Equity wrong?

[MAD King]

So that means every time a expense or income is added it will be added to the equity too?

i.e. if I got $200.000 income and $100.000 expenses the equity will be $300.000?




MAD King wrote: 

>d> I think he's just misunderstanding what equity IS. 
> 
>Indeed I do. May someone would be so nice and explain it to me? 
> 
>   
> 
I guess we need this every so often. 

When double entry bookkeeping began several hundred years ago income and 
expense transactions were immediately posted to equity. That made it 
easy to see the balance of equity at any moment but lost information 
about income and expenses. So somebody came up with a bright idea. Have 
temporary equity accounts of type "income" and "expense". Post those 
transactions there during the accounting period. Then at the end of the 
accounting period close the balances of each of these to another 
temporary account called "profit and loss" and close the total of that 
to "equity" (the permanent equity account). That let you see the total 
of each income or expense category, the net gain or loss for the period, 
and it still ended up in equity after all was done. 

We don't have to go through all of that work as the computer can produce 
the reports. 

All the steps I described in the "old way" might seem unnecessary but if 
you ever did old fashioned pen and ink on paper accounting you would 
know how important to be able to be sure that accounts were correct at 
the point of each "double line" so when an error was discovered isolated 
between where you are now and the previous double line. 

Michael 
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