On 2021-02-15 14:37, Michael or Penny Novack wrote:
> On 2/15/2021 5:17 PM, Adrien Monteleone wrote:
>> (technically, Income & Expenses are 'temporary' Equity accounts, but
>> GnuCash gives them their own 'top-level' with Assets, Equity &
>> Liabilities. In the pen&paper days, you closed these out at the end of
>> the year to Retained Earnings, also an Equity account.)
> Even more pedantic (from somebody who was first keeping books in those
> days when it was pen and ink in paper) you FIRST closed the income and
> expense accounts to a special (equity) account called "profit and loss"
> and you closed THAT account with the net profit (or loss) to retained
> earnings. The closed "profit and loss" account became your "Profit and
> Loss" report.
That's how I learned it at Ernst & Ernst when I worked there. (I
attended the firm's basic accounting course for non-accountants.) I
believe our textbook called the special account Income Summary rather
than Profit and loss, but that's a minor detail.
As an individual who's not running a business, I don't see a need for
Retained Earnings. I close all the income and expense accounts into
Income Summary at the end of the year, and close that into the main Net
Worth account, along with extraordinary income or losses, such as loss
on selling a residence.
>> Thus the expanded equation is:
>> Assets = Liabilities + Income - Expenses
> Well ----------- Assets = Liabilities + Equity + Income - Expenses <
> there really isn't any subtraction; expenses are debits and this is the
> credit side of the equation>
Exactly! I was going to post something, but you beat me to it, and it
expressed it more succinctly that I was going to.
I don't agree, though, about "there isn't any subtraction," or perhaps I
misunderstood your point. Consider this transaction:
Debit: $100 Expense:Depreciation
Credit: $100 Asset:Car
Assets drop by $100 and Expenses rise by $100. Expenses have to be
subtracted, not added, on the right-hand side of the equation, if the
transaction and the books are to be in balance.
--
Stan Brown
Tehachapi, CA, USA
https://BrownMath.com
https://OakRoadSystems.com
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