Opening the books with a Loan (Resolved)

[Pablo Francesca]

Well I had done everything right from the beginning.  Just transfer an opening balance to a liability account. When I do this, liabilities shows the prepaid service liability.  Equity shows Assets minus liabilities as it should.  
The problem lay in my understanding of a balance sheet.  When I look at the bottom of the balance sheet report I expected to see this Ta-Da (the Bottom Line).  Instead I was met with this subtle Total Liabilities & Equity. This is just an indirect way of saying total assets; while it is helpful information, what I was really looking for was always right above it. (Total Equity (what is this company worth?)).  Wikipedia indicates that this information (TL + E) is useful in determining debt loads.  I understand that, but I would have probably caught it sooner if it was expressed as some ratio.  Maybe Total Assets/(Total Assets + Total Liabilities). This makes sense if one remembers that a prepaid service, while a liability, also is reflected in double entry accounting in an asset account (usually a banking account).  So in one sense it is an asset you control, you just don't truly own it.
There is no need to involve any A/R accounts unless your customer decides to take their repayment in services.  At that point, you can create your invoice as usual.  Then just post a payment  to A/R and transfer the funds from the liability account. 

Sorry for any pedantry. I'm just hoping someone finds this information useful in the future.

--- On Wed, 11/11/09, John Edwards <jedwards80 at gmail.com> wrote:

From: John Edwards <jedwards80 at gmail.com>
Subject: Re: Opening the books with a Loan
To: "Pablo Francesca" <rshgeneral at yahoo.com>
Cc: gnucash-user at gnucash.org
Date: Wednesday, November 11, 2009, 2:43 PM

On Wed, Nov 11, 2009 at 3:13 AM, Pablo Francesca <rshgeneral at yahoo.com> wrote:
> Suppose a business starts with zero assets. Suppose they only have a loan for X dollars  to start.  This is obviously a liability.  How would they open their books in GnuCash?
>
> I've considered the following: In Opening Balances, decrease equity by X and credit (increase) a liability account for X.  This would mean that Assets would be zero, Liabilities would be X and Equity would be -X.
>
> Okay, looks good so far to me.  Perhaps I'm missing something obvious in accounting  in the next part. I run a balance sheet report and it tells me that Total Liabilites & Equity = 0.   Shouldn't it be X or at least -X?

Leaving aside the question of why you would take out a loan and put it
into Capital, rather than the bank account, the balance sheet report
is correct.

It doesn't matter how you get there, but your assets have to equal
your liabilities & equity.

If you use A = L + E, then your assets are 0, your liabilities &
equity total to 0. X + (-X) = 0.

If you use A - L = E, then each side of the equation would equal X.

The latter is how I was taught to do a balance sheet.

-- 
John Edwards
"You can insure against the weather, but you can't insure against
incompetence, can you?" - Phil Tufnell