Basic concept question on "Basic Accounting Equation"

[Mike or Penny Novack]

Duncan Thomson wrote:

>The "GnuCash Tutorial and Concepts Guide" provides the following as the
>"Accounting Equation"
>
>*   Assets - Liabilities = Equity + (Income - Expenses)*
>
>But that seems wrong.  It is equivalent to
>
>*   Equity = Assets - Liabilities - Income + Expenses*
>
>That would imply that as my income goes up my equity goes down, and as my
>expenses go up my equity also goes up.  I wish that were true!
>
>Am I missing something?
>
>- Clueless accounting newbie
>  
>
Yes -- missing that this is "double entry".

The first expression of the equation perhaps makes it a bit clearer that 
"income" and "expense" accounts are actually temporary accounts of 
fundamental type "equity". In the earliest days of double entry 
bookkeeping would immediately enter an income or expense item in the 
equity account. But that made it difficult (additional work) to track 
totals for income and expense items during the accounting period. So 
"income" and "expense" accounts were introduced allowing deferring 
closing of these transactions into equity till the end of the accounting 
period (ie: "close the books") and it would be only the net total "gain" 
or "loss" going to equity (doing it pen and ink on paper, first close 
all the income and expense accounts to another temporary account called 
"profit and loss" with that account brought to zero balance (by net gain 
or loss). That temporary account WAS the "profit and loss" report. Since 
GnuCash can build the report for us, we don't do that step).

The second formulation is correct (odd though that looks to you). As 
long as you are considering equity not (yet) being changed, asset goes 
down or liability up for each expense and the reverse for income. The 
meaning of these accounts is confusing you because they have an implicit 
sign; are "on" the debit or credit side of the ledger.

Understanding what is going on is MUCH easier once you have looked at 
elementary bookkeeping the old fashioned pen and ink on paper way. What 
GnuCash is doing for you is saving some steps and greatly reducing the 
chances of an error (it "autoposts" the transactions and it will never 
make a "transcription error"). I know it all looks odd, but what is 
being modeled is a traditional process that allowed the people keeping 
records to find and correct mistakes which would be disclosed by "out of 
balance" (then the finding of the erroneous entry a lot of skill and 
tricks -- thus dividing the OOB difference by 9 could match an item that 
had been decimal shifted).

Michael D Novack