Note : Les descriptions sont présentées dans la langue officielle dans laquelle elles ont été soumises.
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A PLUS-MINUS METHOD OF DUAL-ENTRY ACCOUNTING
TECHNICAL FIELD
This invention relates to a method of maintaining accounting records using
double
entry bookkeeping without using debits and credits. This invention utilizes a
common sense
approach to bookkeeping that will make sense to non-accountants.
BACIKGROIJND ART
The basic system of accounting was invented by Luca Pacioli, a Franciscan
monk, in
1494. He invented what is known as the "double-entry system of accounting".
The basic
elements of the double-entry system have remained virtually unchanged since
then. This
system utilizes debit and credit entries. Every debit has to have a
corresponding credit so
that the debits and credits are equal.
What exactly is a debit? Is it something good? Or is it something bad? A debit
entry to equipment increases equipment. This is good. A debit entry to sales
decreases sales.
This is bad. A debit to the cash account increases the cash account, yet
anyone going to the
bank knows that a debit to an account means to reduce the bank account. The
terminology of
a debit is confusing.
Another confusing thing about accounting is the process of "balancing the
books".
For every debit, there is a credit, and fox every credit, there is a debit.
One would think that a
balanced set of books would mean that revenues equal expenses. If a business'
net worth
decreases from one million dollars to zero dollaxs, it is hard to explain to
the owner that his
books balance. He thinks his books have decreased. Likewise, if a business'
net worth
increases from one million dollars to ten million dollars, it is hard to tell
the owner that his
books balance. He thinks his books have increased.
In reality, debits and credits do not make common sense, nor does the concept
of
"balancing" the books. Business people are handicapped in being able to
understand the
intricacies of their accounting system. They are at the mercy of accountants
and bookkeepers
who feel comfortable in the "debit and credit" environment.
The confusion surrounding current accounting methods is evidenced in the
following
statements: "Don't even try to understand why some transactions are debited
and others
credited to ledger accounts. Just remember . . . ." Seth Godin and Paul Lim,
if you're
clueless about accounting and finance and want to know more, 27 (1990. "The
bottom line
is that the system works although it occasionally seems to defy common
sense.',' Michael
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Muckian, The Complete Idiot's Guide to Finance and Accounting, 42 (1998)
Practically every industry has made tremendous improvements in its systems
over the
past five hundred years, and accounting systems must also improve.
SUMMARY OF THE INVENTION
The current invention addresses the shortcomings of current accounting systems
by
making accounting a useful information tool for the businessperson. The
foundation of the
system is the division of business transactions into three categories:
positive transactions;
negative transactions; and neutral transactions.
A positive transaction is a transaction that increases the net worth of the
business.
Receipt of cash when a sale is made is an example of a positive transaction.
Positive
transactions are recorded with pluses. In the example above, cash is deposited
and it
increases the bank account. Sales are recorded and the net income increases.
Both sides of
this transaction are handled with an addition to each account. The plus
represents that the
company is stronger after the transaction than before the transaction.
A negative transaction is a transaction that decreases the net worth of the
business,
such as when cash is spent to pay an expense. Negative transactions are
recorded with
minuses. In the example above, cash is spent and it decreases the bank
account. Expenses
are recorded and~the net income decreases. Both sides of this transaction are
handled with a
deduction from each account. The minus represents that the company is weaker
after the
transaction than before the transaction.
A neutral transaction is a transaction that does not change the net worth of
the
business. One such example occurs when a company borrows money and deposits it
in its
bank account. Neutral transactions are recorded with one plus and one minus.
In the
example above, cash is deposited and it increases the bank account. A plus is
used to record
the increase in the cash account. Money is borrowed so a minus is used to
reflect the
negative position with the lending institution. The company is no stronger or
weaker than
before the transaction, which is illustrated by the plus and minus offsetting
each other.
A business' general ledger should be divided into two types of accounts: Net
Worth
Accounts and Change in Net Worth Accounts. "Net Worth Accounts" are the
accounts
shown on a balance sheet in current accounting methods. Those accounts reflect
the assets
and liabilities of the business. The accounts with a positive balance are
assets. The accounts
with a negative balance are liabilities. If the accounts with positive
balances are greater than
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the accounts with negative balances, the business shows a positive net worth.
"Change in Net Worth Accounts" are the accounts shown on the income statement
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current accounting methods. Those accounts reflect the current year's income
and expenses.
The accounts with a positive balance are income accounts. The accounts with a
negative
balance are expense accounts. If the accounts with positive balances are
greater than the
accounts with negative balances, the business shows a profit for the current
year.
The accuracy of the books can be verified by determining the difference in the
"Net
Worth Accounts" at the present time as compared to the "Net Worth Accounts" at
the
beginning of the current year. This difference should equal the total of the
"Change in Net
Worth Accounts." For example, if the "Net Worth Accounts" (assets and
liabilities) have
increased by $300,000 from the beginning of the year, the "Change in Net Worth
Accounts"
should show a positive balance of $300,000.
