Difference in Equity and Assets (checking a/c)

Larry Evans cppljevans at suddenlink.net
Mon Sep 14 16:41:08 EDT 2015


On 09/14/2015 04:41 AM, Michael Hendry wrote:
>
>> On 14 Sep 2015, at 08:54, Hossain <contacthossain at gmail.com> wrote:
>>
>> Hello, I m very new to GnuCash, I need some
>> clarifications.I m confused about Equity.  I have 1000$
>> in checking a/c (parent-Assets). I make a transaction at
>> Income for 200$ (Assets:Current Assets:Current Account)
>> but it doesn't increase my opening
>> balance(parent-Equity). IT only increases checking a/c
>> (parent-Assets) to 1200$. As far as I knw, Equity is what
>> I have in total, then why is this 200$ not added to
>> Equity?
>
> Welcome, Hossain.
>
> This is an accountancy question - I don’t think you fully
> understand double-entry bookkeeping.
>
> (I’m not an accountant, I hasten to add).
>
> Equity represents your contribution to the business whose
> accounts you are keeping (and perhaps contributions of
> business partners).
>
> When you make a double-entry of income arriving in your
> Current Account (= US Checking Account), you must record
> the source of this income in one of your Income accounts -
> for example, “Income:Salary" or "Income:Bank Interest".
>
> Michael
>
Hi, Hossain.

Like Michael, I'm not an accountant either.  My education
was engineering and computer science.

This reference:

https://en.wikipedia.org/wiki/Accounting_equation

gives the definition as:

  Assets - Liabilities = Equity

An equation using more understandable terms(for a
non-accountant) would be, in my opinion:

  Owned - Owed = NetWorth

What missing is income and expenses, which occur later in
the wikipedia page in:

  NetIncome = Income − Expenses

So, in a Gnucash Income account, incomes are recorded in the
income column of the income account register
(e.g. Income:Salary) and then transferred (i.e. entered in
the Transfer column of the Income:Salary register) to some
Asset (or, in my terminology, Owned) account, such as your
checking account at some bank, such as Assets:CitiBankChecking.
Alternately, in a Gnucash expense account, expenses are
recorded in the expense column of the expense account
register (e.g. Expenses:Gas) and then transferred to some
asset acount such as Assets:CitiBankChecking, but
that transfer decreases the NetWorth of your
Assets:CitiBankChecking account.

As far as I can tell, there only needs to be 2 types of top
level accounts.  NetWorth and WorthFlow.  A subaccount of
NetWorth, (e.g. NetWorth:CarLoan) can be negative (which
would make it a Liability account in Gnucash's terminology)
or positive (e.g. NetWorth:Citibank:Checking) which would
make it an Asset in Gnucash's terminology).  Likewise, a
WorthFlow can be either positive (an income, Income:Salary)
or negative (an expense, Expense:Gas).  The WorthFlows cause
changes in the NewWorth over time. It's just a convention
that accounting practice records both Assets and Liabilities
as positive amounts, but when calculating Equity, it
substracts the two, reflecting the wikipedia article
equation.  Likewise, income and expense are both recorded in
the gnucash registers as positive but have an opposite
effection on the change of Equity or NetWorth because one is
really a positive change and the other is really a negative
change.

Of course probably people just think it's easier to first
add up all their expenses and then substract them rather
that substract each one from Networth.  Likewise, people
probably think it's easier to add up all the things they own
and the add up all the things they owe and substract the two
to get NetWorth.

Of course maybe I'm missing something.

-regards,
Larry




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