3. Financial Balance

The previous post introduced the mechanics of double-entry bookkeeping and described how those mechanics kept the balance of the general ledger at zero.

General Ledger = 0

Again, double-entry bookkeeping is a matter of recording every transaction within an accounting system as both a deposit from someplace and a withdrawal from another. Since each withdrawal (“credit”) is the negative of a deposit (“debit”), the recording of both causes the balance of the whole system to remain at zero. The deposit increases the debit balance in one account but a correspond withdrawal from another account means that the system as a whole will always have a zero balance. While the individual accounts change their balances with each recorded transaction, the balance of the whole general ledger remains changed.

General Ledger + (Debit Entry + Credit Entry) = 0

Each recorded transaction has a zero effect on the general ledger itself. At the beginning of the business the general ledger started with a balance of zero and each transaction since that time has had a net effect of leaving that balance unchanged.

If we partition the accounts of the general ledger into various categories for whatever purpose that we may have, the sum of balances of all of the partitions remains zero. Like separate accounts, the partitions themselves may have different balances, but their total balance must be the same as the balance of the general ledger itself – zero. For example, if we partition all the accounts in the general ledger into permanent accounts and temporary accounts, we can assume the following:

Permanent + Temporary = 0

Since the Permanent and Temporary partitions together include all of the accounts in the general ledger (the definition of a partition), their combined balance must be the same as that of the general ledger itself.

Since the Accounting Equation is only valid at the time that the temporary accounts are closed and are all set to zero, the following is true when the Accounting Equation is valid:

Permanent + 0 = 0

Or:

Permanent = 0

The permanent accounts each belong to one of terms of the Accounting Equation, the assets, liabilities, or owner’s equity. These three terms are, effectively, a partition of the permanent accounts and, as such, have a combined balance that is the same as the balance of the permanent accounts:

Assets + Liabilities + Owner’s Equity = 0

And again, this zero equation is a true expression of balance, expressing that every deposit is balanced by a withdrawal and every transactions thereby cancels itself somewhere in the general ledger. This is also a very different expression from the general accepted accounting equation:

Assets = Liabilities + Owner’s Equity

In fact, this last expression of the Accounting Equation can only be true when a business has no asset value. For further details see The Tao of Financial Information: