Skip to content

SPEC.md

Latest commit

 

History

History
82 lines (65 loc) · 3.51 KB

SPEC.md

File metadata and controls

82 lines (65 loc) · 3.51 KB
Raw

Zero-Sum Budgeting with Double-Entry Accounting

Introduction

This specification explains how to implement zero-sum budgeting (like YNAB) using double-entry accounting principles. Zero-sum budgeting means giving every dollar a job, where total income equals total allocated funds.

Note on layering: This document describes the budgeting layer's conceptual model. In pgbudget the generic ledger engine is typeless — accounts are just containers with debit/credit counters. The account "types" and balance directions below (asset/liability/equity, debit/credit normal balances) are meaning that the budget layer assigns on top of the engine, not columns stored in the ledger itself.

Account Types

Budget Concept Accounting Type Internal Behavior Normal Balance
Bank Accounts Asset Asset-like Debit
Credit Cards Liability Liability-like Credit
Income Equity Liability-like Credit
Budget Categories Equity Liability-like Credit

Key Insight

While traditional accounting has five account types (Asset, Liability, Equity, Revenue, Expenses), they all ultimately behave as either "asset-like" (debit increases, credit decreases) or "liability-like" (credit increases, debit decreases).

Core Transactions

1. Receiving Income

Debit: Bank Account (Asset) +$1000
Credit: Income (Equity) +$1000

Effect: Increases your bank balance and creates unallocated funds

2. Budgeting Money

Debit: Income (Equity) -$200
Credit: Groceries (Equity) +$200

Effect: Decreases unallocated money and increases category allocation

3. Spending Money

Debit: Groceries (Equity) -$50
Credit: Bank Account (Asset) -$50

Effect: Decreases both category balance and bank balance

4. Credit Card Spending

Debit: Groceries (Equity) -$75
Credit: Credit Card (Liability) +$75

Effect: Decreases category balance and increases credit card debt

5. Paying Credit Card

Debit: Credit Card (Liability) -$75
Credit: Bank Account (Asset) -$75

Effect: Decreases both credit card debt and bank balance

Why This Works

  1. Balance Sheet Integrity: The accounting equation (Assets = Liabilities + Equity) always remains balanced
  2. Category Tracking: Budget categories act as mini-equity accounts that track your financial intentions
  3. Debit/Credit Logic: All transactions follow proper double-entry principles
  4. Financial Clarity: Every dollar has a clear status: where it is (assets/liabilities) and what it's for (categories)

Implementation Tips

  1. Start Simple: Begin with just three accounts: Bank Account, Income, and one Budget Category
  2. Income is Equity: Treat Income as unallocated equity rather than revenue
  3. Categories are Equity: Categories represent portions of your wealth you've assigned to specific purposes
  4. Database Design: Keep account semantics (asset, liability, equity) and their balance direction in the budgeting layer — the generic ledger engine stores only raw debit/credit counters and assigns no type
  5. Reports: Budget reports show category balances; financial reports show actual account balances

Rules to Remember

  • Every transaction affects at least two accounts
  • Total debits must equal total credits in every transaction
  • Budget until Income equals zero (hence "zero-sum")
  • Never spend from a category with insufficient balance