Equity Question

[Derek Atkins]

Chris,

"Maf. King" <maf at chilwell.net> writes:

> On Wednesday 19 August 2009 13:00:26 dude man wrote:
>> Thanks for replying Maf.
>>
>> It kind of makes sense now.  What I don't think I understand properly is
>> the equation Assets - Liabilities = Equity
>>
>> >From my account view I see my assets add up to $1000 (for example).  They
>> > did add up to $1500 before I used one of my accounts to pay my Credit
>> > Card (which had expenses of car and groceries) of $500
>>
>> So my starting Equity was $1500 and according to the equation it should add
>> up $1000 but it still displays $1500.
>>
>> That is what I don't understand.  I guess you can tell I'm not much of an
>> accountant :)

You're confusing "equity" (the account type) with "Equity" the financial
equation term (aka "Instantaneous Equity").  What you're really asking
for is your Instantaneous Equity (IE).  The equity accounts don't provide
that, only reports provide that.

Remember the full accounting equation:

  Eq = A - L + In - Ex

This is the Instantenous Equity equation.  So as you add income and
expenses to the equation then your equity accounts will NOT reflect your
IE because Income and Expenses affect it.

If you run a Profit & Loss (Income Statement) Report that will show you
the next profit for your period which is your change in Equity for the
period.  Then you can run a Balance Sheet and that will also show you
your IE.

The equity accounts only show you your equity at a point in time,
generally at the beginning of your accounting period (or when you
started GnuCash).  In order to get your equity accounts to reflect IE
you need to "Close the Books", which basically means reducing all your
Income and Expense into Equity.  That will reset your start-of-period
and now your equity accounts will reflect the IE at that time.

I hope this helps,

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-derek

-- 
       Derek Atkins, SB '93 MIT EE, SM '95 MIT Media Laboratory
       Member, MIT Student Information Processing Board  (SIPB)
       URL: http://web.mit.edu/warlord/    PP-ASEL-IA     N1NWH
       warlord at MIT.EDU                        PGP key available