Asked • 04/23/19

Accounting equation: does income really decrease equity?

I am new to using [double-entry bookkeeping]( for personal finances. [GnuCash]( uses a variant of [the accounting equation]( that has five variables, and which seems to be known colloquially as an "expanded" or "extended" accounting equation: assets - liabilities = equity + (income - expenses) This can be re-arranged as: equity = assets - liabilities - income + expenses Rearranging it in this way shows that, all other things being unchanged, **an *increase* in income results in a *decrease* in equity**. Conversely, **an *increase* in expenses results in a *increase* in equity**. To me, this is totally counter-intuitive. I would have expected (if all else remains unchanged): increased income to *increase* equity; and increased expenses to *decrease* equity. My question is: have I misunderstood the equation or the meaning of the terms; and if so, what is the correct interpretation; or if not, then why is this the correct interpretation?

2 Answers By Expert Tutors


Cathy B. answered • 05/31/19

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Experienced Accounting Tutor

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