But the software can’t think of it that way because we have to keep it in balance. So, one more time: assets equals liabilities plus your equity.
You can’t argue with the guy that made it up in the fifteenth century because double entry accounting just works. It holds true forever and ever and ever. And that is exactly the change we made to the new YNAB, so that we could make sure to recognize that cash is king in our system, cash is absolutely king, but we are making decisions based on our expenses. What we’re doing is saying, “Well, the liability went up and we’re going to take that cash from here and stick it over in that Credit Card Payment category.” And that’s exactly what we do now in YNAB.
What we’re trying to do in the software is keep everything in balance. If we can’t do that, we can’t rely on our budget. And if we can’t rely on our budget, we’re not making good spending decisions. And then what is the point of anything we do? Dramatic, but you get the idea.
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