Fwd: (no subject)

[Mick Hartzell]

> Begin forwarded message:
> 
> From: Mick Hartzell <mick.hartzell at me.com>
> Subject: Re: (no subject)
> Date: June 2, 2017 at 11:45:21 AM CDT
> To: DaveC49 <davidcousens at bigpond.com>
> Cc: gnucash-user at gnucash.org
> 
> Eneko,
> 
> Remember this:
> In accounting Debits must equal Credits.
> 2 = 1 + 1
> A = B + C 
> Substitute D = B and E = C
> 
> A = D + E
> 
> A = Assets
> D = Debt 
> E = Equity.
> 
> Assets = Debt + Equity.
> 
> Mick
> 
> 
>> On Jun 1, 2017, at 12:42 AM, DaveC49 <davidcousens at bigpond.com> wrote:
>> 
>> 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
>> 
>> 
>> 
>> 
>> 
>> --
>> View this message in context: http://gnucash.1415818.n4.nabble.com/no-subject-tp4691972p4691976.html
>> Sent from the GnuCash - User mailing list archive at Nabble.com.
>> _______________________________________________
>> gnucash-user mailing list
>> gnucash-user at gnucash.org
>> https://lists.gnucash.org/mailman/listinfo/gnucash-user
>> -----
>> Please remember to CC this list on all your replies.
>> You can do this by using Reply-To-List or Reply-All.
>