Startup questions - clearing things up

[David Harrison]

On Wed, 10 Nov 2004 16:38:38 -0600, tufkal <tufkal at granola.mine.nu> wrote:
> Just making sure I have this all stragiht in my head before I go all crazy
> entering in data. Numbers referring to questions I asked in my previous
> post 'Start questions for new business'
> 
> 1) Expenses:Tax catagories arent really needed since I dont cut paychecks
> but I should keep them there for when I do my taxes next year, since the
> taxes I will be paying on my income will fall into those catagories.

Yes.

> 
> 2) Create a Expense account like Expenses:Personal Transfer for when I am
> moving money out of my business checking account to myself.

I would keep it out of expenses.  I'm not sure what country you're in,
or if you are a proprietor/partner or incorporated, but here is how I
would do it in Canada:

For a proprietor/partner - set up an account Equity: Draws - and post
the transfers there, same with transfers into the business chequing
account from you.

For a corporation - set up an account Liabilities: Shareholder's loan
- and post the transfers there, same with transfers into the business
chequing account from you.

This will keep your income statement a lot cleaner for when you go and
prepare taxes as there will be no personal expenses included.
 
> 
> 3) The one that had the most ideas heh. I think the general consensus is
> that I should create an Asset:Inventory account and when the payment comes
> in for that job I split the payment between Asset:Inventory and
> Asset:Checking.  Wether or not I add seperate inbetween accouns to keep
> track of product/service and COGS, the basic idea is that.

Basically.  I highly recommend using the COGS account though - it's
the "correct" way of doing it.

> 
> 4) Manual entries of expenses from Asset:Checking -> Expense:Whatever
> instead of using AP, with possibly making a Liability account in between.

Yes.

> 
> 5) Never got an answer to this one really (prolly cause no one wanted to
> read that damn IRC log i posted lol).   I guess I just really need
> clarification on what the Equity catagories are supposed to do.  My
> retained earnings never changes, is it supposed to?  And what about the
> Profit in the status bar, which I assume is conected to Equity in some
> way, why is that always 0?  Read the log to get more info on what im
> trying to say.

The basic idea of retained earnings is the accumulation of earning
over the life of the entity.  In the first year, the retained earnings
would be zero.  After the first year, the net income (loss) is "moved"
to retained earnings.  Then dividends are paid out of retained
earnings.

To explain it another way, in the basic accounting formula Assets -
Liabilities = Equity, where Equity = Prior year's net income (loss) -
dividends + current year's net income (loss).  Also included in Equity
could be share capital, contributed surplus, or owner's draws, to name
a few.

Because GnuCash doesn't close out the books, I wouldn't expect you'd
see retained earnings change.  If you were to look at a balance sheet,
though, there should be an amount of retained earnings.  This balance
would reflect the above items.

Hope this helps

Dave