Basic Accounting Concepts - what am I missing?

Jeff Kletsky gnucash at
Sun Jan 2 01:03:03 EST 2011

Missing? Balanced transactions, I think ("T accounts").

"Books" represent a closed view of the world that money can't go into or 
come out of.

Accountants have a funny way with signs to make this all work out 
("debit" and "credit") where some types of accounts are "backwards" from 
what an arguably rational person might first think.

Open the books, everything is at zero.

A=0, L=0, E=0, I=0; Eq=0

Transaction 1 -- invest in the business -- 1 million from Equity into Assets

A=1mil, L=0, E=0, I=0; Eq=1mil

Transaction 2 -- 1 million of expenses -- 1 million from Assets to 
Expenses (you had to pay for them from somewhere)

A=0, L=0, E=1mil, I=0; Eq=1mil

On 01/01/2011 08:50 PM, Jim Smith wrote:
> When one writes the Accounting Equation in the form shown below, it
> doesn't make any sense to me.
> (Assets - Liabilities) + (Expenses - Income) = Equity
> If I start off with 1 million in assets and no liabilities and then I
> encounter 1 million in expenses and have no income, I should end up
> with zero equity. The equation makes it seem like this scenario would
> give me 2 million in equity.
> What am I missing?
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