sole proprietorship with respect to my PERSONAL books?

[Buddha Buck]

On Thu, Feb 14, 2013 at 11:55 AM, Ian Konen <iankonen at gmail.com> wrote:

> The part I'm still a little confused in is in each book, what kind of
> account should represent the other entity (I also have a sole
> propritorship, like Paul)?
>

I am not an accountant.  Keep that in mind.

The basic accounting equation is "Assets = Liabilities + Equity".  The
left-hand-side is the value of what you have; the right-hand-side says
where it came from (or who has a claim on the assets, effectively).  When
you put your own personal funds into the business you can treat it either
as a liability (you are loaning money to the business that you expect to be
paid back), or you can treat it as an equity (your ownership stake in the
business is increasing).  As a sole proprietorship, I'm not sure there's
much of a reason to treat it as a liability.

You probably won't be having more than a few equity accounts, as it all
belongs to you anyway.  There are probably reasons to have certain extra
accounts, but you could probably get away with a single Equity:Ian Konen
account.

Income and Expense accounts are traditionally treated as a sub-component of
Equity in the above equation, so it's more like "Assets = Liability +
(Equity + Income - Expenses)".  Income represents an increase in equity,
Expenses represent a decrease in equity.  Traditionally, when you close the
books for the year, you zero income and expense accounts by transfers to
Equity.  Because the 15th-century accountants didn't like subtraction (it's
harder to get right than addition), the expanded equation is usually
written as Assets + Expenses = Liabilities + Income + Equity, and still
represents where the value resides on the left (debit) side, and where the
value came from (or is owed to) on the right (credit) side.

So for a Sole Proprietorship, I would set up an Equity Account for myself.
 When I put my money into the business, I'd debit Assets:Bank and credit
Equity:Buddha.  When I take a draw on the business, I'd debit Equity:Buddha
and credit Assets:Bank.  When I'm closing the accounting period, I'd debit
my income accounts and credit Equity, and credit my expense accounts and
debit Equity.

On the personal side, I'd set up an Asset:Business account, as well as an
"Income:Business" account.  When you transfer money to or from your
personal account to the business account, transfer it to or from
Assets:Bank and Assets:Business; when you close out your business books,
make a transfer from Income:Business to Assets:Business.  The idea is that
transactions involving the Business:Equity:Ian Konen account should be
mirrored in the Personal:Assets:Business account, since both are measuring
the same thing.

But that's just my thoughts as a non-accountant.