The ledgers required to implement the method can be maintained in the
traditional
paper form, on a computer spreadsheet such as Excel, or in a database format
such as Access.
In the case of a spreadsheet or database implementation, each transaction
would be data.
The application would deal with each piece of data, storing the information in
the appropriate
column of a spreadsheet or table of a database in order to allow the balances
as described
above to be displayed.
In the preferred embodiment, a simple computer program guarantees that a plus
to a
"Net Worth Account" is accompanied by a plus to a "Change in Net Worth
Account" (in a
positive transaction) or a minus to another "Net Worth Account" (in a neutral
transaction).
Likewise, this same program guarantees that a minus to a "Net Worth Account"
is
accompanied by a minus to a "Change in Net Worth Account" (in a negative
transaction) or a
plus to another "Net Worth Account" (in a neutral transaction).
Unlike debits and credits, there will not be an equal number of pluses and
minuses.
If there are more pluses than minuses, the company has shown a profit, and its
net worth has
increased. If there are more minuses than pluses, the company has shown a loss
and its net
worth has decreased. These and other objects and advantages of the invention
will become
apparent from the following detailed description of the preferred embodiment
of the
invention.
BRIEF DESCRIPTION OF DRAWINGS
Figure 1 illustrates the process of recording and verifying a positive
transaction;
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Figure 2 illustrates the process of recording and verifying a negative
transaction;
Figure 3 illustrates the process of recording and verifying a neutral
transaction;
Figure 4 illustrates a ledger of exemplary transactions of Change in Net Worth
Accounts;
Figure 5 illustrates a ledger of exemplary transactions of Net Worth Accounts
for
asset accounts; and
Figure 6 illustrates a ledger of exemplary transactions of Net Worth Accounts
for
liability accounts.
DESCRIPTION OF THE BEST MODE
The present invention of a Plus-Minus Method of Accounting is based on
classification of all transactions as positive, negative, or neutral and
properly recording such
transactions in a ledger. Looking at the flow chart of Figure 1, the method of
handling a
positive transaction is illustrated. The method begins at Start (11) where the
user must
determine "Is this a positive transaction" (12). A positive transaction is a
transaction that
increases the net worth of the business. Receipt of cash when a sale is made
is an example of
a positive transaction. Positive transactions are recorded with pluses. If it
is not a positive
transaction the user will proceed to the inquiries illustrated in Figure 2
(step 13). If the
transaction is positive, three steps are required to enter the transaction.
First, the user must
"Determine Which Net Worth Account" (14) is affected by the transaction.
Second, the user
must "Determine Which Change in Net Worth Account" (15) is affected by the
transaction.
Third, the user must increase the Net Worth Account and the Change in Net
Worth Account
(16).
Once the transaction is recorded the next step is to Verify the Entries (17).
This step
can be performed manually or by a simple computer program. The verification
consists of
calculating the difference in the current value of the total Net Worth
Accounts and the value
of the total Net Worth Accounts at the beginning of the current year. The
Verified step (18)
will determine if this difference equals the total Change in Net Worth
Accounts. If the
difference equals the total Change in Net Worth Accounts, the Entry is
verified and this
Entry is Complete (19). If the difference is not equal to the total change in
Net Worth
Accounts, there is an Error (20). To resolve the error, the Net Worth Account
and the
Change in Net Worth Account must be decreased by the amount of the
transaction, and the
process must be restarted to correctly enter the transaction.
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Looking to Figure 2, a flow chart illustrates the method of handling a
negative
transaction. A negative transaction is a transaction that decreases the net
worth of the
business, such as when cash is spent to pay an expense. Negative transactions
are recorded
with minuses. The method begins at step (21) after step (13) from Figure 1,
wherein the user
determined the transaction was not positive. The user determines "Is this a
negative
transaction" (22). If it is not a negative transaction the user will proceed
to the inquiries
illustrated in Figure 3 (23). If the transaction is negative, three sequential
steps are required
to enter the transaction. First, the user must "Determine Which Net Worth
Account" (24) is
affected by the transaction. Second, the user must "Determine Which Change in
Net Worth
Account" (25) is affected by the transaction. Third, the user must "Decrease
the Net Worth
Account and the Change in Net Worth Account" (26).
Once the transaction is recorded the next step is to Verify the Entries (17).
