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

[Stan Brown (using GC 4.14)]

Hello, Anselm, and welcome to GnuCash!

Your questions are really about accounting, not about GnuCash, but I'll
try to indicate some answers.

On 2025-08-14 07:24, Anselm Schüler wrote:

> 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.

It is two things: a description of how balanced books will look, with
total assets, total liabilities, etc, and a description of how each
individual transaction will look.

Just to be clear, this is not something special about GnuCash; it's how
double-entry bookkeeping has worked since the Italian bankers invented
it a few centuries ago.

Please look at https://en.wikipedia.org/wiki/Double-entry_bookkeeping
or the Tutorial and Concepts guide, or any introductory-level book on
double-entry bookkeeping. Trust me, getting those concepts under your
belt will make things a lot simpler for you.

> 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/.

What's absurd about that is having income that doesn't affect any asset
account. What would be non-absurd is Assets:Checking Account = $5,
Income:Lemonade Sales=$5, and zeroes in the others. Remember that Income
and Expenses are _temporary_ accounts, which will eventually be closed
into an equity account or simply recorded on the balance sheet as
Retained Earnings, depending on the options you select in your reports.

 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/?

Eventually, yes; but in the moment when the income is earned, no. A form
of the accounting equation that you might find less confusing is

Assets - Liabilities = Equity + Income - Expenses.

> 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)?

You're overthinking it. Our Italian ancestors had no concept of negative
numbers there were only debits and credits. _None_ of the numbers in the
accounting equation are negative, just as none of the numbers in "7-4 =
3" are negative. A positive 4 is subtracted from 7, just as positive
expenses are subtracted from income n the basic accounting equation to
determine net income that will eventually be added to equity.

With negative numbers being taught in elementary school (I hope), it's
easy to apply them where they aren't really relevant, as in bookkeeping.
You were taught that 7 - 4 = 7 + (-4), but the Italians who invented
bookkeeping would have understood the left-hand side of that equation,
not the right-hand side.

> If liabilities are not in lockstep with expenses,

Of course liabilities are not, repeat NOT, in lockstep with expenses. If
they were, what would be the point of having separate account types?
When you pay your electric bill with cash or a check, the electricity
expense is paired with the cash asset or checking account asset. When
you pay your electric bill with your Visa card, the electricity expense
is paired with the Visa card liability. Either way, it's a debit to
electricity expense; the corresponding credit may be to cash (asset),
checking account (also asset), or Visa card (liability).


Stan Brown
Tehachapi, CA, USA
https://BrownMath.com
> You can do this by using Reply-To-List or Reply-All.