I didn't follow Oxymoron's example. I think what he's saying is "debit" doesn't mean positive and "credit" doesn't mean negative (or vice versa - I'm so confused!)
Using your last paragraph above, the machinery depreciates in value. Why would this reduce profits? I'd still be producing the same amount of materials from the factory and so get the same income. The costs of making it are still the same, so profit should still be the same.
Let's assume you're right that profit decreases and it reduces retained earnings. Why would the balance sheet balance? Surely the balance sheet reduces? Is it because you cheat and stick depreciation as an asset or something to make it balance?
Edit: I think I've worked out the answer to my last question...it's because retained earnings are part of the "equity and liabilities" section so this figure reduces the same as the asset figure. I've never understood why equity comes under the liabilities part of things...I've always thought it should be Assets + Equity = Liability
Last edited by a moderator: Jul 31, 2014