Help with GnuCash! Accounting vs a Math degree

[Dean Gibson]

On 2012-10-18 19:53, Robby Burns wrote:
> My thanks to those who have tried to help me. It is amazing to me how
> complicated this seems to be...considering that I was a math major in
> college.
>

I too was a math major (at CalTech), and when I had to install an 
accounting software system at a company, I had to learn a bit about 
accounting:

First, like you, I found that accounting has nothing to do with math;  
it has to do with record-keeping.  However, being a mathematician helps 
a little, because both disciplines require precise thinking and logic.  
Just like advanced math, sometimes the logic seems twisted at times, but 
don't fight it;  it makes sense after a little thought.

Second, don't try to defeat "double-entry" accounting.  If you want 
that, use Quicken (which I did for years, until I got tired of the lack 
of tracking that any "double-entry" accounting system easily provides).

Third, unless one is already VERY familiar with accounting, I strongly 
suggest that in GnuCash you use the formal accounting labels of "debit" 
and "credit", and set "Reverse Balanced Accounts" to "None".  It may be 
initially confusing, but not as confusing (to a newbie) as a system 
which represents positive/negative numbers differently in different 
accounts.

Forth, read up on the difference between "cash accounting" and "accrual 
accounting".  I recommend "accrual", because (except for very simple 
needs) it seems more logical, AND it allows you to easily keep track of 
money owed (eg, "Accounts Payable" -- sometimes denoted as "A/P").  I 
personally don't mark "accounts payable" accounts as "Accounts Payable" 
in GnuCash, because (for me) it makes it difficult to make changes to 
such transactions.  As a result, for each credit card account, I have a 
current liability account (charges since the last reconciliation) and a 
separate "A/P" (actually, liability) account to track bills.

Fifth, don't be afraid to set up a lot of accounts (at least initially), 
and use a tree-structure for account grouping.  In GnuCash, you can 
easily combine transactions in accounts later, but it is A REAL PAIN to 
decide later to split them out according to a new need.  I see people 
here fussing about how to set up reports to get the information they 
want.  The key is to group transactions into enough separate accounts so 
that the reporting is easy.  In fact, I don't even use GnuCash reports;  
I get all the summary info I need from the main account list (where I 
have enabled the display of current and reconciled balances).

Sixth, while there are "add-on" to accounting systems that allow 
budgeting, stock tracking, etc., fundamentally, accounting is a system 
of keeping track of what HAPPENED (historical transactions), not 
forecasting or tracking current value.

Finally, I view "double-entry" accounting as a small five-sided 
building.  Each side of the building has a window with a little man at 
the window, wearing a green cap.  Each man at each window records any 
money that passes through his hands, but no money is ever kept inside 
the building;  it always goes out through another (or the same) window.  
Over each window is a sign with the type of accounts handled by that 
window (eg, Asset, Liability, Expense, Income, Equity), along with a 
little reminder as to whether that type of account is normally is a 
debit (Asset, Expense) or credit (Liability, Income, Equity), so that 
the little man doesn't laugh at you when you come to the window with the 
wrong type of request. Examples:

