Basic Accounting Concepts - what am I missing?
James Kerr
jim at jkerr82508.free-online.co.uk
Mon Jan 3 04:33:21 EST 2011
On Mon, 2011-01-03 at 01:28 -0500, Jim Smith wrote:
> I have come to understand the Accounting Equation as a function rather than
> a mathematical equation. It is a function because of the restriction that
> double entry is always required. It doesn't work as a purely mathematical
> equation. Thinking of it as an equation leads to nonsensical results.
>
Only if you fail to understand that all of the elements in the equation
relate to ledger account balances.
The basic accounting equation is:
Assets - Liabilities = Equity
but during the course of the accounting period the Equity ledger account
does not include net income for the period and so net income for the
period must be added to the right hand side of the equation in order to
achieve balance, hence the form of the equation:
Assets - Liabilities = Equity + (Income - Expenses)
After the books are closed at the end of the accounting period, the
Equity ledger account does include net income for the period and Income
and Expenses are both zero.
In other words, the numerical values assigned to Equity, Income and
Expenses will depend on whether you are dealing with the ledger before
or after the books are closed.
Jim
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