Novice accounting question

[Keith A. Milner]

On Wednesday 25 July 2007 18:20:29 Drew Hope wrote:
> So, I'm just starting to use GnuCash and I have pre-existing financial
> transactions... and every time I start keeping track of things with GnuCash
> I end up with lots of dangling transactions because they reference things
> that happened before I started using GnuCash.  I really don't want to go
> back and input 20+ years of financial history, but I also want GnuCash to
> be up to date as of now...

That's because Gnucash is double-entry. The essence of this is that everything 
must balance. You cannot have a single ended transaction: the money simply 
moves around between accounts.

>
> What's the right way to 'start' using GnuCash?  Just pick a date and do
> everything from then onward?  Or should I go back and put in as much
> information as possible?

One way would be to have an equity account for this stuff. I'm assuming this 
is for personal finances rather than for business accounts (where it's far 
more important to do things properly)?

Create an account (feel free to call it "Money from Before I Kept Track with 
GnuCash") and hang the other end of the transactions into this. Once you've 
done this for old transactions, you won't want to use it again. You can then 
set this to "hidden" so it doesn't get in the way.

Note that in business accounting it's standard practice to "close the books" 
periodically. This means copying all of the income and expense balances into 
a "profit and loss" equity account for the previous period. In this way they 
all start at zero for the new period.

Now I wouldn't suggest you do this for personal accounts, but you could 
consider what you are doing as "closing the books" on your old system. As 
such an equity account equivalent to the P&L one is quite valid.

>
> Is there a 'right' way?
>

Arguably, no, but this might be the best way depending on your circumstances.

>  PS: On a similar note, why are 'Starting Balances' considered Equity?  Can
> there just be a magic 'Money from Before I Kept Track with GnuCash'
> account? =)

No there can't. Again, the essence of double-entry is the money has to come 
from  or go to somewhere. This "somewhere" can be an equity account. That's 
very loosely what equity accounts are there for: to record money coming into 
and out of the system.

Cheers,

Keith

-- 
Keith A. Milner
mailto:kamilner at superlative.org