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214 lines
7.8 KiB
214 lines
7.8 KiB
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<ARTICLE ID="XACC-DOUBLEENTRY">
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<ARTHEADER>
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<TITLE></TITLE>
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<TITLE>Understanding Double Entry Accounting</TITLE>
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</ARTHEADER>
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<SECT1>
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<TITLE> Why Use Double Entry Accounting?</TITLE>
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<PARA> </PARA>
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<PARA>If you are a novice to accounting, you <EMPHASIS>need</EMPHASIS> double
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entry accounting to help you keep your accounts straight. It
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will keep you from creating an unverifiable mess. It will make
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your life easier, and it will make this software easier to
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understand and to use.
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</PARA>
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<PARA>And if you are an experienced accountant, you would likely
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feel <EMPHASIS>ill</EMPHASIS> at the thought of life without it.
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</PARA>
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</SECT1>
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<SECT1 ID="XACC-DOUBLEDEF">
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<TITLE> What is Double Entry Accounting?</TITLE>
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<PARA> </PARA>
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<PARA>Double entry bookkeeping is an accounting methodology
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introduced in the 13th century to to make sure that each
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accounts and indeed <EMPHASIS>each transaction</EMPHASIS> is properly
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balanced.
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</PARA>
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<PARA>When these are all required to balance, the likelihood of
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data-entry errors is greatly reduced. For large, complex sets
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of accounts with many transactions, it is distressingly easy to
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make errors that may go undetected for a long time, and be
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appallingly difficult to track down, even when double-entry
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bookkeeping is used.
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</PARA>
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<PARA>A double-entry transaction is a transaction that contains
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entries for two (or more) accounts that balance against one
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another. One account is <EMPHASIS>debited</EMPHASIS> by an amount exactly
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equal to what the other is <EMPHASIS>credited.</EMPHASIS> By ensuring that
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each transaction balances, a balanced set of accounts is
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guaranteed. This doesn't prevent you from having errors, but
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certainly eliminates the large class of <EMPHASIS>I forgot to enter
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that part of the transaction</EMPHASIS> errors.
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</PARA>
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<PARA>Double-entry may be introduced in a more intuitive way via
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the notion of a transfer from one bank account to another,
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where an amount is taken out of one bank account and deposited
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in the other. This is effectively the "rule" of double entry
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accounting; if you add something in to one account, you <EMPHASIS> have</EMPHASIS> to have another component to that transaction to
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balance it.
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</PARA>
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<PARA><EMPHASIS>Not-quite-an-aside:</EMPHASIS> If you look at your bank
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statements, they are typically written up from the <EMPHASIS> bank's</EMPHASIS> perspective, which is exactly <EMPHASIS>opposite</EMPHASIS> to
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yours. For instance, when you put money in, establishing a
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deposit, this establishes a <EMPHASIS>DEBT</EMPHASIS> on their part.
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As a result, "newcomers to accounting," who only see the terms
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"Debit" and "Credit" on statements from their bank seem to get
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fairly confused about this.
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</PARA>
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<PARA>The perhaps less obvious extension is the notion that double
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entry can be used to represent income and expenses as well as bank
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transfers. See the <LINK
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LINKEND="XACC-INCOMEEXPENSE">Income/Expense</LINK> page for a more
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detailed discussion of that.
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</PARA>
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<PARA><ANCHOR ID="IDENTITY">In a traditional system that records
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debits and credits separately, the identity that all
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transactions are required to satisfy is that <ENVAR>Total of
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Debits = Total of Credits.</ENVAR>
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</PARA>
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<PARA>The fact that the identity requires merely that the <EMPHASIS> total</EMPHASIS> balances means that it is a little bit misleading to
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call this <EMPHASIS>double</EMPHASIS>-entry bookkeeping; it would be
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somewhat more accurate to call it <EMPHASIS>multiple-</EMPHASIS>entry
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bookkeeping. Unfortunately, there's 700 years of history of use
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of the term, which sufficiently discourages changing it. (To
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think some newcomers to UNIX think that it has some crufty old
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bits of oddness. Hah! We've got UNIX beat by the better part of
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a millennium!)
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</PARA>
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<PARA>GnuCash treats "Debits" as positive values, and "Credits" as
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negative values, so that this identity simplifies to <LITERAL> value<SUBSCRIPT>1</SUBSCRIPT> + value<SUBSCRIPT>2</SUBSCRIPT> + value<SUBSCRIPT>3</SUBSCRIPT> + ...
