double entry and accounting equation
Terry Boon
terry@counterfactual.org
Wed, 27 Sep 2000 18:41:51 +0100
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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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