6. General Ledger

To fully understand the meaning of the Accounting Equation, we need to reduce it to its most abstract level, determine its essence, and then reconstruct it to its most commonly recognizable form. As part of the “reduction to the abstract” process, let us begin by giving it an alternative form that will, perhaps, stimulate some critical thought. Let’s express the Accounting Equation as follows:

Toilet Paper Expense + Everything Else = 0

This form of the equation assumes that the organization keeps track of the amount of money that it spends on toilet paper by maintaining a separate expense account for that expenditure. The “Everything Else” term of the equation represents all of the accounts in the general ledger with the exception of the Toilet Paper Expense account. The Everything Else term includes accounts that are assets, liabilities, revenues, and other expense accounts. Together these two terms represent every account in the whole accounting system (the general ledger).

The meaning of this unorthodox expression of the Accounting Equation is simply this:

Since double-entry bookkeeping requires every deposit (debit) entry into one account be matched by a corresponding withdrawal (credit) entry from another account, the total balance of all the accounts will always be zero.

Essentially, this is all that the Accounting Equation says. The balance in the Accounting Equation is simply axiomatic of the process of double-entry bookkeeping. Every debit entry is matched by an opposing credit entry so that the balance of all the entries recorded remains zero.

If I know that the Toilet Paper Expense account has a debit (deposit) balance of $87.56, I also know that the balance of “Everything Else” must be $87.56 to the credit (withdrawal) side, allowing the total balance of the general ledger to be at zero.

Finally reduced to the most abstract level, the Accounting Equation says the following:

Regardless of how we partition the general ledger, the partitions must have a combined balance of zero – the balance of the general ledger itself.

Or, in mathematical terms, if we partition the accounts of the general ledger into “n” number of partitions (here, “n” represents any variable whole number), the following is true of the balances (B_i) of the partitions:

B₁ + B₂ + … + B_n = 0

This is all that the Accounting Equation is saying at the most essential level.

Now, to bring it back to the level of common practice, we can partition the accounts of the general ledger into terms that represent the company’s assets and other conceptual groupings:

Assets + Liabilities + Owners’ Equity + Temporary Accounts = 0

And, after we have closed the temporary accounts and assigned their balances to the Owners’ Equity term, this last equation becomes:

Assets + Liabilities + Owners’ Equity = 0

However, this very correct expression means something far different from the following:

Assets - ( Liabilities + Owners’ Equity) = 0

Which, although the traditional form of the Accounting Equation, is inconsistent with the most fundamental rules of double-entry bookkeeping.