[GNC] Question about the accounting equation in the GnuCash guide

[David Warren]

If we now spend $3 on expenses we get

Assets $2...........Income $5
Expenses $3......Liabilities $0

Nicely balanced.  At the end of some period, we could resolve Income -
Expenses to Equity and show

Assets $2.........Income $0
Expenses $0...Liabilities $0
.......................Equity   $2

All represented as positive numbers, which is all they knew when double
side accounting started

On Thu, Aug 14, 2025 at 6:03 PM David Warren <david at warren1.net> wrote:

> Hi.  No gnucash questions here.  I think maybe if the gnucash intro didn't
> help, some other intro to the accounting equation is going to be critical
> for you; e.g. https://www.investopedia.com/terms/a/accounting-equation.asp
> .
>
> Income and Expenses are temporary accounts that get resolved to Equity.
> So if the only thing that happened in the period was you earned $5 of
> income and put it in the bank (into an asset account), we would
> (temporarily) show
> Assets $5 ..... Income $5
> ......................Expenses $0
> which absolutely balances to a net worth of $5, as we would take (Income -
> Expenses) -> Equity = $5
>
> On Thu, Aug 14, 2025 at 5:46 PM Anselm Schüler <mail at anselmschueler.com>
> wrote:
>
>> Hi,
>>
>> I’m reading the GnuCash guide that’s offered on initial launch of GnuCash.
>>
>> The chapter The Basics introduces the accounting equation:
>> /Assets - Liabilities = Equity + (Income - Expenses)/
>> And I do not understand how it is intended to be understood.
>>
>> If we understand equity as representing the total net wealth,
>> aggregating the “settled” income in assets and the “in-flight” income
>> then we can see that a simple test scenario
>> /Assets = $0
>> Liabilities = $0
>> Income = $5
>> Expenses = $0/
>> gives the absurd result of /Equity = -$5/. But if we instead take what
>> the manual says earlier, that an increase in income is always paired
>> with an increase in assets, by adjusting to /Assets = $5/, then we get
>> the result that /Equity = $0/. This is similarly absurd, in my view.
>> Shouldn’t we have /Equity = $5/?
>>
>> It’s also unclear if liabilities and expenses should be negative numbers
>> in the equation. If I spend $5, does that mean the equation is
>> /Assets - Liabilities = Equity + (Income - $5)/ (where expenses are
>> denoted as positive values), or
>> /Assets - Liabilities = Equity + (Income + $5)/ (where expenses are
>> denoted as negative values)?
>> If liabilities are not in lockstep with expenses, then this means that
>> to get equity to behave intuitively, we’d need to treat liabilities as
>> positive numbers, but expenses as negative numbers. If liabilities are
>> in lockstep with expenses, then we either get /Equity = -$10/, or
>> /Equity = $0/, which seem ridiculous.
>>
>> So I simply do not understand how equity and the equation is to be
>> understood. Could anybody help me here and clarify what is meant?
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>