Opening the books with a Loan (Resolved)
rshgeneral at yahoo.com
Wed Nov 11 18:04:47 EST 2009
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
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.
"You can insure against the weather, but you can't insure against
incompetence, can you?" - Phil Tufnell
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