Basic concept question on "Basic Accounting Equation"

[Phil Longstaff]

On Thu, 2010-02-25 at 11:55 -0500, Duncan Thomson wrote:
> The "GnuCash Tutorial and Concepts Guide" provides the following as the
> "Accounting Equation"
> 
> *   Assets - Liabilities = Equity + (Income - Expenses)*
> 
> But that seems wrong.  It is equivalent to
> 
> *   Equity = Assets - Liabilities - Income + Expenses*
> 
> That would imply that as my income goes up my equity goes down, and as my
> expenses go up my equity also goes up.  I wish that were true!

If you receive a paycheck and deposit it into your bank, your Income
will go up but your assets will go up by the same amount, so your equity
will be unchanged.

Alternately, if you were given a paycheck, but signed it over to someone
to whom you owed money, your income would go up but your liabilities
would go down by the same amount, so assets and equity would be
unchanged.

Changes in equity accounts happen rarely:
1) to provide an "opening balance" as offset for any asset or liability
account
2) potentially once a year, the value of all income account expense
accounts is zeroed, and the offsetting amount is added to equity to keep
the equation true.  This is common, happens in business, but doesn't
really have to happen if you are just doing home accounting.

Phil