double entry and accounting equation

[Terry Boon]

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On Wed, Sep 27, 2000 at 12:31:57PM -0400, Judah <milgram@cgpp.com> wrote:

> On Wed, 27 Sep 2000, Robert W. Brewer wrote:
> 
> > But when I create fresh assets and equity accounts, then transfer my
> > opening balance from equity to assets, I'm left with a negative equity
> > account balance.  Is this what I want?  I would think it should be 
> > positive so the above fundamental equation would be satisfied.
>
> This bothers me too.

It *is* different, but seems reasonable: I explain my understanding of
the reasons for the difference below.
 
> BTW GnuCash shows "Assets" in the lower RH corner of the main window, this
> appears to be the sum of all the "assets-type" accounts minus the sum of
> all the "liabilities-type" accounts.

Under UK accounting rules (I'm less familiar with those of other
countries), that value is referred to as "net assets": assets minus
liabilities.

> This also is at odds with the
> terminology in basic equation you quoted (which I've seen in every
> accounting book I looked at in the bookstore).

The traditional accounting equation is 

   assets = liabilities + equity

It arises from the system of double entry: assets correspond to debit
entries, while liabilities and equity correspond to credit entries.
Since each journal entry has

   total credits = total debits

the accounting equation holds true.

However, Gnucash represents debits as positive numbers and credits as
negative numbers.  So journal entries do not satisfy "total credits =
total debits", but instead satisfy the equation

   total credits + total debits = 0.

and the fundamental accounting equation becomes

   assets + liabilities + equity = 0.

This seems quite reasonable to me.  For each balance, we need to store
a magnitude and whether it is a debit or a credit, so treating it as a
signed number makes sense (to me, at least).

Best wishes,
Terry Boon

- -- 
Terry Boon, Hertfordshire, UK
terry@counterfactual.org 

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