Newbie's experience with gnucash

[Carol Champagne]

Eric,

Here's my understanding of how some of this works.  I am also working on
a Quick Start guide to using Gnucash, so I would appreciate feedback on
whether my explanation clears anything up for you  (and anyone else out
there, please tell me if I am DEAD WRONG on any of this :-):

Eric Schwartz wrote:
> Just by withdrawing the money from an (equity?) account, that creates it
> (as far as the
> accounting system is concerned, I mean-- we can presume that it doesn't
> actually insert
> the money in my account!)?  In other words, transferring money out of an
> equity account
> adds that amount of money to my net worth?

Think of it as opening a business: you haven't earned any money yet, so
you don't have any income.  But you have to have some money to start the
business with---that's your equity, your "starting capital".    As your
business grows, you take in income and pay out expenses, and at the end
of the year you have net income (income - expenses).  That net income
gets added to equity (net worth) in the form of retained earnings.

Every transaction in Gnucash has at least two parts--a source and a
destination.  Quicken works that way, too---every transaction specifies
an account and either a category or another account. For example, if you
buy food and pay with a check, Quicken would record this as account
Checking and category Food.  If you transfer money from Checking to
Savings, Quicken would record both accounts in that transaction. 
Gnucash just calls income and expenses "accounts" instead of
"categories", but this shouldn't make much of a difference.

The way Quicken handles opening balances differs from Gnucash, but it
still requires a source and a destination.  Opening balances in Quicken
specify the same account name as the source and destination---at least
that's how it worked several years ago when we set up our accounts.  So
in Quicken, it looks like you transferred the opening balance FROM
Checking TO Checking.

Gnucash tries to handle this more like a business would handle an
opening balance.  As a business, you have a starting date where you take
that starting capital and open the business.  From that point on, you
keep track of all your transactions, but you don't track what happened
BEFORE your business opened--that's outside your scope.  When you
deposit your initial funds into your checking account, that money must
have a source and a destination.  The destination is checking, of
course, but you must transfer the money in from some source.  That
source is your "starting capital", or your equity.  How you got that
starting capital is beyond the scope of what you want to track.

Now what if you decide to set up a second checking account, and you
write a check on Checking 1 to open Checking 2?  Well, that would just
be a transfer from Checking 1 to Checking 2---no effect on equity,
because you did not increase the overall amount of money in your
"system"---you just shuffled it around.   When you receive income, you
specify an income account (just as you would specify an income category
in Quicken) and the checking account (assuming it's all going to
checking).  Eventually that income will have an effect on equity, when
you close the books for the year and roll up net income into the equity
account.
 
 
> Er, what's a, I, and e?  My guesses are: a = equity, I = income, e =
> expense (with a - sign
> in front, so you can add)?

The basic idea behind this equation is:  what you own - what you owe =
your net worth
Accountants flip this equation around for some reason, but it's still
the same idea.

The accounting equation is a = l + e
A= assets (things you own)
L= liabilities (things you owe)
E= equity (net worth)

In accounting, the "balance sheet" shows the balances of these three
types of accounts, and they must follow this accounting equation
(a=l+e).  The "income statement" shows income and expenses.  Income and
expenses are related to equity in this way:  at the end of an accounting
period, expenses are subtracted from income and the net income (or loss)
is added to (or subtracted from) equity.

As Bill mentioned earlier, Gnucash currently shows the equation as: a -
l + e = 0.  This is incorrect, and the developers are working on
changing it.  For now, the equity account carries a negative balance.

> > > As an example, I just got a cheque back from my former apartment
> > > manager for my security deposit.  So I'd create a "Payments
> > > Recieved" account of type Equity (perhaps as a subaccount of a
> > > general Equity account that would sum up all this stuff).  I'd
> > > record the amount of the cheque in that, and then transfer it to the
> > > bank account in which I just deposited it.  Is that the right idea?

Just a suggestion here....Treat it as a refund on an existing expense
account (category).  This is a refund of money you paid your apartment
manager, isn't it?   If it was entered in Quicken, it should have an
expense category associated with it, maybe something like "rent".   So
just enter it in Gnucash like you would in Quicken: go to your Checking
account and record a deposit of the money with transfer account
(category) of "rent" (or whatever you called that expense in Quicken).  

 
> Ah.  With the end of the year coming up far too soon for my taste, is there
> any documentation
> on how to do this in gnucash?

Will work on this!

Hope this helps....

Carol Champagne