12 ms·

I think the most important equation to understand about accounting is assets = liabilities + equity ROA, ROE, etc come from the above formula.

talaketu 6y ago
more basic: Assets = Net Equities In other words, "all the assets are claimed". Owners equity is the the balance of the assets once other claims are discharged.
- kgwgk 6y ago
  Maybe you mean Equity = Net Assets ? That would make some sense.
sago 6y ago
I always felt that equation was confusing. Because then the sign has to be taught separately, or numbers have to have two columns (credit and debit) and you need to understand where each one is. assets + liabilities + equity = 0 Seemed much more general. Double entry just became: everything (transactions, whole companies) sum to zero. Then just one other little thing (where money comes from in a transaction is positive, where you put it is negative) and you have the math. IMH(and not accountancy)O
- watsocd 6y ago
  Your formula is not correct. If you want to do it that way, it should be assets - liabilities - equity = 0. Think of it this way. When you start a company, you invest $100. For the company accounting, that is $100 in the bank account/asset and $100 in equity. $100 - 0 - $100 = 0 Now you take a loan for $100. Now you have $200 in the bank account, a $100 liability, and $100 in equity. $200 - $100 - $100 = $0.
  - sago 6y ago
    It is not incorrect. To make everything positive (and use the subtraction as you have) you need to have two different types of 'positivity' Credit and debit. And then you have to remember which things are subtracted and added so it gets back to balancing. That's why it gets so complicated. Money in your bank account is _negative_. It is a _debit_ in your accounts (this is not my invention this is true). Your bank account statement is from the bank's perspective. The money came from you, so it is a credit from their perspective only. Try to submit your statutory accounts with 'bank credit' and you'll get in trouble! Your software or accountant will definitely flip it to become a debit! Your transaction to start your account: Equity: $100 (or $100CR) Bank account: $-100 (or $100DB) Loan: Debt: $100 (or $100CR) Bank account: -$100 (or $100DB) Accounts: Assets > Bank account: $-200 (or $200DB) Liabilities > Debt: $100 (or $100CR) Equity: $100 (or $100CR)
    - wrycoder 6y ago
      Equity is similar to a liability. Ít is owed to the owners of the entity. Making assets positive in code is conventional.
      - sago 6y ago
        > Equity is similar to a liability. Ít is owed to the owners of the entity. You can kind of see the easy rationale there. I'm not sure it's very deep though. Revenue is in the same group (Credit). And the assets are like expenses (Debit). That is a bit more of a just-so-story in my mind. > Making assets positive in code is conventional. Are you sure? What code are you talking about? Making everything positive in the UI is certainly common. And not showing whether a value is credit or debit. But I really hope my accountancy software isn't coded that way! It needs to track whether a number is a credit or a debit. It could do it with an unsigned value in a struct with a 'is_cr' Boolean and some custom operations to combine the money structs. But I've only ever seen code using signed values, because it is so much faster and less errorprone. Doing it manually is just reinventing the math of negative numbers. And then, the overwhelming convention is the former is positive, the latter negative, not the other way round.
        6y ago
- soheilpro 6y ago
  Think of it this way: Assets - Liabilities = Equity If we deduct everything that we owe (Liabilities) from everything that we own (Assets), whatever is left belongs to the shareholders (Equity).
  - sago 6y ago
