Double-entry bookkeeping is based on a fundamental economic truth: that every action has a reaction.
This is the audio version:
This is the transcript:
I believe in double entry.
Now, that's hardly surprising. I have, for over 40 years, been an accountant. I was a chartered accountant in practice for most of that period of time. Of course, I believe in double-entry bookkeeping.
That is the way in which every set of books, of every organisation, in almost every country around the world, is recorded because it reflects a fundamental truth , and that is that for every action in the economy, there is a reaction. And that is what double-entry records.
People get confused about what debits and credits mean. They wonder whether they should be on the left or right when they're learning accounting, but it doesn't matter.
What matters is that fundamental understanding that if you're going to undertake a transaction, there isn't just one consequence; there will always be two.
There will be two within your organisation, but for any transaction that is of any significant consequence in the world, you will be transacting with somebody else. So not only is there a reaction for you, there is a reaction for someone else. And what you have to think about, particularly if you are a politician, and this is where I get to my point, if you are a politician, you have to think about what is the reaction to your action? And our politicians don't do that.
And that is why I want to talk about double entry, because if our politicians began to understand this fact that every action has a reaction, I believe that we would get vastly better politics than we've got.
Just think about it. If somebody sells something, somebody has to buy it.
If the government wants to tax, somebody has to pay it.
If somebody wants to trash our climate, then at some time in the future, somebody's going bear the consequence.
If you want to balance the state's books, you're going to probably unbalance the private sector's books because they're going to suffer the consequence.
And, if you want to cut government spending, as is so often the desperate desire of most neoliberal politicians, somebody's not going to get the benefit of the money that you might have otherwise spent and, as a consequence, there is going to be less money in the private sector economy, which is probably going to shrink in size as a result.
For every debit, there is a credit. For every action, there is a reaction. That's the way the world works and the way it will always work.
And yet our politicians aren't told that.
Even worse, governments try to pretend that this isn't true, and nowhere is this more apparent than when we look at the government's accounts. Take the UK for example, but the same model is basically used throughout Europe, in the USA, and in other developed countries, right around the world. When we look at those accounts, they are prepared on a single-entry basis. There is no double-entry accounting in the data produced by the Office for National Statistics for the UK Treasury to advise ministers upon, month in, month out, throughout the year, and on which we are told whether the economy is growing or not.
There are, therefore, no checks and balances in this data. There is no recognition of consequences in this data, and some of that data is absolutely stupid as a result of there being no double entry reflected in the way in which it is constructed.
Let me take a simple example. Over 10% of the UK's national income is supposedly made up of rent that people like me, who own their own house, whether with a mortgage or not, pay ourselves for the right to live in our own properties month in, month out.
Let me assure you of something. I do not pay myself rent to live in my own house. Nor does anybody else I know in the entire UK economy pay rent to live in their own house.
What's even more important is that recording a transaction between a person and themselves is about as meaningful in economic terms as shifting a £10 note from your left pocket to your right pocket. It is utterly economically inconsequential, and yet, according to our Office for National Statistics, 10% of our national income is made up of this completely made-up transaction between one person and themselves.
This is ludicrous, and that is the consequence of making up economic data that does not follow the rules of double entry.
There is no double entry here because a person can't do a transaction with themselves: it nets out to zero, always. Therefore, there is nothing to record, and yet our politicians are told that this matters.
And at the same time, they are also given data, which is fundamentally wrong.
For example, the figures for the UK national debt are not prepared on the basis of double-entry bookkeeping. There is debt in there that does not exist. At one point, well over £200 billion of the UK national debt was made up of something called the 'Bank of England contribution'. It is still significant. It's around a hundred billion plus, and yet the Bank of England contributes precisely nothing to the UK's national debt.
This is a made-up figure representing the supposed consequence, which has not occurred, of transactions involving quantitative easing, which might not ever happen, either.
And yet at the same time, there are liabilities that genuinely exist in the economy, which are not recorded, like some pension data, and as importantly, there is no data in the figure for national debt about what the national debt actually funds.
In other words, our schools, our hospitals, our infrastructure, our roads, our transport systems, our electricity networks, if they are state-owned, and everything else that is paid for by the government.
This is a singular and inappropriate view of the government as a consequence, because it fails to take into account that there is double entry or that there is the balancing figure on every balance sheet of every organisation in the country, which is the equity of those to whom the organisation is accountable, in this case, us, the people of the country.
