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?
_______________________________________________
gnucash-user mailing list
[email protected]
To update your subscription preferences or to unsubscribe:
https://lists.gnucash.org/mailman/listinfo/gnucash-user
-----
Please remember to CC this list on all your replies.
You can do this by using Reply-To-List or Reply-All.
