Accounting Equation

[Daniel]

Hello,

Welcome to GnuCash.

> I don't have any credentials and my arithmetic is terrible,
> but it seems to me like the documentation's development
> of the accounting equation is completely wrong.

The documentation is correct and I will be happy to explain. What you 
wrote is a _very_ common confusion and it _is_ confusing. The problem is 
that in one equation Equity means "Equity Today" and the in the other it 
means "Equity on Day 1" - _very_ confusing.

So let's try to figure this out:

You already know the basic equation:

Equity = Assets - Liabilities

This equation is always true. The _Definition_ of Equity is "take your 
assets and subtract your expenses". Someone just looked at his net worth 
one day and said "I'll call this Equity".

I'll rewrite that equation using more clear terms:

Equity_Today = Assets_Today - Liabilities_Today

Now, your Equity_Today is the same as your Equity on Day 1 plus all your 
income, minus all your expenses. Makes sense? Stuff coming in makes you 
richer, stuff going out makes you poorer.

Equity_Today = Equity_on_Day_1 + Income - Expenses

Day 1 is just the day you started keeping of your income and expenses.

Now, combine the two formulas and we get:

Equity_on_Day_1 + Income - Expenses = Assets_Today - Liabilities_Today


And _that_ is the accounting equation that you see in the documentation. 
The reason why this matters is that you are going to create an account 
in GnuCash called Equity, and it is going to have your equity on day 1. 
If you prefer, you could rename this account "Equity on Day 1". That 
might help you remember what it really contains.

If you ever ask yourself, "what's my equity today?" don't look at the 
"Equity" account. Just subtract your liabilities from your assets. The 
number in the Equity account tells you what your equity _was_ the day 
you began keeping track of your money.


I hope this is helpful.

Cheers,
Daniel.