(no subject)

[DaveC49]

Hi Eneko,

The full accounting equation is
Assets = Liabilities +Equity+(Income -Expenses) where Income and Expense
accounts are temporary Equity accounts which record the changes in equity
during the current accounting period (usually a financial year). 
You can rewrite this as Equity = Assets - Liabilities, which possibly makes
more sense to non-accountants.

It is not necessarily that an increase in assets is matched by an increase
in liabilities. This is only true if you purchase an asset using credit.
I.e. If you buy a piece of equipment on credit ( your credit card for
example), the balance of the asset account for Equipment is increased by the
amount of the purchase and the balance of your Accounts Payable ( a
liability account) is also increased by the same amount. (Gnucash refers to
these entries as splits) and a transaction recording an event in your
account generally consists of at least two splits, each affecting one
account, and can consist of more splits where a transaction affects more
than two accounts ( atransaction which has a sales tax , VAT or GST
component for example). For the above if the purchse price was $500, the
splits would be 
                                      Debit            Credit
Asset:Equipment             $500      
Liability:CreditCard                              $500.

The transaction which records this is a debit entry to the Asset:Equipment
account and a credit entry to the Liability:AccountsPayable account. This is
why accountants write the equation in the first way above since in this form
increases in accounts on the left hand side(LHS) of the equation are debit
entries (and decreases  in the accounts on the LHS  are therefore credit
entries) and increases in accounts on the right hand side are credit entries
(and decreases in accounts on the RHS are debit entries).

If your equipment purchase was by cash however, there is no liability
created as you are paying from an existing asset, your bank account. As your
bank account balance is decreased when you make the purchase, then entry to
your bank account is a credit entry for the value of the purchase. I.e. the
splits would now be

                                      Debit            Credit
Asset:Equipment             $500      
Asset:Bank Account                              $500.

What has to balance for any given transaction is the sum of the debit
entries (splits) and the sum of the credit entries (splits) for each
transaction. 

More clearly an increase in a given asset account either has to be balanced
by 
         *a  corresponding decrease in another asset account; or
         *a corresponding increase in a liability account; or
         *a corresponding increase in an equity account; or
         * any combination of the above in which the sum of the decrease in
the asset account and decrease in 
             the liability and/or equity accounts totals to equal the
increase in the first given asset account.

I hope this helps make this section a bit clearer. Wikipedia also has some
fairly good entries on double -entry book keeping/accounting.

David Cousens





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