Basic accounting

I still don't know which way debit and credit go, so I wanted to use something that's easier to understand. The accounting used in the app tries to resemble real world accounts and interactions between them.

Basics

Accounts

The only big nuance is the terms "Assets" and "Liabilities". But even those are pretty simple!

  • Assets - any account that's supposed to have a positive balance.
    • bank accounts - the accounts you can login into and see a balance: savings, stocks, deposits, pension, investments.
    • valuables - for simplicity and bookkeeping valuable things (real assets) are also assigned an account, such as a car, property, art.
  • Liability - any account that's supposed to have a negative balance.
    • bank accounts - any form of debt. Even unofficial stuff like a loan from a family member, which technically doesn't have an account, would be here.

This creates a really simple way to calculate net worth. Which is just a sum of all account balances.

Sample accounts:

  • Assets
    • Main bank account 200
    • Stocks 3000
    • Car 5000
    • Property 100000
  • Liabilities
    • Student loan -5000
    • Car loan -3000

Net worth = 200 + 3000 + 5000 + 100000 - 5000 - 3000

External accounts

You might notice in the app there are Income and Exepense accounts. Those are used to model external world: economy, people, companies, but their balances are irrelevant to calculations, it's just to show that money comes from somewhere and goes somewhere.

Payments

Once we have some accounts we can move money between them. There are 3 important types of payments:

  • income - increases your networth. Such as salary, dividends, assets growth, deposit interest.
  • expense - reduces your networth. Such as rent, groceries, insurance, commute, fuel, bills.
  • transfer - neutral payments, these don't affect the networth. It's the money flowing in between your accounts: investing, buying other assets, pay off mortgage*. Unlike income and expenses, which interact with external world accounts owned by others.

Thinking about networth as a bucket of water: an income adds more water, an expense drains it, transfers do nothing - they just make the water flow and swirl.

The financial heart - main bank account

To simplify how most of the accounting works a lot of financial interactions happen via the main bank account.

It's possible to have multiple "main" day-to-day transaction accounts, but for simplicity of modelling they it's better to aggregate them into 1.

Some country specific names for the main account:

  • UK: Current account
  • France: Compte courant
  • Germany: Girokonto
  • US: Checking account
  • Canada: Chequing account
  • Australia: Everyday account
Buying & selling an asset

When creating an Asset it's automatically purchased with money from the main bank account.

For example, adding an Asset like a car:

  • real world: pay to a dealer/person, in exchange they give the car
  • simulator: skip the dealer, simply transfer money from the main account to the car account. This allows to achieve a final state, where the main account is charged -1000 and car account gets +1000.
Getting and paying off a liability

When creating a Liability a deposit is automatically paid from the main account. The repayments are also paid from the main account. When a final pay off is required, the main account is charged.

Historic balance

Most likely you already have some accounts. When creating them in the Timeline just mark them as "I already have this".

The visual for this is a special gray payment.

Advanced

Value change over time

Other annoying accounting terms: appreciation and depreciation. It's simpler to think about value/price fluctuation or value change over time.

Usually assets have their value change over time, such as cars costing less after purchase and properties increasing in price. But this value change is not guaranteed.

There's a guaranteed value change instrument though. Interest. It can work for you as a deposit interest, which brings money, and against you as a mortgage interest, which loses money.

Modelling various financial instruments

Loans

There's a varying sentiment about loans and debt. Some people get "good debt", some get debt leading them to a bankrupcy. With the modelling it becomes apparent how repayment and interest accumulation happens. As repayment is a money transfer within your accounts - it's neutral, it doesn't inherently make you richer or poorer. An interest is a different story and it's like a leaking bucket of water, the higher the rate the bigger the hole.

Stocks

There's a simplified way to model stocks and their performance by treating them as cash. But it's also possible to go an advanced route and manage actual units like $APPL and their prices