So we have a crazy situation where politicians are told that they may take actions which have no consequences. But, that's not true. We know that, and I'll go back to the issue of cutting government expenditure, this does have consequences. Cut benefits, and immediately shops do not have as much spent in them because everybody who gets benefits in this country spends the benefit that they get to support their lifestyle, and yet ministers apparently don't know that because they don't know that actions have reactions.
And at the same time, they are taught to think purely about the silo in which they operate. So, a minister for the NHS only thinks about the NHS when they think about health. They don't think about the consequences for work, for the economy, for how social care is impacted, because that's in another department. The 'action has a reaction' idea is simply not present in their thinking.
And in my opinion, this is a national economic scandal. Not only is the data that we are using for national decision making wrong because it doesn't reflect the fact that double entry bookkeeping is the core of good accounting, but ministers are being told that there is no consequence of their action because there is no reaction to the entry that they effectively make in the nation's accounts by the decisions that they make.
Until we understand this, we are going to have poor decision-making.
Until ministers are taught this most basic accounting truth, they will not realise that they have to think rather more broadly than most of them do at present.
This might challenge their little minds, and I'm afraid to say, many of them appear to have rather small economic minds, but this fundamental truth has to be at the core of our economic management, or we're going to continue to be in deep economic trouble.
Accountancy has a purpose.
Double-entry bookkeeping has a purpose.
Politicians need to learn it.
If they did, they would be better at their jobs.
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My pet peeve is that politicians never seem to use a Social Return On Investment approach to costing. When SROI is used the results can be startling. My favourite example, because it was done by those well-known radical lefties Price Waterhouse Coopers, is a study showing that universal free school meals wold cost… nothing ! – https://urbanhealth.org.uk/insights/reports/expanding-free-school-meals-a-cost-benefit-analysis
SciencesPo – a top French uni – have just done a study for the Paris mayoralty on its plans to reduce emissions by half over the next 5 years, and to zero by 2050, showing that far from ‘costing’ anything at all, this investment could, by 2050, have returned a profit of 13% – https://www.ofce.sciences-po.fr/pdf/pbrief/2025/OFCEpbrief145.pdf
The key, of course, is viewing government expenditure as investment – not just spending – and including in your calculations all of the returns we get back.
Thanks
Crucial Richard, really crucial and well said.
When I do a business case for a development, paid for out of the housing revenue account, I may know that using the piece of land will save the Council money elsewhere every year by not having to manage it over the 60 year period the affordable rent pays down the the cost of the build. But I am not allowed to factor that in, because those savings come from the general fund. I am not allowed to factor in any other benefits like making the area better and helping the house prices of existing units or reducing crime or traffic.
This lack of the accounting for wider benefits (‘externalities’ they call them is it?) is all very narrow and it makes the case for spending much harder and reduces the acknowledgement of real value for money of the investment. It’s also a negation of reality.
It’s a load of bollocks and needs to stop. This is why it so easy to paint the public sector as poor value for money.
Another potential benefit seems to have been lost due to this blinkered outlook.
https://www.theguardian.com/society/ng-interactive/2025/may/17/uk-government-drops-healthy-eating-push-after-lobbying-by-ultra-processed-food-firms
All UK government units should be required to publish audited accounts to Generally Accepted Accounting Principles. Then everyone would literally be on the same page.
There is an interesting mentality issue in your point about assuming you pay rent to yourself. It derives from the old Schedule A income tax which did indeed charge home owners tax on their “imputed rent”. Obviously the ONS haven’t been officially told that this was abolished about 60 years ago.
All parts of government need to be dragged into the21st century.
It is required to do that, and does. They are called the Whole of Government Accounts. They are always published years late and anyway International Financial Reporting Standards are not for for this purpose. They assume there is a shareholder, and there is not.
As I understand it, imputed rent for owner occupiers is added to our GDP statistics to make them comparable with other countries, where there is much more renting and less owner occupation than the UK.
GDP is notoriously bad for what it counts and what it does not. Even Simon Kuznets, the creator of its immediate predecessor national income in the late 1920s and early 1930s, cautioned “the welfare of a nation can scarcely be inferred from a measure of national income”.
Presumably in the 19th century people just got on with doing things rather than messing about with economic statistics.
It is very curious that we can impute, very incompletely, this made up figure and yet none of the others that might be required, like the cost of care, keeping a famiuly, volunteering or the value of care or education for the recipient.