This step
can be performed manually or by a simple computer program. The verification
consists of
calculating the difference in the current value of the total Net Worth
Accounts and the value
of the total Net Worth Accounts at the beginning of the current year. The
Verified step (1~)
will determine if this difference equals the total Change in Net Worth
Accounts. If the
difference equals the total change in Net Worth Accounts, the Entry is
verified and this Entry
is Complete (19). If the difference is not equal to the total Change in Net
Worth Accounts,
there is an Error (29). To resolve the error, the Net Worth Account and the
Change in Net
Worth Account must be increased by the amount of the transaction, and the
process must be
restarted to correctly enter the transaction by Returning step (30), which
returns the user to
Start (11) of Figure 1.
Looking to Figure 3, a flow chart illustrates the method of handling a neutral
transaction. A neutral transaction is a transaction that does not change the
net worth of the
business. One such example occurs when a company borrows money and deposits it
in its
bank account. Neutral transactions are recorded with one plus and one minus.
After the user
determines that the transaction is not negative the user moves to the steps
outlined in Figure
3 from Figure 2 (31). Because the user has previously determined that the
transaction is not
positive (12) and not negative (22), the only remaining option is that the
Transaction is
Neutral (32). The user must then determine which "Net Worth Accounts" are
affected (33)
or which "Change in Net Worth Accounts" are affected (34). The next step is to
determine if
one of the Net Worth Accounts increase (3~5) as a result of the transaction.
If so, then another
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of the Net Worth Accounts must decrease. There will be no change in the
company's net
worth from this transaction. If the user determines that one of the Change in
Net Worth
Accounts increases (36), then another of the Change in Net Worth Accounts must
decrease
(37). Again, there will be no change in the company's net worth from this
transaction.
Once the transaction is recorded the next step is to Verify the Entries (17).
This step
can be performed manually or by a simple computer program. The verification
consists of
calculating the difference in the current value of the total Net Worth
Accounts and the value
of the total Net Worth Accounts at the beginning of the current year. The
Verified step (18)
will determine if this difference equals the total Change in Net Worth
Accounts. If the
difference equals the total change in Net Worth Accounts, the Entry is
verified and this Entry
is Complete (19). If the difference is not equal to the total change in Net
Worth Accounts,
there is an Error (39). To resolve the error, if one of the Net Worth Accounts
was increased
it must be decreased and the Net Worth Account that was decreased must be
increased.
Alternatively, if a Change in Net Worth Account was increased then it must be
decreased and
the Change in Net Worth Account that was decreased must be increased. If an
error
occurred, the process must be restarted to correctly enter the transaction by
Returning step
(30), which returns the user to Start (11) of Figure 1. The following example
illustrates the
method.
Below are sample transactions for a hypothetical company, and the ledgers of
Figures
4-6 illustrate the list of transactions to indicate how the company's books
would look as a
result of these transactions: 1. Company sells some of its product for $2,000
on credit (see
Figures 4 and 5); 2. Company sells some of its product for $100 in cash (see
Figure 4); 3.
Company collects $1,950 of its outstanding receivables (see Figure 5); 4.
Company buys
inventory worth $1;600 on credit (see Figures 5 and 6); 5. Company pays
vendors $1,650 of
the Company's outstanding payables (see Figures 5 and 6); 6. Company incurs
$1,500 as a
cost of inventory sold (see Figures 4 and 5); 7. Company pays $200 of its
expenses (see
Figure 4); 8. Company depreciates its equipment at $90 (see Figures 4 and 5);
9. Company
pays its shareholders dividends in the amount of $50 (see Figures 4 and 5);
10. Company
pays $80 of its long-term debt (see Figures 5 and 6); 11. Company pays $40 of
interest on
its outstanding debt (see Figures 4 and 5).
The above transactions are properly classified as follows: Transaction 1.
positive
transaction (plus accounts receivable and plus sales); Transaction 2. positive
transaction
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(plus cash and plus sales); Transaction 3. neutral transaction (plus cash and
minus accounts
receivable); Transaction 4. neutral transaction (plus inventory and minus
accounts payable);
Transaction 5. neutral transaction (plus accounts payable and minus cash);
Transaction 6.
negative transaction (minus inventory and minus cost of sales); Transaction 7.
negative
transaction (minus cash and minus operating expenses); Transaction 8. negative
transaction
(minus accumulated depreciation and minus depreciation expense); Transaction
9. negative
transaction (minus cash and minus dividend); Transaction 10. neutral
transaction (minus
cash and plus long-term debt); and Transaction 11. negative transaction (minus
cash and
minus interest expense).
Figures 4-6 further illustrate the final balances in the general ledge
accounts. The
ledger example illustrates that the company has increased it net worth by
$220, from $600 to
$820.
The embodiments described above are provided for illustrative purposes only
and are
not for purposes of limitation.
Thus, although there have been described particular embodiments of the present
invention of a new and useful A PLUS-MINUS METHOD OF DUAL-ENTRY
ACCOUNTING, it is not intended that such references be construed as
limitations upon the
scope of this invention except as set forth in the following claims.
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