Basic Accounting Concepts - what am I missing?

[Robert Plantz]

Michael,

Thank you VERY much for your explanation about not using subtraction. 
You have answered many accounting puzzles I have encountered over the 
years. For example, many years ago I had an argument with a contractor 
doing a remodel for me. His billing charged me twice for a change I 
requested. I, being an engineer, found the mathematical error. He, being 
a business person, took an accounting 101 class at the local community 
college the next semester.

I shall look for a good accounting 101 book.

--Bob


On 1/3/2011 5:44 AM, Mike or Penny Novack wrote:
> This is really going to be easier if we start from the basics (and the 
> way this is usually taught). I believe a good deal of the trouble 
> people are having in seeing how this works is not understanding that 
> the balances of some sorts of ledger accounts are intrinsicly the 
> opposite sign of other -- the usual state of their balances. Debits 
> and credits.
>
> Forget subtraction. The whole point is that the early accountants 
> decided that it would be less error prone if records were kept so that 
> the ONLY arithmetic operation was addition. That would eliminate the 
> possibility of an error from adding when one should have subtracted or 
> vice versa. Also keep in mind that there were other important 
> considerations. There was no automated mechanism for maintaining a 
> running balance, no automated report generators, and errors could 
> always be made in entering or copying numbers (so you would want a way 
> of noting "up to this point no errors" so searching for an error 
> didn't have to start from the beginning of the books each time).
>
> That's why the fundamental equation is conventionally addressed as:
> Assets = Liabilities + Equity
> Which since income and expense accounts are temporary accounts of 
> fundamental type equity (delaying their affect on equity so their 
> totals can be seen)
> Assets = Liabilities + Equity + (Income - Expenses)
>
> NOT strictly speaking algebra. In terms of algebra might be seen as
> Assets + Liabilities + Equity + Income + Expenses = 0
> (Assets and Expenses normally have debit balances; Liabilities, 
> Equity, and Income credit balances -- the net sum of the books is 
> always zero if they are in balance)
>
> What "double entry" means is that EVERY transaction you enter will 
> change debits and credits by the same amount (and thus add nothing to 
> the net sum of the books; if in balance before the transaction still 
> in balance afterwards.
>
> Accounts never have a negative balance which means no need to keep 
> track of sign or the risk of error from losing a sign. Instead the 
> balance would be on the opposite side (debit or credit) from where you 
> would ordinarily expect it to be.
>
> Does this make more sense now? The system was designed to make errors 
> less likely and easier to find when they did occur.
>
> The usual way this is taught is by "T diagrams" for the accounts. I 
> seriously suggest that if you don't know standard 
> accounting/bookkeeping you get a text teaching "accounting 101" as 
> this will show these to you and make clear what is going on. Some of 
> the questions we have here are of the nature "how do I use GnuCash to 
> do thus and so?" (which I understand how to do in some other 
> application or pen and paper) and others are more along the lines of 
> "how do I do thus and so?" (at the level where you would have the SAME 
> question doing it pen and paper; not really a Gnucash question even 
> though asked in the context of Gnucash).
>
> Michael
>
>
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