# Basic Accounting Concepts - what am I missing?

James Kerr jim at jkerr82508.free-online.co.uk
Sun Jan 2 03:33:31 EST 2011

```On Sun, 2011-01-02 at 00:20 -0500, Jim Smith wrote:
> >
> > On Sun, Jan 2, 2011 at 12:00 AM, Ryan Flegel <rflegel at gmail.com> wrote:
>
> On 1 January 2011 22:50, Jim Smith <jimsmth761 at gmail.com> 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?
>
>
> > You've got it mixed up I think. It should be:
>
>
> > (Assets - Liabilities) - (Expenses - Income) = Equity
>
>
> > Note the subtraction of (Expenses - Income) instead of addition.
>
>
> > --
>
> Ryan
>
>
> Ryan, maybe I'm a bit rusty on my algebra, but I think your equation works
> out to this:
>
> (Assets - Liabilities) - (Expenses - Income) = Equity
>
> Assets - Liabilities - Expenses + Income = Equity
>
> Assets - Liabilities  = Equity + (Expenses - Income) <-- not correct
>
> So I'm still confused

The equation is (Assets-Liabilities)=Equity+(Income-Expenses)

which means Equity=(Assets-Liabilities)-(Income-Expenses)

1m=(0-0)-(0-1m)

Note that the "Equity" that must be used in this form of the equation is
the balance in your Equity account, which will only change when you
close the income and expense accounts (reduce them to zero by
transferring the balances to the Equity account). When you do so, in
this example, Equity would indeed become zero, but so would Expenses.

Jim

```