[GNC] Can someone tell me how A-L=Eq+(I-Ex) is correct?

[David Cousens]

Stan 

To be a little bit pedantic, most accounting textbooks will give the accounting
equation 
as 
Assets = Liabilities + Equity
and the extended equation for temporary accounts
as
Assets= liabilities + Equity + (Income -Expenses).

The reason for putting it in this form is that the accounts on the LHS  have
debit balances (debits increase the balance and credits decrease the balance)
and the accounts on the RHS  have credit balances (credits increase the account
balanc and debits decrease the balance with the exception of the expense
accounts just to recomplicate things). Why they don't make it completely
symmetric as
Assets + Expenses = Liabilities + Equity + Income
which would make far more sense given the reason usually supplied is another of
those mysteries of life and accounting.

David Cousens

On Mon, 2022-08-29 at 13:05 -0700, Stan Brown wrote:
> I agree with what Michael or Penny wrote, but I'm going to post anyway
> because seeing it described in slightly different ways may be helpful
> for the original questioner.
> 
> On 2022-08-28 15:38, W. Neal Lewis wrote:
> > However, although (A+L)=Eq, (A+L)≠Eq+(I+Ex). I have added a term to the
> > right side that is most decidedly not on the left ∴ they cannot be equal.
> > ∴ A and L must be terms that include other factors.
> 
> First off, it's assets MINUS Liabilities, not plus, and the same for
> Expenses. If you have a $500,000 house and a mortgage balance of
> $150,000, with no other assets or liabilities. your net worth (Equity)
> is not $500,000+150,000 = $650,000; it's $500,000-150,000 = $350,000.
> 
> Secondly, your two equations assume different conditions. The more
> general equation
>         Assets - Liabilities = Equity + Income - Expenses
> is always valid, so that's probably the one to think about until it's
> second nature.
> 
> But what happens if(*) you "close the books"? This means to total up the
> year's or month's income and expenses, post the total net income or net
> loss into an Equity account such as Retained Earnings, and zero out all
> the income and expense accounts. GnuCash has a menu item to perform this
> closing for you. Since all income accounts and all expense accounts have
> zero balances right after closing the books, the general equation
> reduces to
>         Assets - Liabilities = Equity
> 
> (*) I say _if_ you close them, because there's no requirement to do so
> in GnuCash. Some people including me like a fresh start each year;
> others don't.
> 
> But that shorter equation is always valid, even when there are nonzero
> income and expense account balances, if you interpret "Equity" in a more
> general way. GnuCash actually does this for you when you run a balance
> sheet.
>     It adds up all income account balances and subtracts all expense
> account balances, obtaining your net income or net loss to date. That
> total is shown in the Equity section of the balance sheet as Retained
> Earnings.
>     GnuCash doesn't change any account balances, and the computed
> Retained Earnings don't get posted to any actual account in your
> database; it's purely a rollup of the income and expense balances rather
> than showing them individually on the balance sheet. If we interpret
> Equity as "all equity accounts plus the net income (or minus the next
> expense) since the books were last closed",(**) then once again you have
>         Assets - Liabilities = Equity
> 
> (**) This might seem like cheating, but it's not. All income and expense
> amounts are logically part of your net worth, as the following example
> will show.
> 
> Suppose you have earned $90K salary so far this year and spent $76 K of
> it in food, clothes, and so forth. You still have a $500 K house with
> $150 K mortgage.
> 
> Assets: $514 K ($500 K house, plus the $14K part of your salary that's
> still in your in a bank account)
> Liabilities: $150 K (mortgage balance)
> Equity: $365 K (The $350 equity in your house, plus your $90 K in salary
> income, minus your $76 K in expenses)
> 
> Once again, Assets - Liabilities = Equity: $514 K - $150 K = $364 K.
> 
> Suppose you want a balance sheet that doesn't roll net income or expense
> into Retained Earnings, but shows the individual account balances? That
> is called a Trial Balance, and GnuCash can create such a report for you.
> Or of course you can run a Balance Sheet for the desired date and an
> Income Statement (Profit and Loss statement) for the period starting the
> day after the books were closed and ending the date of the Balance Sheet.
> 
> Stan Brown
> Tehachapi, CA, USA
> https://BrownMath.com
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