d2jsp
Log InRegister
d2jsp Forums > Off-Topic > General Chat > Homework Help > Are There Any Accounting Texts That Recognize This
12Next
Add Reply New Topic New Poll
Member
Posts: 35,075
Joined: Jul 26 2006
Gold: 125.00
Oct 28 2017 08:55pm
It really annoys me at work and in school.

The equation is:
Assets = Liabilities + Equity

What this does is it ends up making schedules confusing. You'll have liabilities shown as positives, when they are a credit.

The actual equation is:
Assets + Liabilities + Equity = 0

You could technically say:
Abs(assets) = Abs(liabilities + equity)

For example:
Assets = 10
Liabilities = (5)
Equity = (5)

So, 10 does not equal -10. The assets = liabilities + equity equation doesn't work.

This isn't just a technical stand-point. It's a practical one. If you take a schedule (say, the SCI), and you display everything as positive numbers, then it can get confusing. I'll give you an example:

Assets: ------ ADJ: ------ Adjusted assets:
10 ------------ (8) --------- 2
Liabilities:
5 -------------- (4) -------- 1
Equity:
5 -------------- (4) -------- 1

In this scenario (above), your adjustments are showing as a subtraction, but are actually all debit entries. This would be better presented as:

Assets: ------ ADJ: ------ Adjusted assets:
10 ------------ (8) --------- 2
Liabilities:
(5) ------------ 4 ---------- (1)
Equity:
(5) ------------ 4 ---------- (1)

Why is this useful? Because when you're working with several schedules and programs, and some use brackets/negatives to denote a credit, and some don't, it's annoying to switch back and forth. If everything is consistent across the board (all account presentation, all schedule presentation, etc), then there would be common understanding: A positive number as an adjustment to a liability indicates a reduction to the liability.

This post was edited by Canadian_Man on Oct 28 2017 08:57pm
Member
Posts: 8,061
Joined: Oct 27 2012
Gold: 2,080.00
Oct 29 2017 12:53am
Because everyone in the industry uses A = L + E to balance (the actual equation). You first equation is wrong: Assets - Liabilities - Equity = 0.

You can debit liabilities as well. They're not always credits. You're thinking only from a G/L perspective on the 1st entry, not the counter balancing entry from a BS perspective.

This post was edited by Icyfear on Oct 29 2017 12:56am
Member
Posts: 35,075
Joined: Jul 26 2006
Gold: 125.00
Oct 29 2017 04:10pm
Quote (Icyfear @ Oct 28 2017 11:53pm)
Because everyone in the industry uses A = L + E to balance (the actual equation). You first equation is wrong: Assets - Liabilities - Equity = 0.

You can debit liabilities as well. They're not always credits. You're thinking only from a G/L perspective on the 1st entry, not the counter balancing entry from a BS perspective.


I am speaking from a conceptual point-of-view here.

When you dissolve a company, typically what you do is you bring all balances to zero. In practice this can't always occur on a dissolution, but the ideal stands. The conceptual point I am coming from is that a corporation always owes whatever it gains to someone, or some other corporation. A corporation cannot accumulate its own reserves that are attributed to itself, so it can never become anything more than an entity that nets to 0.

I get that a liability or equity account in credit form is meant to represent a positive number, and that an asset in debit form is meant to represent a positive number, therefore assets = liabilities + equity. I am arguing that a liability is a negative from the business's point-of-view, as it represents a business's finite quantifiable debts. I am also arguing that any equity is a negative from the business's point-of-view as well, as equity represent's a business's debt in infinite perpetuity to its shareholder(s).

This post was edited by Canadian_Man on Oct 29 2017 04:11pm
Member
Posts: 8,061
Joined: Oct 27 2012
Gold: 2,080.00
Oct 29 2017 04:16pm
But that's assuming only the business point of view matters.

When someone acquires equity, that's very much a positive asset to them. Debt / liabilities can be incredibly accretive in value as well. As such, everything is kept in a positive account by default, because accounting was created to serve as a record for all parties (standalone business, lenders, equity holders) when they reference the business they're interacting with.
Member
Posts: 35,075
Joined: Jul 26 2006
Gold: 125.00
Oct 29 2017 04:21pm
Quote (Icyfear @ Oct 29 2017 03:16pm)
But that's assuming only the business point of view matters.

When someone acquires equity, that's very much a positive asset to them. Debt / liabilities can be incredibly accretive in value as well. As such, everything is kept in a positive account by default, because accounting was created to serve as a record for all parties (standalone business, lenders, equity holders) when they reference the business they're interacting with.


Sure, but the person's acquisition of the business is separate from the business's books.

On the business side, if we simplify:
DR/increase in Cash
CR/increase in Equity

The person is not a business, so we don't apply the same logic. If it is the person's business that is acquiring equity in another business, then we can apply the same logic, but it ends with the person's interest in their own corp.

The person does acquire something real. They acquire the equity. But that's just it: The equity is a debt to that acquirer, from the business's point-of-view. From the person's point-of-view, it's a share of the business: a share in profits, and a value that can be cashed in on if sold/settled. While it is positive to the buyer, it is negative to the business.

This post was edited by Canadian_Man on Oct 29 2017 04:27pm
Member
Posts: 8,061
Joined: Oct 27 2012
Gold: 2,080.00
Oct 29 2017 07:47pm
The point is when anyone else looks at the business, they don't care about the business's view on what's incremental or a drain.

Don't disagree that you can net to zero, but it's easier to think 1 = 1 than 1 + -1 = 0 when you have many parties interpreting 3 statements from different incentives. Why should only one party get the benefit of having positive numbers? As an investor or lender looking at a P&L, why would I want to deal with the mental math of converting my $ into negatives?

What if I posited that no one gives a hell about the business view in the long run? It's all about equity / debt in + what you get out as a return on investment, otherwise people wouldn't start a business. When a start-up is founded, some guy puts $30k into his business and let's say buys inventory. That $30k in inventory sure isn't viewed as positive for the founder unless it generates some return. So therefore it's quite negative from that viewpoint. Now go to the bookkeeper for the business, who does align with your view, in which case equity is the liability. Lenders would side with the equity stake holders.

It's why it's defaulted to A = L + E after hundreds of years of modern accounting--the internal business view is just one of many views out of all the parties that look at financial statements of a business. I understand your view on trying to hold a + / - across each party's individual 3 statements, if you will, but why have people switch positive and negative when flipping between financials, vs. keeping it all positive?
Member
Posts: 35,075
Joined: Jul 26 2006
Gold: 125.00
Oct 30 2017 04:57pm
Fair. Just hate flip flopping on different schedules between brackets for a CR balance on a liability, and no brackets for a CR balance on another schedule. Then additions or subtractions induce a feeling of dyslexia as you have to double check the meaning of the signage.
Member
Posts: 8,061
Joined: Oct 27 2012
Gold: 2,080.00
Oct 30 2017 05:33pm
Totally get your frustration on the raw accounting front. Sounds like you may be happier transitioning over to a finance gig, haha.
Member
Posts: 35,075
Joined: Jul 26 2006
Gold: 125.00
Oct 31 2017 03:24am
Quote (Icyfear @ Oct 30 2017 04:33pm)
Totally get your frustration on the raw accounting front. Sounds like you may be happier transitioning over to a finance gig, haha.


Don't know. Still learning. I'll go where the money takes me.
Member
Posts: 18,713
Joined: May 31 2013
Gold: 0.00
Nov 2 2017 04:41pm
Hey you mentioned you got a nice job, congrats! Where and what? In industry or public practice?
Go Back To Homework Help Topic List
12Next
Add Reply New Topic New Poll