Accounting Question

[Linas Vepstas]

On Sat, Jan 26, 2002 at 12:10:12AM -0500, Michael T. Garrison Stuber was heard to remark:
> Okay, while we're on the subject of the finer points of double column 
> accounting, could someone please explain to me what (for personal finances) 
> the point of an equity account is?  I know it is used for establishing 
> opening balances, but I fail to understand why it gets subtracted out (I 
> think) on some of the reports.  Help.  Most everything else (income, 
> expense, liabilities, and assets) makes perfect sense to me, but when I 
> start wrestling with this one, it makes my brain hurt.  What does it mean 
> to me that I have this big negative value in my equity account?  It's not 
> like I owe the money to a share holder -- it's my money.  I don't use the 
> account for anything else either, so it seems doomed to stay there forever. 
> A clear explanation would be much appreciated.  Thanks!

at the very start, the balance in the equity account is equal (and
opposite) of the sum total of all your assets minus liabilities.  
So its a kind of 'one-number-is-the-total' thing.

As time goes on, you have income, and expenses, and as a result, your
assets & liabilities change.  But your equity account still shws how
things were at the begining.  So you can compare to what you started out
with.

At the start of a new year, you can start all over again:  start with 
zero income and expense balances.  The way to do this is to transfer 
all of the income and expense balances to equity (so that they read
'zero').  At this point, equity should again equal the total of all
assets and liabilities.

(Bascally, if there were no equity accounts, there would be no way to
make certain transfers: e.g. to set opening balances).


--linas


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pub  1024D/01045933 2001-02-01 Linas Vepstas (Labas!) <linas@linas.org>
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