Opening a New Account with Existing Retained Earnings

[Mike or Penny Novack]

Roger wrote:

> Clearly, I am missing something.  I have entered my pre-existing 
> assets and used "Opening Balance" for the double-entry.  It seems to 
> me the "Opening Balance" is the same as or is a main contributor to 
> "Retained Earnings from Previous Year"  but it isn't all of it.  For 
> example, I don't know how to account for all of the Retained Earnings 
> which are say accumulated from 10 years ago.
>
> In Simply Accounting there is an account "Retained Earnings from 
> Previous Year" which seems to sum all of the previous retained earnings.
>
> I guess since
>
> A = L + (E + RE)
>
> I could add some dummy account under Assets that would be half the 
> double-entry or, essentially, the Retained Earnings from previous years.
>
It would be a real (not dummy account) and it would be under Equity, not 
Assets. The "retained earnings" dummy account is simply the net of the 
income and expense accounts. When you do a "close the books" at the end 
of each cycle (and if you were doing this manually) you could be closing 
all the income and expense accounts into a "retained earnings/loss for 
year X" account instead of directly into equity in which case the 
original main equity account stays the same and these X, Y, Z, etc. 
accounts would show you the net change for each year -- with the equity 
total (including these) still showing net worth.

A = L + E   (where E is the sum total of "starting equity" and "retained 
equity"

History of double entry ---- the only fundamental account types are 
asset, liability, and equity. Each expense or income item was 
immediately entered against equity. But quickly it was discovered that 
very useful to be able to track and categorize income and expense items 
for an accounting period instead so the temporary income and expense 
accounts were created. In effect, of fundamental type equity BUT not yet 
incorporated there so the individual totals can be seen until at the end 
of the accounting period these are closed into equity.

I think the confusion is that the reports can show you a "retained" 
figure (the net) at any time -- in effect, what the change to equity 
would be if books closed as of that point in time. Back in the days of 
pen and ink on paper this was an actual account (well a "trial account" 
used in a "trial closing") where the balances of all the income and 
expense accounts(the amounts required to "trial close" them) were 
transactions along with the amount required (retained earnings or 
retained loss) to make the balance zero.

NOTE: the only problem I can see starting your books with a "retained 
form previous years" (and with a book "starting equity" also from the 
start of that previous time) is that unlike when working pen and ink on 
paper you can't split both sides of a transaction (AFAIK none of the 
modern computer apps allow that). A couple ways you could proceed. One 
way you could create two accounts (children) of equity, "original 
equity" and "retained from previous years". Now after opening your 
GnuCash books with two transactions (equity vs split of assets and 
equity vs split of liabilities) enter a third transaction breaking the 
parent equity up into its two children. Of course you get the data 
(numbers) for that split form your previous financial data.

Michael