how to view total for expenses subaccount

[Phil Longstaff]

On Thu, 2008-10-30 at 08:10 -0400, Donald Allen wrote:

> On Thu, Oct 30, 2008 at 7:48 AM, Mike or Penny Novack
> <stepbystepfarm at mtdata.com> wrote:
> >
> >>
> > Fundamentals. Assets = Liabilities + Equity
> > You can rearrange, so Assets - Liabilities = Equities and thus changes
> > to (Assets - Liabilities) = changes to (Equity)
> >
> > You can think of Equity as "net worth".
> >
> > Accounts of type "Income" and "Expense" are temporary accounts used to
> > categorize those changes to equity during an accounting interval. If the
> > total of income is greater than the total of expenses, net worth is
> > increasing, otherwise decreasing, the most famous literary definition
> > being in "David Copperfield" by Dickens.
> 
> Correct me if I'm wrong, but I believe this is not necessarily true.
> For example, if income > expenses during an accounting period, but the
> value of your assets decreases during that period by an amount greater
> than income-expenses (as many of us have experienced during the recent
> stock market turmoil), your net worth decreases, contrary to what you
> said above.

>From an *accounting* point of view, if your assets decrease, there must
be a transaction representing this decrease, probably as an unrealized
loss.  This is either a negative income (if you normally do your
accounting to show an unrealized *gain*) or a positive expense.  Given
the recent market turmoil, probably a large expense.  If your income is
still > expense, and your assets have decreased, then your liabilities
must have decreased more than your assets did, and your net worth has
increased.

I believe that in the past, assets were often shown at cost i.e. if you
bought your house 50 years ago at $20,000, that's how you would show it
on your balance sheet.  Doesn't match reality, but then you don't need
extra transactions marking it to market value.  That's actually part of
the problem Wall Street had.  They had these "assets", but as their
perceived worth dropped, they needed to follow accounting rules and
record huge losses.  Of course, if their perceived worth rises again
(maybe because the mortgages aren't as risky as people fear), they can
record huge incomes as well.

I think part of the issue is that accounting uses the same words as
normal English usage, but they don't quite mean the same (or normal
English usage is a subset of accounting usage).  "Income" means salary,
but can also mean other positive amounts (e.g. if a mutual fund
automatically reinvests a dividend, that is income from an accounting
point of view, but not necessarily "income" in normal usage).

Phil