4 ms·

#1 and 2 are generally correct. Personally, I would remove the quote "nothing about assets, liabilities or equity". Accounting is "all about" those accounts.

#1 and 2 are generally correct. Personally, I would remove the quote "nothing about assets, liabilities or equity". Accounting is "all about" those accounts. #3 couple edits: Change "the equity goes down by $1000" to "either equity or liabilities will increase by $1000". Equity will either remain the same or increase when a business obtains $1000 out of thin air. Change "the loan account goes down by $1000" to "the loan account goes UP by $1000". Obtaining a loan will increase cash/increase liability accounts. #4 is correct.

kazinator 6y ago
That is wrong; the equity and liability accounts run negative in this view, because they represent external interests in the business. When equity increases, the equity account representation of it decreases; i.e. decrements toward negative infinity. > Equity will either remain the same or increase when a business obtains $1000 out of thin air. By "out of thin air" I meant that the business doesn't owe the money other than to its owners as equity. Like say the business won that in a lottery or something. > Obtaining a loan will increase cash/increase liability accounts You don't get the system obviously; you're thinking in the broken credit/debit system.
kazinator 6y ago
Though in accounting you have to be clear about what you have versus what you owe, and transactions must target the correct accounts in order to make sense, there is no need to befuddle the fundamental equation with those details. It is much clearer mathematically to have the fundamental equation be "all accounts always add to zero". That's it; no mention of their "type". Likewise, the increments/decrements in a transaction just have to add to zero. This is the same as conservation laws in physics; e.g. integral over a closed path over a conservative field. Or the Kirchhoff voltage law (sum of voltages around an electric circuit is zero). Debit/credit accounting is like designing a circuit in which for some silly reason we decided to mix conventional current and electron current! Oh, this is a liability resistor, so we use electron current, but this is an asset capacitor, so we use conventional current. The circuit law then doesn't add to zero, unless you remember which elements need to have their sign flipped, and you end up with strange rules like equity volages equal asset voltages minus liability voltages. Can you imagine doing such a thing when designing a device with hundreds of parts? Yet, big ledgers can likewise have hundreds of accounts. Then a corporation needs a small army of accountants to keep a simple thing straight. It's not just the adding to zero that is crystal clear, but the polarities of the accounts. When I see a negative balance account in the ledger, I have a good idea that it's an equity/liability account just from the balance alone. Minus means owing, plus means having: very clear.

kazinator 6y ago

That is wrong; the equity and liability accounts run negative in this view, because they represent external interests in the business. When equity increases, the equity account representation of it decreases; i.e. decrements toward negative infinity. > Equity will either remain the same or increase when a business obtains $1000 out of thin air. By "out of thin air" I meant that the business doesn't owe the money other than to its owners as equity. Like say the business won that in a lottery or something. > Obtaining a loan will increase cash/increase liability accounts You don't get the system obviously; you're thinking in the broken credit/debit system.

kazinator 6y ago

Though in accounting you have to be clear about what you have versus what you owe, and transactions must target the correct accounts in order to make sense, there is no need to befuddle the fundamental equation with those details. It is much clearer mathematically to have the fundamental equation be "all accounts always add to zero". That's it; no mention of their "type". Likewise, the increments/decrements in a transaction just have to add to zero. This is the same as conservation laws in physics; e.g. integral over a closed path over a conservative field. Or the Kirchhoff voltage law (sum of voltages around an electric circuit is zero). Debit/credit accounting is like designing a circuit in which for some silly reason we decided to mix conventional current and electron current! Oh, this is a liability resistor, so we use electron current, but this is an asset capacitor, so we use conventional current. The circuit law then doesn't add to zero, unless you remember which elements need to have their sign flipped, and you end up with strange rules like equity volages equal asset voltages minus liability voltages. Can you imagine doing such a thing when designing a device with hundreds of parts? Yet, big ledgers can likewise have hundreds of accounts. Then a corporation needs a small army of accountants to keep a simple thing straight. It's not just the adding to zero that is crystal clear, but the polarities of the accounts. When I see a negative balance account in the ledger, I have a good idea that it's an equity/liability account just from the balance alone. Minus means owing, plus means having: very clear.