On 5/18/2016 8:51 PM, John Ralls wrote:
On May 18, 2016, at 7:03 AM, Aaron Laws <dartm...@gmail.com> wrote:
On Tue, May 17, 2016 at 5:22 PM, John Ralls <jra...@ceridwen.us
<mailto:jra...@ceridwen.us>> wrote:
The Balance Sheet report shows you net worth. You probably didn't recognize it because
the accounting word for it is "equity". Recall that the accounting equation is
Assets = Liabilities + Equity*, so by associativity Equity = Assets - Liabilities.
When we say Assets = Liabilities + Equity, it means All Assets = All
Liabilities + All Equity. This works if I include all (non-$0) assets,
liabilities and equity, and do so when there are no revenues nor expenses (just
after closing the books). At any other time, or in any other way, that equation
doesn't hold, and even in that specific case, it's not the information I'm
seeking.
A bit of history (and you have NOT looked at the balance sheet carefully
enough)
a) In double entry bookkeeping, originally there were no accounts of
type income or expense. Transactions were immediately entered against
equity. That made it possible to quickly/easily determine net worth at
any moment, but all information about how income or expense categories
were grouped was lost << I am talking several hundred years ago >> Then
somebody got the bright idea to introduce accounts of type income and
expense, actually temporary accounts of fundamental type equity. That
allowed information about categories of income and expense to be seen.
Then these (temporary) accounts were closed to another temporary account
of type equity called "profit and loss report" and then finally that was
close to equity itself (by the net gain or loss amount). That was the
process of closing the books in the days of pen and ink on paper << and
how I myself learned bookkeeping >>
b) Take closer look at the balance sheet under equity. Do you not see
there a line for which you do not have an actual account? One that has
the amount of the net of all income and expense accounts << it will
either be a gain or a loss >>
The equation is always valid. The accounts of type income and expense
are part of the equity side.
Michael D Novack
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