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= 0</LITERAL>
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</PARA>
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</SECT1>
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<SECT1 ID="XACC-DOUBLEUSE">
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<TITLE> Using Double Entry</TITLE>
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<PARA> </PARA>
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<SECT2>
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<TITLE>Creating Transactions</TITLE>
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<PARA> </PARA>
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<PARA>To create a double-entry transaction:
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<ITEMIZEDLIST>
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<LISTITEM>
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<PARA> Click on a box in the column marked <SCREEN>Transfer From</SCREEN>
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on the left-hand side of the register.
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</PARA>
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<PARA>A menu will drop down, listing all of the accounts from
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which a transfer may be made.
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</PARA>
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</LISTITEM>
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<LISTITEM>
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<PARA> Select one.
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</PARA>
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<PARA>When you record the transaction, the double-entry will
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automatically be made, and the transaction automatically
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appear in all windows showing the transferred-from and the
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transferred-to accounts.
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</PARA>
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</LISTITEM>
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</ITEMIZEDLIST>
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</PARA>
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</SECT2>
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<SECT2>
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<TITLE>Changing Transactions</TITLE>
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<PARA> </PARA>
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<PARA>To <EMPHASIS>change</EMPHASIS> a double-entry transaction:
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</PARA>
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<PARA>Simply edit the transaction in any window in which it
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appears.
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</PARA>
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<PARA>Any changes made will be automatically reflected in both
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accounts and all windows displaying the transaction.
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</PARA>
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<PARA>Similarly, when a double-entry transaction is deleted, the
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"splits" will be deleted from both accounts, and balances will
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automatically be recalculated for <EMPHASIS>both</EMPHASIS> accounts.
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</PARA>
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<PARA>To change the transfer account, simply select a new account
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from the pull-down menu. When you record the transaction, it
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will automatically be selected from the old account, and
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inserted into the new account.
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</PARA>
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</SECT2>
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</SECT1>
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<SECT1 ID="XACC-SCRUBBING">
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<TITLE> Scrubbing Clean</TITLE>
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<PARA> </PARA>
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<PARA>GnuCash may be configured to be strict about double entry,
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or you may configure it to be "loose."
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</PARA>
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<PARA>In "loose" mode, you can create <EMPHASIS>unbalanced
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transactions,</EMPHASIS> that is, transactions where the "splits"
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don't balance to zero. That discards the validation that comes
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from using the more strict double entry scheme, which is
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probably not a really wise move. In effect:
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<ITEMIZEDLIST>
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<LISTITEM>
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<PARA>If you aren't sure of what you're doing, you likely do
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not want to discard the validation of <EMPHASIS>double entry,</EMPHASIS> as
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this helps you keep your accounts balanced even when you're
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not perfectly clear on this.
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</PARA>
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</LISTITEM>
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<LISTITEM>
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<PARA>If you are an <EMPHASIS>accounting whiz,</EMPHASIS> you'll know that
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it's <EMPHASIS>really important</EMPHASIS> to keep things in balance, and
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again will prefer <EMPHASIS>double entry.</EMPHASIS>
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</PARA>
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</LISTITEM>
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</ITEMIZEDLIST>
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</PARA>
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<PARA>But if you decide to "outsmart the system," and have a
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number of unbalanced transactions, you'll probably want to
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clean this up at some point. To clean up these unbalanced
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transactions, you <EMPHASIS>Scrub</EMPHASIS> the account clean by choosing
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<GUIMENU>Scrub</GUIMENU> from the window menu.
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</PARA>
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<PARA>The process will examine each transaction; if the
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transaction doesn't balance, a split entry will be created and
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placed into an account named <EMPHASIS>Unbalanced.</EMPHASIS> You may then
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review these splits and move them to their proper accounts.
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</PARA>
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<PARA><EMPHASIS>Warning: Functionality Changing...</EMPHASIS>
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</PARA>
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<PARA>At present, control over whether GnuCash is "strict" or
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"loose" is established at compile time, and defaults to <EMPHASIS> strict.</EMPHASIS>
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</PARA>
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<PARA>In the future, there will be no option of "looseness."
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</PARA>
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</SECT1>
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</ARTICLE>
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