N00b question: expenses & equity

[Dr. Bubbles]

Ooh, excellent and useful answers both!  Many thanks to you!



--- On Tue, 10/26/10, Mike or Penny Novack <stepbystepfarm at mtdata.com> wrote:

From: Mike or Penny Novack <stepbystepfarm at mtdata.com>
Subject: Re: N00b question: expenses & equity
To: "Yawar Amin" <yawar.amin at gmail.com>
Cc: "Dr. Bubbles" <drbubb1es at yahoo.com>, gnucash-user at gnucash.org
Date: Tuesday, October 26, 2010, 8:12 AM


> Short answer: In GnuCash, you just run an Equity report and it immediately tells you what your current equity is. Each time you enter an expense and reload (refresh) the report, you’ll see your equity decrease.
> 
> Long answer: It’s an accounting thing. The equity account balances will not change until you ‘close the books’, so to speak. Traditionally this meant annually entering one or more closing transactions to zero out all your income and expense accounts and move their balances to equity (retained earnings) accounts. This would effectively make Equity the sum of all income minus all expenses for the year.
> 
> Hope this helps,
> 
>  
When accounting was in its infancy (Renaissance) income and expense transactions were entered against Equity immediately. That made it easy to see what net worth at any instant but lost all information about categories of income and expense items. So somebody came up with the bright idea of income and expense accounts as TEMPORARY accounts of fundamental type Equity. Now easy to see what all the income and expense totals are and at intervals these can be closed to main Equity.

If you run the Income Statement report (aka Profit and Loss aka Revenue Statement etc.) it will show you the net change to equity for the period.

It might help if you understand even more of the history? It only looks like a lot of extra work doing it this way. But back then they couldn't even see the balance of any account without doing extra work so the trial balances, etc. they did and which would show "what's equity now" wasn't adding much work for them back then.

Michael