double entry and accounting equation

[Dave Peticolas]

Terry Boon writes:
> 
> 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.

Exactly. Perhaps we should label it 'Net Assets', instead of just 'Assets'.

 
> 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).

This is why in the default settings, equity accounts show negative
balances when they have positive credit balances. However, you can
change the settings. Go to the 'Preferences' menu and change
'Reversed-balance account types' to be 'Credit accounts'. Now you
will see all the 'credit accounts' (including equity) with a positive
balance when they have positive credit balances.

dave