 1. You want to purchase something that is an expense.  You go to the
    "Assets" window with the money, and tell the little man where you
    got the money (eg, petty cash, bank account).  He hands the money
    inside the building to the man at the "Expense" window, where you
    take the money back an go buy the item.  Both of the little men
    record (in the transaction ledger) the transaction:  a debit
    (increase) to the expense account, and a credit (decrease) to the
    bank asset account. OK, so this is a bit pedantic, but keep the
    general idea in mind.
 2. You buy an asset (something you plan to keep for a period). The
    money comes in (say, from the bank) and goes out the same window,
    recorded as the initial value of a fixed (owned) asset. Create and
    debit (increase) the new fixed asset account, credit (decrease) the
    bank asset account.
 3. The value of the asset decreases.  This is a depreciation expense
    (typically recorded at the end of the financial year), recorded as a
    corresponding decrease in the value of the asset. Debit (increase)
    the expense account, credit (decrease) the fixed asset account.
 4. You get a loan.  Money comes in through the "Liabilities" window,
    and out (presumably to the bank) through the "Assets" window.  Debit
    (decrease) the bank asset account, credit (increase) a (new)
    liability account
 5. The loan accumulates interest.  Debit (increase) an interest expense
    account, credit (increase) the loan liability account.
 6. You make a payment on the principal value of the loan.  Debit
    (decrease) the loan liability account, credit (decrease) the bank
    asset account.  Typically the payment is split between an interest
    payment and a principal payment. so you normally record both in a
    "split" transaction.
 7. You charge something on your credit card.  Debit (increase) the
    appropriate expense account, credit (increase) the credit card
    liability account.  I also have a summary grouping account, so I can
    see the total of all my unbilled credit card charges.
 8. You get the monthly bill for the credit card.  Debit (decrease) the
    credit card liability account. credit (increase) the "accounts
    payable" (liability) account.  As I said above, I keep separate such
    "A/P" accounts for all my billers.  In a summary grouping account, I
    can see the total of all my currently owing bills.
 9. You get the monthly bill for something else.  Debit (increase) the
    appropriate expense account, credit (increase) the appropriate "A/P"
    (liability) account.
10. You pay a monthly bill.  Debit (decrease) the appropriate "A/P"
    (liability) account, credit (decrease) the bank asset account.
11. Income is similar.  Debit (increase) the bank account, credit
    (increase) the appropriate income account.  Use "accounts
    receivable"("A/R") accounts to track money owed you but not yet paid.
12. The owner adds money to (eg, at startup), or takes money from, the
    entire system.  This is an Equity transaction.  I keep a separate
    account for each financial year for my business.
13. At the end of the year, you "close the books" for that year. In
    GnuCash, this is very easy.  I have two equity accounts: "Yearly
    Income" and "Yearly Expenses".  I use the "Close Books" menu item,
    and specify these two accounts.  All expense accounts are
    automatically  "zeroed" out:  a transaction is automatically
    generated to (typically) credit each actual expense account, and the
    corresponding debit is recorded in the "Yearly Expenses" account. 
    The same thing happens for income accounts.  Note that in GnuCash,
    these are just ordinary transactions, so if you have to go back and
    correct something in a "closed" year, you can delete the
    automatically generated closing transactions, go back and fix
    things, and then "re-close" the books for that year.  I FIND THIS TO
    BE REALLY, REALLY USEFUL, if done correctly.


Note that "double-entry" accounting-think treats some items illogically 
at first glance:

 1. I record a salary advance as a debit (increase) to my bank account,
    and a credit (increase) to my salary advance LIABILITY account. 
    It's a liability because it (conceptually) is money that I really
    haven't earned until I receive my actual pay check and pay stub for
    the pay period, at which point I debit (decrease) my salary advance
    liability account as part of the posting of my income received
    (along with Fed. income tax withheld, Social Security, Medicare, etc).
 2. In a related "accounting-think", I record Fed. income tax withheld
    as a debit (increase) in a "tax withholding" asset account: 
    Conceptually, it's still my money that the IRS is keeping for me to
    pay my yearly taxes.  When I compute my yearly tax bill, that amount
    entered in an IRS tax (debit) expense account, offset by a credit
    (decrease) in the withholding asset account, and any difference is
    either a payment (credit) or refund (debit) to my bank account.  If
    it's a refund, I will debit (increase) the refund to a tax refund
    "accounts receivable" ("A/R") account, to be credited (decreased)
    when the refund is received and debited (increased) to my bank
    account. Yes, I could immediately record the tax withheld as a tax
    expense, but then a refund has to be recorded as an "income" (in the
    next year), which doesn't seem correct.


Note that some of this can be done more simply (eg, in a cash accounting 
setup), but I prefer the above for the level of detail and tracking it 
provides.  Yes, it's a bit of work, but there is no magic:  If you want 
to track your money, you have to devote the effort.

What I really like about GnuCash is the integration with AqBanking. It 
makes much of the work of entering expenses automatic.  So much so, that 
when I decided to get an additional VISA card for paying for business 
expenses, I disqualified banks that didn't support OFX integration.  I 
have two GnuCash files:  One (personal accounting) created by importing 
from Quicken, and another (home business accounting) created by 
importing from QuickBooks (see my "how-to" message earlier this year).  
I had twelve years of history in both Intuit programs, and it is nice to 
now be able to get to that history in ways that _I_ want, not in ways 
that the "geniuses" at Intuit decide.

Note that some accounting professionals may "fuss" at my explanations or 
procedures.  I welcome such "fussing" (corrections).  I'm not an expert 
at this and welcome better ways to do things.

-- Dean