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

[David Cousens]

Anselm,
The first thing is to understand that Income and Expenses are actually
Equity accounts that are temporary in traditional accounting so that profit
or loss can be calculated for the current accounting period, usually silly
the current financial year but not necessarily so. The basic equation can
be written as Assets - Liabilities = Equity ( + Income - Expenses) when the
temporary accounts for the current period are included. It can bewritten
however in the form Assets + Expenses= Liabilities + Equity + Income
because in that form the sense of debits and credits to accounts is defined
by which side of the equal sign they lie. Debits increase and credits
decrease the balance of accounts in the types on the LHS and credits
increase and debits decrease the balance of accounts of the type on the
RHS. It is more commonly written as Assets = Liabilities + Equity ( +
Income - Expenses) to emphasisze that  the temporary accounts are Equity
accounts which are closed to Equity at the end of each accounting period in
traditional npractice.

On Fri, 15 Aug 2025, 2:09 pm Stan Brown (using GC 4.14), <
stan+gc at fastmail.fm> wrote:

> 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.
>
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