Wednesday, August 30, 2006

Learning accounting by doing accounting

When I was a manager in a company years ago, I remember one of the oft-requested classes was business finance. People who had risen (or who hoped to rise) in the ranks without working in finance wanted to learn accounting so they could understand better how the company operated and how results were tracked. I've seen courses based on explanations and on simulation. While I learned from all of them, I think I learned the most from combining doing (or the trying to do) with reading to experience it for myself.

I'm now understanding that one of the best ways I've found to learn about accounting (obviously a subset of business finance) is to set up my own accounting system and run it. It doesn't matter too much whether it's for business or personal finances; getting one's hands around setting up and using a double-entry accounting system is quite educational, even if it's occasionally frustrating.

In the past, I always faced the initial challenge of setting up a chart of accounts: the framework upon which all else is hung. In my looking, I'd find charts of accounts that seemed too complex (Facilitated Systems isn't a $100M company!), that cared about things I don't care about, or that were too simple. When I looked at an economical commercial product and a very attractive open source product, they seemed to try to hide the complexity, and it seemed that decisions I made in setting up my chart of accounts could live with me forever and perhaps doom my efforts if I selected poorly. I resigned myself to having to read about the theory of charts of accounts, to design reports I might want to create, and to design my own structure without much experience.

I've been using Ledger for some time now, and I realize that one of its great strengths is its flexibility. It's a double-entry system, and it relies on accounts, but it's very easy to change those accounts (I've done it multiple times!) if some change suits my needs: since the ledger itself is a simple, formatted text file, I can just edit the names of the accounts I've used in the ledger, and I have a new chart of accounts. If I want to add a new account, it's even easier: I just start using it.

If you want to try ledger, I'd encourage you to think about a few prerequisites you might find helpful. (I'll assume you're on Windows; if you're on Linux, you probably know how to do this already, and, if you're on a Mac, it's probably easier than this.) You'll want a text editor to manage your ledger file. While notepad would suffice, I'd be lost without Emacs. You'll want a shell to provide a command line prompt to build and run ledger. The easiest approach I know is to install cygwin.

You'll also need a bit of insight into how to install a program in a Linux environment; if you're not familiar with the 'configure' and 'make' commands, you could have a bit of studying to do. That said, I simply used gunzip to uncompress the download and 'tar -xvf' ('tar -xvzf' should have been able to replace both those commands; some of my old habits die slowly) to unpack the files. Then I followed the basic installation instructions in the INSTALL file to install Ledger.

You'll likely want a bit of help besides the built-in help, and there's a quiet but helpful forum. I've also found a PDF version of a slightly older version of the manual online.

So, if you'd like to improve your understanding of financial systems, try designing your own using a tool such as Ledger. Now's probably as good a time as any, for the author, John Wiegley, just released version 2.5.


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