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The short and somewhat sarcastic answer: job security for accountants and auditors.

The longer answer: imagine a world where every account can only have positive numbers in it. For example: “My house is worth $100,000.” “I have a $60,000 mortgage.” From your perspective, the house is a $100,000 asset and the mortgage is a $60,000 liability, but you generally refer to both as positive numbers when you’re talking about them.

If you make a $1,000 extra payment on your mortgage, the mortgage value drops by $1,000 to $99,000. If you buy a $1,000 improvement for your home, its value might rise by $1,000 to $101,000. In both cases the cash flowed in the same direction —- out of your pocket and into the ‘account’. In one case, it increased the value of the asset, and in the other case, it decreased the value of the liability. Either way, your home equity position increased by around $1,000.

Regards,
-Chuck
Discovery/HR Home Fool
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