(no subject)

[Mick Hartzell]

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
> 
> 
> 
> 
> 
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