Equity-Opening Balance

[John Edwards]

On Wed, Jan 27, 2010 at 10:58 AM, Jeff Kletsky <gnucash at allycomm.com> wrote:

> Accounting is a pretty bizarre thing at least until you figure out why it
> "works."
>
> The basic rule is "everything comes from somewhere and goes to somewhere"
> -- this means that you can (or your computer can) sum up two sets of numbers
> and, if they match, the "books balance" -- if not, you made a mistake
> somewhere.
>
> There are a few big categories:
>
> Income -- Money you "make" -- things that, for some reason, add to your
> "big pile of money" (BPOM)
> Expenses -- Money you "spend" -- things that take away from your BPOM
>
> Liabilities -- Money you "owe" -- things that will eventually take away
> from your BPOM
> Assets -- Money you are "owed" -- things that eventually should/could add
> to your BPOM
>

The main difference between these two types of accounts is that Income and
Expenses are temporary, while Assets & Liabilities aren't.

By "temporary", I mean that they reset to 0 at the end of each year.


> What else goes in Equity? For a personal set of accounts, often not much
> else. So yes, it is something of an arcane "standard accounting practice"
> that the account structure for personal use is "Equity:Opening Balances"
> rather than just calling it "Opening Balances"
>

All that you would normally add or subtract would be the different between
Income and Expenses in a given year. Obviously, if you take in more than you
spend in a year, your Equity (or net worth) will go up.

My set of accounts has an "Opening Balances" account and a "Retained
Earnings" account. When I do my year-end, I'll reset all my income and
expense accounts to 0 balances, and transfer the difference into Retained
Earnings.


> For businesses, it is a lot more complicated with investors and
> shareholders and needing to produce periodic reports. You may hear of
> "closing the books" for a business -- what they basically do is "roll up"
> many of the accounts into Equity accounts so that the new period has "zero
> balances" starting off in the basic accounts -- In a business you often want
> your account balance to represent "how much have I sold this year" as
> opposed to "how much have I sold since I started the company"


An individual will want to close out the books at the end of each year as
well. If you want to do your income tax, you are going to look for the
amount you made in a particular year, not what you've made since you
started.

For businesses, Equity is where ownership is recorded. So any new share
issues (or redeeming of shares) affects Equity directly, without going
through Income or Expenses. And, yes, it gets a lot more complicated really
quickly.

John

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