undo close books?

[David Cousens]

There seems to be some confusion between the concepts to balancing the
books, reconciliation, adjustments, closing the books for a period and
locking of records and/or files and the purposes of and reasons for
doing/using each. My apologies in advance if the following is exceedingly
verbose and has a good dose of teaching mother to suck eggs and also for any
omissions and errors in my synthesis of the extended argument.

Balancing the books is inherent in the double entry bookkeeping system and
the accounting equation and in the recording of a transaction as a debit of
one account and a credit to another account. 

However an individual account does not necessarily have to be balanced (in
the sense that the sum of debits and credits to that account has to be zero
in an individual accounting period), whether the period is weekly, monthly,
quarterly, semi-annually or annually. E.g. this is not generally true for
long term asset accounts or similarly long term liability accounts. However,
over the period of the lifetime of the asset or liability, it will become
true when the asset is written off or disposed of or depreciated to zero
value.

It is generally true of income and expense accounts which are used primarily
to record transactions which relate to objects or services whose "lifetime"
is generally less than or equal to the accounting period is use (determined
by a combination of business needs, external (e.g. legislative) and internal
reporting requirements and conventions of accounting practice), but only
because the closing transactions transfer the balances out of these accounts
into an equity account. There is no inherent zeroing of an account in the
recording of the transactions

Reconciliation as used by accountants and businesses is primarily a
methodology for reconciling external records (bank statements, invoices
received and sent , receipts etc.) of transactions against the internal
records recorded in the books/accounts, i.e. making sure the taxman and
shareholders and other stakeholders will be happy with your accounts as
presented to them. It is frequently done at a sub-period e.g. weekly or
monthly in an annual accounting period so that the task is done in small
manageable chunks ( and errors don't creep in as a result of fatigue).

Adjustments are generally made at the end of an accounting period, prior to
closure of the accounts. These generally correct the accounts records to
ensure income is recorded in the period in which it is earned and
expenditure is recorded in the period in which it is incurred (accrual
accounting), not necessarily when the cash changes hands (cash accounting).
E.g., you pay your insurance for the year in March and your accounting
period runs from June to July.  Unless the tax legislation in your
jurisdiction allows your business to use cash accounting, the portion of the
premium from March to the end of July is recorded in the current annual
period and the remainder is recorded in the next annual accounting period.
The adjustments reflect the fact that even though the cash was handed over
in March, the expenditure is incurred across two accounting periods. They
may also be used to remove non-business income/expenditure from your
business records.

Closure of accounts is the process used to determine the profit /loss
surplus/deficit for non-profit organisation, increase or decrease in net
worth for an individual) over the period. It is not just a requirement of
accountants per se, but a consistent method for extracting the profit or
loss for any period when the books were actually physically kept in books.
It generally takes place after both reconciliation and adjustments have been
carried out and involves transactions which make the account balances of the
temporary (income and expenditure) accounts zero at the end of the period by
transferring the values of those balances to an equity account profit/loss
summary account, which records profit and loss for the period . Further
transactions to record tax liabilities ( which may depend on profit or
loss), distributions to owners/shareholders etc., retention of earnings
within the business, often take place during or after closure of the
accounts.  The closing balances of the fixed (equity, asset and liability
accounts) then become the opening balances for these accounts for the next
accounting period.

 It may be argued that a report of profit and loss for any desired period
can be produced from the computer records and that closure is not really
required, however it also involves the transfer of profit/loss into equity
to establish the net worth of the business after taking out distributions to
the stakeholders in the business by dividends and or owner withdrawals of
capital from the business.

Locking of records or accounting periods or files is intended to prevent
changes to records which have already been reconciled and/or closed. If
these processes have been done correctly, in principle there should be no
need to alter past records. In practice, who completes their annual tax
return on the last day of the financial year and often vital information
arrives after completion of a given period not necessarily within it.

Michael Novak's point about file and record locking and absolute security is
clearly valid, however there may be value in a user being able to restrict
alteration of records to the current period being worked on simply to
prevent accidental entry of records into previous periods. Who has not
accidentally typed the wrong date into an entry?  That then makes two
periods incorrect, the one it accidentally went into and the one it was
supposed to go into. Realising you have made the mistake is necessary before
you can start the search to find and correct it.  As an accountant if you
are coping with shoebox bookkeepers you may also not always be supplied with
the data in an ordered or complete form. As a business formal records do not
always reach you on time, get lost, misfiled etc. 

Preventing the deliberate alteration of past records is difficult and not
even desirable. However having the ability to restrict the period for which
data entry is currently being carried out to a set range of dates (and to
change that range as desired or needed) could perhaps meet the user
requirements that Geoff Jankowski has identified of minimising the
likelihood of adding an incorrect transaction, while still using a single
file for multiyear periods, with the clear reporting advantages that has.
For those sufficiently confident that they never make mistakes, an open date
range could be set.  I am not sure how difficult this would be to implement
and whether the developers are willing to consider implementing such a
restriction on data entry, but it would obviously involve a fair bit of the
existing engine code. 

This wouldn't require  file or record locking and the use of snapshot
backups  appropriately labelled and consigned to CD, DVD or print out could
any meet external requirements for permanent unalterable record keeping as
both David and William suggested. 

David Cousens

-----Original Message-----
From: Derek Atkins [mailto:warlord at MIT.EDU] 
Sent: Saturday, 5 October 2013 12:51 AM
To: Tommy Trussell
Cc: GNU Cash User
Subject: Re: undo close books?

Tommy Trussell <tommy.trussell at gmail.com> writes:

> One thing that you CAN do to "lock" changes to an account in GnuCash 
> is to BALANCE the account. Then (unless you have chosen to ignore the 
> warnings,

And by "BALANCE" you mean "Reconcile", right?

> which you can always reset) GnuCash will warn you before you make any 
> sort of change to the accounts, even to the text of transactions 
> (which wouldn't affect the balance).
>
> For example I often balance even my Cash in Wallet account; not so 
> that I don't accidentally change old transactions, but so that I can 
> have an estimate for the money I have spent but neglected to record. 
> However, having all my current asset accounts balanced makes it much 
> less likely I will change an old transaction. (Sometimes need to 
> update a description on a balanced transaction, so I acknowledge what 
> I'm doing and proceed. I never change the transaction amounts on a 
> balanced account because that would cause trouble.)

> Please remember to CC this list on all your replies.
> You can do this by using Reply-To-List or Reply-All.

-derek

-- 
       Derek Atkins, SB '93 MIT EE, SM '95 MIT Media Laboratory
       Member, MIT Student Information Processing Board  (SIPB)
       URL: http://web.mit.edu/warlord/    PP-ASEL-IA     N1NWH
       warlord at MIT.EDU                        PGP key available