    Except in your case you need all the rules about income and expenses. And loads of grey cases get weird (it is possible to have assets or liability of the wrong sign), and require serious accountancy expertise to know all the rules to get them back to the signs that you expect. Or you can use negative numbers and everything just works. Your financial software _will_ use my approach. As do the most sophisticated software of the most complicated companies. But their presentation gets mangled through a complicated series of rules for archaic reasons.
- lenzm 6y ago
  Yeah. It's all left over from the fact that double entry bookkeeping is older than the use of negative numbers. Start with the rule that every account has to be positive and you get all of the inane rules. CPAs are the OG Luddites, refusing to use negative numbers to make their jobs simpler and easier to understand.
- mehrdadn 6y ago
  > assets + liabilities + equity = 0 So how does this actually work? Say I worked for 8 hours at $25/hr. I get a $200 deposit in my checking account; that increases my assets. How is the sum still zero?
  - sago 6y ago
    Transaction: Income > Work: $200 (or $200CR) Assets > Bank Account: -$200 (or $200DB) This is exactly how it would be stored in any software system behind-the-scenes, and how it would be submitted in statutory accounts. The only thing that makes this look weird is that you are used to seeing your bank account statement with 'credit'. But that's only because the bank account statement is from their accounting perspective. Money comes from somewhere (Positive, Credit); it goes somewhere (Negative, Debit). The entire confusion about signs and what to add and remove, and what categories 'increase' with debit or credit, it all disappears when you allow negative numbers. I guarantee your accounting software _will_ simply store them as positive or negative. It is frustrating that it appears so complex simply because of avoiding negative numbers.
    - mehrdadn 6y ago
      I don't understand where the negative comes from. I just gained $200. Why would my bank balance go down by $200?! If you're talking about the bank's perspective, why is that relevant to me? I'm just asking about how to do my own accounting.
      - sago 6y ago
        Debit is where you put money. Credit is where it came from. I am not inventing this. Money in your bank is debit in _your_ accounting. You are very welcome to treat it as positive and add. As long as you keep track of where every positive number is a credit or a debit, and you learn all the rules about which accounts to add and which ones need taking away. Or you can just treat credits as positive numbers and debits as negative. Literally the only 'weirdness' is that money you have put somewhere for future use (like a bank) is negative. Your initial reaction might be "that's just nonsense and ridiculous!" But I guarantee that is how your accountant and accountancy software is storing it. Your bank balance is debit from your accounts. Legally and intuitively. The only reason it is weird is because you receive statements from the bank from their perspective (a credit because they received the money from you). If you have made it to junior high school you are quite capable of the math. Treat debits as negative and credits as positive. No accountancy ed / special rules needed. If you want to get it more intuitive you can think of it as: Negative numbers are money that you put somewhere and is now owed to you. If you have $1000 in 'your' account, legally that means you are $1000 down because you are owed that money by the bank. It is your debit. You have given them credit. It may not feel like a loan because it feels like you can get the money any time you want. But loans you have given and bank accounts are both assets in your accounting. They are both debit. They are both money you have put somewhere.

