Investments

[John Ralls]

On Nov 22, 2010, at 6:39 AM, Dennis Powless wrote:

> Oddly enough, I figured out that I can't transfer money into the
> mutual fund, it has to come from a cash type account, or some other
> account in the assets area.
> 
> So, I have a transfer from the checking account (a split from the
> paycheck) that is paired with the fund cash account.  Then I transfer
> the money into the fund account and buy shares etc...
> 
> I'm figuring the dividends work the same way.  However, I have a
> dividends account that keeps getting bigger in the income area.  I see
> in the guide about a DRIP account, but not much is said about this.
> 
> I don't get income per se from the dividends, they are reinvested as
> shares in the fund account.  But, they do show up as income.
> 
> That's my next hurdle.....
> 

No, you still don't get it.

Learning how to do this on paper will teach you how to do this in Gnucash. It's the same model. That's why I suggested a bookkeeping tutorial or textbook.

Income and expense accounts do indeed grow without limit. (You can flush the balances to Equity periodically if you like, or you can use reports with date ranges to extract the amounts that you need for, e.g., doing your taxes.) They're used for categorizing income and expenses, and you can divide them up any way that makes sense for you -- or not. Just having a single, top-level account for each will work, though you won't be able to extract much information that way.

Even though it appears to you that your monthly 401K contribution materializes as shares in FMXYZ, it actually takes two transactions, and the way double-entry accounting (and Gnucash) works you have to do both transactions:

(1) Your company pays your contribution to the 401K manager. This is income to you, in dollars, and so is entered as a debit to the income account (debits are positive in income accounts) and a credit in the 401K cash account. 

(2) The 401K manager buys shares in FMXYZ. This is entered as a debit to the cash account and a buy transaction (which includes the conversion from dollars to FMXYZ shares) in the FMXYZ account.

It's perhaps easier to understand why the income account always increases if one considers the taxable side: Every two weeks, you get paid and that is entered as a debit to income (positive number, remember) and a credit to wherever you (or your employer, if you have direct deposit) deposit it (also a positive number). You then spend that money on groceries, gas, dinner out with your wife, toys for your kids, etc. Those transactions are recorded as credits to expense accounts (positive) and debits to your bank account (we'll assume that you pay with a check for everything to keep it simple).

At the end of the year, you can look at how much was added to the income account so you can report that to the IRS and pay your taxes on it. If you have a deductible expenses account (e.g., mortgage interest), you can get the change in that
for the year for your Schedule B. If you've kept a separate "groceries" expense account, you can see how much your spending on groceries. 

Now go study bookkeeping.

Regards,
John Ralls