Owner's contribution is liability or equity account?

[Buddha Buck]

IANAA, but here's my feeling.

First off, you have an accountant who did last years balance sheets.  He's
probably the best person to ask this question of.  GnuCash can most likely
handle whatever your accountant says is proper, and coming to us and asking
"My accountant says I need to do X, how do I do that in GnuCash" is more
likely to get sympathy than "I see how to set this up in GnuCash, but I
don't see how it makes sense accounting-wise..."

Now, to answer your accounting question (re-iterating, I am not an
accountant, and even if I were, I am not your accountant, which you have).

I would expect the balance sheets provided by the accountant to include
more equity accounts than just "retained earnings".  The fundamental
accounting equation is "Assets = Liability + (Owner's) Equity".  Unless the
two shareholders started the business with nothing and borrowed everything
to get it off the ground, there should be an equity account holding the
amount they initially invested.  So those should be reflected in GnuCash.
 In fact, I would expect every line (except totals lines) in the balance
sheet to be reflected as an account in GnuCash.  You may have them, but
didn't feel they were important to your question.  They are.

Second, what is the fundamental nature of the "Shareholder contributions"?
 Do they represent an increase in ownership in the business, and thus
equity?  Are they expected to be repaid like a loan, and thus a liability?
 This is the fundamental question that should be answered.

I don't think your transactions involving the Shareholder Contributions are
right, either.  You have them crediting Shareholder Contributions (seems
legit) and debiting Retained Earnings (seems...questionable).  Retained
Earnings is simply a way of saying "accumulated profits and losses that
have not been distributed to owners", and isn't actually a pile of cash the
way a bank account is.  If Shareholder 1 wrote a check to the company as an
owners contribution, that check should be debited to the bank account, not
to Retained Earnings.

Most of the sources you have looked at seem to treat "Owners contribution"
as an increase in ownership of the business, and thus equity.  Thus,
keeping them all in equity, with an Equity structure which looks something
like:

Equity
  Opening Balances
  Stock Holdings
    Shareholder 1
    Shareholder 2
  Retained Earnings
  Owners Contributions
    Shareholder 1
    Shareholder 2

I wouldn't make separate accounts for each year -- balance-sheet accounts
(Assets, Liabilities, Equity) typically represent the state at a particular
point in time, not historical data.  The retained earnings on the balance
sheet are the retained earnings over the entire course of the company's
existence, etc.  If you need to identify your retained earnings for a
particular year, there are reports for that (Income Statements, Profit and
Loss Report, etc (and yes, I know those are two names for the same report).

In fact, it may not be necessary to have a "Retained Earnings" account at
all in GnuCash, assuming you are starting from a clean slate.  I just
checked a balance sheet report from GnuCash and there was both a "Retained
Earnings" equity account, and an autocomputed "Retained Earnings" line in
the equity section, included as part of total equity.  The "Retained
Earnings" account is a hold-over from the days of periodically closing the
books.

It's not necessary in GnuCash to "close the books" periodically as is done
in traditional accounting.  Traditionally, every accounting period (month,
quarter, year) the income and expense accounts would get closed out by a
transaction with Retained Earnings to bring the income and expense accounts
to zero.  One of the major reasons for this was to manage the amount of
data that needed to be checked and double checked -- if  a trial balance
was off, you only needed to check the last month's worth of data, not the
last 10 years -- and it also made reports like income statements easier.
 With computers doing the checking and reporting, closing the books is
almost anachronistic.

Looking at your example again...  Your business suffered a loss of $8000,
and the two owners chipped in $7000 to help save it?

I would expect the balance sheet to look something like:

Assets:
 Cash and Equivalents: $2000
 Inventory: $30000
Total Assets: $32000

Liabilities:
  Bank Loan: $5000
  Past Due Bills: $1000
Total Liabilities: $6000

Equity:
  Stock Holdings:
    Shareholder 1: $10,000
    Shareholder 2: $10,000
  Owner's Contributions
    Shareholder 1: $4000
    Shareholder 2: $3000
  Retained Earnings: ($1000)
Total Equity: $26,000
Total Liabilities+Equity: $32,000

I hope this has made sense.  Again, I Am Not An Accountant, and I am not
YOUR accountant.  If you want answers you can bank on (or defend in court
or audit), talk to your accountant.


On Fri, May 17, 2013 at 3:47 PM, Tigran Davtyan <tigrand at gmail.com> wrote:

> Hello,
>
> I guess I have a basic accounting question that I am trying to solve in
> GnuCash.
>
> The small business has two shareholders with equal share split. The last
> fiscal year (2012) balance sheet is already available in paper from the
> accountant that holds particularly the retained earnings. There is some
> amount due to shareholders for their periodic contributions into the
> business (say 7000).
>
> What I want to achieve?
> Setup GnuCash for bookkeeping, to particularly track each year's
> contributions per shareholder as well as each year's retained
> eanings/looses for the business.
>
> If I use Liability accounts to track shareholders annual contributions that
> works nicely. Ex:
>
> Equity
>     Opening Balance
>     Past Retained Earnings
>         2012
>
> Liability
>     Shareholder contributions
>         Shareholder1
>             2013
>             2012
>         Shareholder2
>             2013
>             2012
>
> And to start off of the last year balance sheet I will record the
> following:
> Liability:Shareholder contributions:Shareholder1:2012 4000 CR
> Equity:Past Retained Earnings:2012 4000 DB
> Liability:Shareholder contributions:Shareholder2:2012 3000 CR
> Equity:Past Retained Earnings:2012 4000 DB
>
> However as I read thru different sources majority suggests Owners
> contribution account to set as Equity account. If that becomes the case how
> can I track both the owners contributions for each year as well as retained
> earnings if both are equity accounts?
> In particular how to start the accounts using the last year balance sheet
> where retained earnings is (say) -8000 and owners contribution is
> say(7000)?
>
> Thanks in advance
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