Bill Lear wrote: > I'm reading Randy Wray's book on money, and took a detour through > Heilbroner and Galbraith's *The Economic Problem*. On p. 335, they > introduce the notion of a "T account" and say, regarding assets and > liabilities: "it is obvious that the two sides of the balance sheet > must always come to the same total. *The total of assets and > the total of liabilities are an identity*." (emphasis in original)
I don't know how many people follow this convention, but I distinguish a "balance sheet" from a "T chart." In a balance sheet, assets = liabilities + net worth (A = L + NW), with both L and NW on the left-hand side. In a T-chart exercise, on the other hand, it's typically assumed that NW does not change, so that the _change_ in liabilities = the change in assets (where both liabilities and assets are positive numbers) so that the change in assets (dA) - the change in liabilities (dL) = 0.[*] If they're talking about a balance sheet, H&G must be assuming that NW = 0. Or they're talking about a T chart and changes in A and L, assuming that NW is constant. > I'm trying to work through some examples based on some of Wray's > writings and I'm having trouble understanding how T accounts work > when, to me, it appears you can have assets with no corresponding > liability, and the identity mentioned above falls apart. yes, NW does not correspond to L. It's the excess of A beyond L. It's what's called equity capital, capital, or equity. > For example, let's say I purchase some land, and a bank building, and > have $1 million in cash with which to open a bank. I put > the cash in the vault and open my doors for business, ready to prey > upon ... uh serve the public. > > At this point, before any other accounts have been opened, what does > the T account for the bank look like? The assets would be the $1 > million, but what are the liabilities? Would it be my ownership > stake, i.e., shares of the company that I own? the bank has no liabilities at this point. Your shares are claims on NW. They do not represent debt (L). [*] of course, NW does change, often without warning. For example, it could turn out that a lot of the A are worthless paper, based on sub-prime mortgages, financial engineering, Ponzi schemes, etc. Of course, that never happens. -- Jim Devine / "If heart-aches were commercials, we'd all be on TV." -- John Prine _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