talaketu 6y ago

more basic: Assets = Net Equities In other words, "all the assets are claimed". Owners equity is the the balance of the assets once other claims are discharged.

kgwgk 6y ago
Maybe you mean Equity = Net Assets ? That would make some sense.

sago 6y ago

I always felt that equation was confusing. Because then the sign has to be taught separately, or numbers have to have two columns (credit and debit) and you need to understand where each one is. assets + liabilities + equity = 0 Seemed much more general. Double entry just became: everything (transactions, whole companies) sum to zero. Then just one other little thing (where money comes from in a transaction is positive, where you put it is negative) and you have the math. IMH(and not accountancy)O

watsocd 6y ago
Your formula is not correct. If you want to do it that way, it should be assets - liabilities - equity = 0. Think of it this way. When you start a company, you invest $100. For the company accounting, that is $100 in the bank account/asset and $100 in equity. $100 - 0 - $100 = 0 Now you take a loan for $100. Now you have $200 in the bank account, a $100 liability, and $100 in equity. $200 - $100 - $100 = $0.
- sago 6y ago
  It is not incorrect. To make everything positive (and use the subtraction as you have) you need to have two different types of 'positivity' Credit and debit. And then you have to remember which things are subtracted and added so it gets back to balancing. That's why it gets so complicated. Money in your bank account is _negative_. It is a _debit_ in your accounts (this is not my invention this is true). Your bank account statement is from the bank's perspective. The money came from you, so it is a credit from their perspective only. Try to submit your statutory accounts with 'bank credit' and you'll get in trouble! Your software or accountant will definitely flip it to become a debit! Your transaction to start your account: Equity: $100 (or $100CR) Bank account: $-100 (or $100DB) Loan: Debt: $100 (or $100CR) Bank account: -$100 (or $100DB) Accounts: Assets > Bank account: $-200 (or $200DB) Liabilities > Debt: $100 (or $100CR) Equity: $100 (or $100CR)
  - wrycoder 6y ago
    Equity is similar to a liability. Ít is owed to the owners of the entity. Making assets positive in code is conventional.
    - sago 6y ago
      > Equity is similar to a liability. Ít is owed to the owners of the entity. You can kind of see the easy rationale there. I'm not sure it's very deep though. Revenue is in the same group (Credit). And the assets are like expenses (Debit). That is a bit more of a just-so-story in my mind. > Making assets positive in code is conventional. Are you sure? What code are you talking about? Making everything positive in the UI is certainly common. And not showing whether a value is credit or debit. But I really hope my accountancy software isn't coded that way! It needs to track whether a number is a credit or a debit. It could do it with an unsigned value in a struct with a 'is_cr' Boolean and some custom operations to combine the money structs. But I've only ever seen code using signed values, because it is so much faster and less errorprone. Doing it manually is just reinventing the math of negative numbers. And then, the overwhelming convention is the former is positive, the latter negative, not the other way round.
      - 6y ago
soheilpro 6y ago
Think of it this way: Assets - Liabilities = Equity If we deduct everything that we owe (Liabilities) from everything that we own (Assets), whatever is left belongs to the shareholders (Equity).
- sago 6y ago
  Except in your case you need all the rules about income and expenses. And loads of grey cases get weird (it is possible to have assets or liability of the wrong sign), and require serious accountancy expertise to know all the rules to get them back to the signs that you expect. Or you can use negative numbers and everything just works. Your financial software _will_ use my approach. As do the most sophisticated software of the most complicated companies. But their presentation gets mangled through a complicated series of rules for archaic reasons.
lenzm 6y ago
Yeah. It's all left over from the fact that double entry bookkeeping is older than the use of negative numbers. Start with the rule that every account has to be positive and you get all of the inane rules. CPAs are the OG Luddites, refusing to use negative numbers to make their jobs simpler and easier to understand.
mehrdadn 6y ago
> assets + liabilities + equity = 0 So how does this actually work? Say I worked for 8 hours at $25/hr. I get a $200 deposit in my checking account; that increases my assets. How is the sum still zero?
- sago 6y ago
  Transaction: Income > Work: $200 (or $200CR) Assets > Bank Account: -$200 (or $200DB) This is exactly how it would be stored in any software system behind-the-scenes, and how it would be submitted in statutory accounts. The only thing that makes this look weird is that you are used to seeing your bank account statement with 'credit'. But that's only because the bank account statement is from their accounting perspective. Money comes from somewhere (Positive, Credit); it goes somewhere (Negative, Debit). The entire confusion about signs and what to add and remove, and what categories 'increase' with debit or credit, it all disappears when you allow negative numbers. I guarantee your accounting software _will_ simply store them as positive or negative. It is frustrating that it appears so complex simply because of avoiding negative numbers.
  - mehrdadn 6y ago
    I don't understand where the negative comes from. I just gained $200. Why would my bank balance go down by $200?! If you're talking about the bank's perspective, why is that relevant to me? I'm just asking about how to do my own accounting.
    - sago 6y ago
      Debit is where you put money. Credit is where it came from. I am not inventing this. Money in your bank is debit in _your_ accounting. You are very welcome to treat it as positive and add. As long as you keep track of where every positive number is a credit or a debit, and you learn all the rules about which accounts to add and which ones need taking away. Or you can just treat credits as positive numbers and debits as negative. Literally the only 'weirdness' is that money you have put somewhere for future use (like a bank) is negative. Your initial reaction might be "that's just nonsense and ridiculous!" But I guarantee that is how your accountant and accountancy software is storing it. Your bank balance is debit from your accounts. Legally and intuitively. The only reason it is weird is because you receive statements from the bank from their perspective (a credit because they received the money from you). If you have made it to junior high school you are quite capable of the math. Treat debits as negative and credits as positive. No accountancy ed / special rules needed. If you want to get it more intuitive you can think of it as: Negative numbers are money that you put somewhere and is now owed to you. If you have $1000 in 'your' account, legally that means you are $1000 down because you are owed that money by the bank. It is your debit. You have given them credit. It may not feel like a loan because it feels like you can get the money any time you want. But loans you have given and bank accounts are both assets in your accounting. They are both debit. They are both money you have put somewhere.