double entry and accounting equation

[Christopher Browne]

On Wed, 27 Sep 2000 00:14:26 EDT, the world broke into rejoicing as
"Robert W. Brewer" <rbrewer@Op.Net>  said:
> I'm using gnucash 1.4.6 under Linux.  It seems to be 
> pretty nice for tracking my personal finances.  
> I have some questions though.  I'm 
> an accounting newbie, but I've been reading up on enough 
> accounting lately to be dangerous.  :)  
> 
> My "Accounting for Dummies" book says that the fundamental accounting
> equation is
> 
> assets = liabilities + equity
> 
> To me this seems to be how the whole double entry system works.
> I read somewhere in the online help that opening balances should
> be taken from an equity account, and this matches what the "Dummies"
> book says too.
> 
> 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.
> 
> Thanks for your time!

What you're getting is fine.

That equation is expressed in such a way that it normally works out
nicely with the "signs" of all three values being of "positive" value.

A very simple balance sheet might look like:

  Assets:   $100 in cash
  Liabilities: $50 balance on credit card
  Equity: The difference, namely $50 of "retained earnings."

That works nicely with
   $100 = $50 + $50

But it sort of oversimplifies things.  Accounts tend to either have
a "credit" balance or a "debit" balance.  Asset accounts _usually_
take on "debit" balances, whilst liabilities and equity are typically
"credit" balances.

Thus, the above would be represented via:
            Debit   Credit
Cash        $100
Credit Card           $50
Retained Earnings     $50

Totals:     $100  =  $100

In GnuCash, "debits" are treated as positive values, while "credits"
are negative values, so that you'd get:

Cash          $100
Credit Card:  -$50
Retained Earn.-$50

Total:          $0

Whether we have "debits" and "credits," or whether we use positive/
negative values, it is fairer to say that in the accounts, 

    assets + liabilities + equity = 0

That's probably a more useful claim to use 90% of the time.

The other 10% is when you're writing financial statements, which
is is probably _not_ what you'll be doing all the time.
--
cbbrowne@ntlug.org - <http://www.hex.net/~cbbrowne/linux.html>
They are called computers simply because computation is the only
significant job that has so far been given to them.
-- Louis Ridenour