Worse than politicians are the proprietors of the billionaire press – and their tame journalists. They forever headline only one side of the argument.
In November 1942, the Liberal-led Beveridge Report provided a summary of principles necessary to banish poverty and ‘want’ from Britain. The paper proposed a system of social security which would be operated by the state, to be implemented at war’s end. A large section of the report described the economic situation and his vision for how it might be managed – the benefits as well as the costs. (the two sides of the ‘double entry’)
For the 1945 General Election, Labour argued for policies to address the ‘five giants’ that Beveridge had identified: ‘Want, Disease, Ignorance, Squalor and Idleness’. Labour’s election manifesto included promises of nationalisation, economic planning, full employment, a National Health Service, and a system of social security. The Party won 397 seats to the Conservatives 197.
This was what the serving forces and their struggling families wanted. Six years later, looking at only one side of the ledger – the press magnates got into gear to oust Prime Minister Attlee.
1945: Massive housing shortage! Local authorities were provided with funds and required to build houses for rent. This provided employment (also much needed) and helped the economy. (The two sides again).
Current situation: shortage of housing – in particular of the poorest! Government response: ‘Leave it to the market’ to build more homes for the wealthy. (One-sided argument – talk about ‘growth’ and hope)
Communal action can provide universal benefits. Individual action, while it can be of value, cannot benefit all.
Thanks
Double-entry bookkeeping isn’t just an accounting tool—it’s a mindset every decision-maker should adopt. The idea that every action has a reaction, every debit a credit, isn’t just financial theory—it’s reality. Yet we still see politicians, from Parliament down to County, District and even Parish Councils, making decisions as though consequences don’t exist. That’s the result of widespread accounting illiteracy among those in power—and it shows.
We’re in the mess we’re in precisely because too many elected officials don’t understand basic financial cause and effect. They cut funding without understanding the knock-on effects. They tax or borrow without appreciating who’s absorbing the impact. They silo decisions and ignore systemic consequences.
Worse still, we see the Dunning-Kruger effect in action—those who know the least about how public finance actually works often seem the most confident in their decisions. A little knowledge and a lot of ego is a dangerous mix when it comes to budgets, benefits, and infrastructure.
This isn’t just a technical oversight—it’s a democratic failure.
We need to be teaching the fundamentals of double-entry thinking not just to finance ministers, but to councillors, civil servants, and even schoolchildren. Not to make everyone an accountant, but to instil a basic literacy about how money, power, and responsibility actually work.
Without that, we’ll keep getting short-term thinking, poor policies, and broken systems. And the public will keep paying the price.
For a good explanation of the Dunning Kruger effect see:
https://www.youtube.com/watch?v=BdnH19KsVVc&t=177s
Thanks
Thank you Richard. A very good one to choose to make into a video. You’ve been very productive over the weekend, I hope you take time for a bird walk soon.
My eenrgy is running high
But we did go bird watching both days over the weekend
Does “wealth creation” exist?
I notice so many people using this phrase — even your recent post on immigration refers to ‘wealth generation’ — but how can wealth be ‘generated’? Yes, money can be created by governments, but doesn’t looking through our double-entry glasses tell us that ‘wealth creation’ is actually money redistribution? Sure, things of worth can be generated: a vaccine, a novel, etc, but wealth? Over to you, Richard 🙂
Work
Is it really that hard to work out?
Work, combined with energy.
Wow. I am staggered you think there is no such thing as wealth. Of course there is. But it’s not necessarily got anything to do with money.
Chuckles. No need to be staggered, I do believe in wealth. I was seeking your opinion on the *creation* of wealth.
I’ve come across the idea mostly in relation to entrepreneurs maintaining that everybody benefits when a company is successful. The double-entry viewpoint suggests to me that if the owner (and, yes, employees too) are getting wealthier then the people purchasing the product are getting poorer. In the above context I’ve always felt wealth creation was very much talking about money (or goods that can be exchanged for money).
If we’re talking about wealth in the sense of improved quality of life, I photographed a pair of kestrels recently and certainly felt my life was richer for it. But is that the kind of thing you had in mind when you say wealth isn’t necessarily anything to do with money?
Re a) you sort of summarise Marx
Re b) yes, and more besides. The banter with the bartista who just served me was not charged for, but I think we both enjoyed it.
🙂