disposing of splits

[Michael T. Garrison Stuber]

We're almost there, but there's still a little confusion going on here . . 
. I'm going to start with a further explanation, and then address the rest 
of your email.

I'll start by noting that I am not an account, and any truly qualified 
professionals may snicker at my explanation, but I think it gets the point 
across.

When it's all said and done, each account can be consider a "pool" of 
money.  Accountants keep track of separate pools of money because not all 
money is the same.  (For example, the equity in your house or the 
investments you own are money that's yours, but you can't run to the store 
and buy your groceries with it.)  The designations (Bank, Stock, Expense, 
Income, etc) are really just there to help organize things.  (You could 
have every account be an expense account and track things just fine.  There 
are just some reports that would be broken.) Let's consider some different 
"pool" configurations:

1 Account Only -- This isn't very useful.  It's like being out on a dessert 
island.  It doesn't matter how much money you have, there's nobody to buy 
anything from.

2 Accounts:  1 Bank Account (we'll call it "Checking") and one other 
account ("Transactions" -- created as an expense account).  Basically this 
is you and the outside world.  Money might come into "Checking" from the 
outside world, or it might go out of "Checking" to the outside world.  The 
balance of "Checking" should match with your bank statement.  The balance 
of "Transactions" should be equal to all of the money you received, minus 
all of the money you've spent, since you bothered tracking.  Oddly enough, 
this will be the the same amount as balance of "Checking", it will just be 
negative.  See "Sidenote"

Sidenote:
In the world of double column accounting, you want everything to add up to 
zero.  (In case you're wondering why, double column accounting was invented 
by a monk (Paccoli?) in the 15th (?) century.  Back when there were no 
computers it was much easier to check your math if everything add up to 
zero).  In this scenario, since all transactions are between these two 
accounts, "Checking" plus "Transactions" will equal zero.

3 Accounts:  1 Bank Account ("Checking"), 1 income account "Income", 1 
expense account.  Here's where things start to get interesting.  In this 
scenario, all of your income (pay checks, gifts, inheritence, interest) 
would be transaction from "Income" to "Checking."  All of your expense 
(groceries, credit card bills, bank charges) would be a transaction from 
"Checking" to "Expenses."  The balance in "Checking" should match your bank 
statement.  There are a couple of very cool things about this 
configuration:  By looking at the balance of "Income" you will see all the 
money you've taken in since you started tracking.  By looking at the 
balance of expense you will see all the money you've spend since you 
started tracking.  If you add Income and Expense together, it will match 
the balance of "Checking."

4+ Accounts:  From here you can start getting jiggy -- you don't have to, 
but you can if you want to.  For example, you might want to track income 
from interest and dividends separate from payroll income, create a second 
income account.  You might have another checking account (I have three), 
create another checking account.  You get the idea.  When/if you get really 
sophisticated (or have no life :) ) you can start tracking the equity in 
your house or your car, by having an account for the value of the asset, 
and another for the loan.  This can get as complex as you want, but right 
now I'd start simple.

--On Saturday, March 16, 2002 10:13:57 PM -0500 Haines Brown 
<brownh@hartford-hwp.com> wrote:

> Michael,
>
> Aha, I think I'm catching on a bit. If I understand correctly,
> everything is a transaction between accounts, and so I probably need
> an "income" account and an "expenses" account.

You need either an income account, an expense account, and a checking 
account, or an income account and transaction account.

> My checking account is currently of type "expenses," but you suggest
> going back to my original "bank" type. I could label it "expenses" and
> confine it to monies going out (if I understand correctly).

Yeah, you could do that.  When it's all said and done you want either two 
or three accounts (see above) with the right names and types.

> Then apparently I should create a second bank type account, which I
> could call "income." I would then start recording in it all new income
> transactions.

Remember, all double column accounting transactions are between at least 
two accounts.  Assuming three accounts all new income transactions would be 
a transaction from "Income" to "Checking."  Assuming two accounts, all new 
income transactions would be a transaction from "Transactions" to "Checking"

> So, when I make a bank deposit, I enter a transaction that put the
> money into the income account; when I make out a check, I deduct the
> amount from the expenses account. Is this example entirely valid?

The money goes into your Checking account.  I know it seems strange, but it 
comes _from_ your income account.  This is a good thing.  I would be very 
happy to have millions of dollars coming from my income account into my 
checking account.  When you make out a check, the money goes from 
"Checking" to "Expenses".  Alternatively, if you just want to stick with 
two accounts, when you make a deposit, the money comes from the outside 
world ("Transactions") into your checking account ("Checking").  When you 
write a check the money goes from "Checking" to the outside world 
("Transactions").

> You point out that since will have only two accounts, I'll never have
> to create a split. But I used to have only one account, but still got
> the dialog asking me who makes the split. I trust that if I do as you
> suggest, that split dialog will never again pop up.

I'm not sure what dialog you're referring to.  I think you're talking about 
the "your transaction is unbalanced, do you want GNUCash to fix it" dialog. 
Remember, all transactions are between at least two accounts.  Because they 
can be between multiple accounts, you have to enter the amount twice.  The 
basic idea is this:  Enter how much money you want to take out/put it in 
the first account, then enter how much money you want to take out/put in 
the second account.  These numbers should match.  If you have a split they 
won't match, but you'll have a third account and everything will add up to 
zero (it pops up everywhere!).  I know it's a little counterintuitive to 
many new users, but it's the way double column accounting works.  You've 
got two accounts, therefore you have to enter two numbers.  They just 
happen to be the same.

> One thing I still don't understand. You suggest that all transactions
> (legal ones, anyway ;-) occur between two accounts. That is clear,
> but if I call all my various sources of income simply "income," then
> I'm not specifying any accounts from which the monies derive. How,
> then, can there be a specific transaction? Income in practice just
> appears; it does not derive from any account about which I have any
> knowledge.

Earlier I mentioned that "accounts" can be thought of as "pools" of money. 
The pool (account) that you're interested in keeping track of is your bank 
account (unless of course you do this just for fun).  In the two account 
model, the money comes from the outside world ("Transactions").  In the 
three account model, the money comes from the "Income" account.  In both 
cases you don't have a lot of perspicuity into how the monies derive, but 
you really don't need it.  As you say "Income in practice just appears." 
You can get more vision by having multiple income accounts, one for each 
employer, one for each bank (interest), one for each investment 
(dividends), but it's really up to you.  The income account doesn't let you 
see the inner workings of the other side, but it does let you track how 
much income you've received, and, if you use multiple income accounts, from 
which sources.