Basic Accounting Concepts - what am I missing?
jimsmth761 at gmail.com
Sun Jan 2 18:45:16 EST 2011
On Sun, Jan 2, 2011 at 6:02 PM, Mike or Penny Novack <
stepbystepfarm at mtdata.com> wrote:
> You are double-counting. Expenses and income are (at least in Gnucash)
>> immediately posted into Assets or Liablilities. In traditional
>> journal-oriented bookkeeping, the journal is posted into the General
>> periodically, so that to obtain an intermediate picture, you have to
>> consider the journal entries as well as the General Ledger.
> GnuCash is standard journal + ledger accounting except that these steps of
> first entering the transaction in the journal and then later posting into
> the ledger has been automated. Since errors made while posting were one of
> the headaches of old fashioned pen and ink on paper bookkeeping this
> "autoposting" is wonderful.
> Normally we enter the transactions working from the ledger account of ANY
> of the accounts affected. We get to specify the other account(s) and how
> much split to each (if it is a split). GnuCash builds the corresponding
> journal entry for us (you can ask to see the journal; one of the reports).
> The journal is the time ordered record of activity. The ledgers hold that
> activity segregated into like types (and then within that ordered by time).
> You could think of the whole thing as simply a pile of transactions (each
> double entry grouped and ordered in different ways).
> BUT --- no, expenses and income are not "immediately posted into assets or
> liabilities". That's not what "posting" means. Any transaction affecting an
> account of type income (or expense) will also normally* be affecting an
> account of type asset or type liability as the other side of the double
> entry. All transactions add a net zero to the books (they remain in
> * Conceivably could be equity on the other side of the transaction. For
> example, if I paid an expense of my business using my PERSONAL check then I
> have in effect "made an additional investment" in the business -- the
> opposite of a "draw".
I'm glad to see you take an interest in this thread. Do you agree that the
following equation is indeed correct?
(Assets - Liabilities) + (Expenses - Income) = Equity
I believe it is equivalent to
Assets - Liabilities = Equity + (Income - Expenses)
as posted here: http://code.gnucash.org/docs/guide/accts-concepts1.html
If we confirm that the equation "(Assets - Liabilities) + (Expenses -
Income) = Equity" is correct, what is the common sense explanation for why
income negatively affects equity?
Jeff explained some important points above and I assume he is totally
correct. But he also said, "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." So do
I just have to accept that some things are backwards, or is there a "common
sense" explanation for why more income leads to less equity in this
Or is it that the equation is governed by rules other than purely
mathematical ones? I think that's what Jeff and others hinted at. Are there
rules (e.g. double entry) that restrict the way the equation can be used?
Without these rules, clearly more income means less equity and that still
strikes me as weird.
EDIT/UPDATE: I reviewed the diagram at
http://code.gnucash.org/docs/guide/accts-concepts1.html again. From the
diagram, income contributes to equity. But I don't recognize the same
relationship from the equation and the more I think about it, the more I
believe this accounting equation is not a "real" mathematical equation so
much as a shorthand for a whole set of other concepts (e.g., "accounting
concepts" including double entry restrictions). It seems like the equation
doesn't stand on its own. It only works if double entry rules restrict it's
scope. Still confused...
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