Why does equity go up when expenses are added?

[Beth Leonard]

On Sat, Jun 18, 2005 at 04:35:03AM -0500, Andrew Anderson wrote:
> This may seem superbly silly to most users out there familiar with 
> accounting, but I cannot understand it at all. Why does my equity go up 
> when I add any type of expense - such as electricity, phone book, etc? My 
> assets go down - as they should, since I'm pulling the money from my CASH 
> account, but the equity goes up!?... why?

It's complicated to explain, but basically because Equity and Expenses
are defined in accounting terms to be on the same side of the
accounting equation in opposite directions:

Assets - Liabilities = Equity + (Income - Expenses)

Any time you make a transaction, only two accounts should be
affected, so if you have an increase in an expense account,
if the transfer account is your Bank Account (an asset account)
you see assets go down and expenses go up because it keeps
the whole thing balanced.

If you think of it like algebra, you are subtracting N from
both sides.  Because there is a minus sign in front of the
expenses, the actual expenses go up, but it is a subtraction
on that side of the equation:

Assets - Liabilities - N = Equity + (Income - Expenses ) - N
(Assets-N) - Liabilities = Equity + (Income - (Expenses+N) )

A better explanation is here:
http://www.gnucash.org/docs/v1.8/C/gnucash-guide/basics_accounting1.html#basics_accountingequation2

Now, if you are seeing a change in Equity when you make an
Asset<->Expense transaction, something doesn't seem correct.

What do you mean when you say "Equity goes up"  What part of
the screen goes up?  Is it possible one of your accounts is
of an incorrect account type?  Click the options button->Account fields
to display->Type to display the account types.  The various
reports use the account types.

It's also possible you have
Edit->Preferences->Accounts->Reversed-balance-account-types set
to something confusing.  I believe the default is credit accounts
which makes the most sense to me.

--Beth 
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+                             Beth Leonard                          +
+       O say, does that star-spangled banner yet wave              +
+       O'er the land of the free and the home of the brave?        +
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