How difficult is it (really) to reorganize a Chart-of-Accounts after the fact?

[Buddha Buck]

On Fri Jan 02 2015 at 9:16:19 PM Patrick Doyle <wpdster at gmail.com> wrote:

> Hello Michael,
> Thank you for your patience and your gentle instructions.  I'm sorry
> to be so dense about this.
>
> It is possible that I may have finally screwed my head on straight
> about this.  Thank you for sticking with me.
>
> When I first read the section in the GNUCash manual that describes the
> 5 different basic account types, it blew my mind.  I understand the
> most basic, fundamental concept of double entry bookkeeping -- for
> every credit, there must be a corresponding debit.  That made both
> intuitive and logical sense to me.
>
> What blew my mind (and I was _sure_ I had found a typo in the
> documentation) was the two sentences that read:
> " In asset and expense accounts, debits increase the balance and
> credits decrease the balance. In liability, equity and income
> accounts, credits increase the balance and debits decrease the
> balance."
>
> Did that _really_ say that _DEBITS_ _INCREASE_ the balance of _ASSET_
> accounts? Huh?  (I cried to myself).
>
> I really expected that sentence to say _liability_ and expense ccounts
> would increase with debits and decrease with credits, not _asset_ and
> expense accounts.
>

Debit and credit have a very specialized meaning in modern accounting that
has very little to do with the origins of the name. Once you understand how
modern accountants think of debit and credit, it will (a) blow your mind,
and (b) potentially make things simpler for you to wrap your head around
why things are the way they are.

Here's the debit/credit secret to modern accounting:

"Debit" is synonymous with "left side" or "left hand column"
"Credit" is synonymous with "right side" or "right hand column".

That's it, in modern accounting. Any old meaning, especially the original
Latin/Italian mean of "thing owed" and "loan", are no longer directly
relevant.

Every account ledger has two columns, a debit (left) column and a credit
(right) column. An account has a "debit balance" when the sum of the left
column is greater than the sum of the right column, and vice versa for a
"credit balance". "Debit accounts" are normally expected to have a debit
balance, similarly with "credit accounts". A debit account's balance is
reported in reports as the difference between the left and right columns. A
credit account's balance is reported as the difference between the right
and left columns.


> So I talked it over with the CFO at my company, and he explained that
> there was no typo.  That what was described is standard accounting
> practice.  Asset and expense accounts are called "debit" accounts, and
> that Equity, Income, and Expense accounts are called "credit"
> accounts.
>
> I just nodded my head at him, backed slowly away, and thought about
> all this for 9 or 10 months.  (Actually, he explained the concepts
> quite well, but life got very busy right about then, and I figured the
> new year was as good a time as any to switch over to GNC.)
>
> But now I think I finally get it.
>
> My checking account is an asset.  (That I knew).
> An asset account is a debit account.  (Still blows my mind, and
> perhaps that's what leads to my missing the point, over and over
> again).
>

Here's where the confusion on this point often resides:

To you, your checking account is an asset, and thus is a debit account.
When you put money in the checking account, are increasing the value of
that asset, so you debit the account (add an entry to the debit/left
column). When you take money out, you are decreasing the value of that
asset, so you credit the account (add an entry to the credit/right column).

But, if you've never done your own double-entry bookkeeping, you are
naturally unfamiliar with this setup, and only see debit/credit when it is
on your bank statements.

The bank statements aren't from your point of view, they are from the
bank's point of view, and their view is reversed.

To your bank, your checking account is a liability, and this is a credit
account. When you deposit money in your checking account, you are
increasing the amount the bank owes you, so they credit the account. When
you withdraw money in your checking account, you are decreasing the amount
they owe you, so they debit the account.

When you look at your statement, you see deposits as "credits" and
withdrawals as "debits". Hence, you think it natural for putting money into
your account to be a credit, and taking it out to be a withdrawal. But from
an accounting perspective, that's looking at the wrong set of books -- the
banks, not yours.

By the way, here's a digression, but one which will tie debit/credit back
to its historical roots (which, I know, I just told you to forget about).

The Fundamental Accounting Equation (short form) is:

    Assets = Liabilities + (Owners) Equity.

The value of the stuff on the left (Assets) equals the value of the stuff
on the right (Liabilities and Equity). Assets are on the left, and are thus
"debits", Liabilities and Equity are on the right, and are thus "credits".

But one very old, but perhaps helpful to you, way of thinking about it is
that the stuff on the right is Things, and the stuff on the left is People.
In that way of thinking, the equation says "The value of all the Things
owned by the business equals the total value owed by the entity to others
or the owners of the business".

The debit/left side of the equation represents a debt owed by the business
to the creditors listed on the credit/right side.

One of the reasons why the debt/creditors view of debit/credit has been
minimized is that, while it is still mostly true, there are cases in modern
accounting where doesn't make sense to say it quite that way. Income and
Expense accounts don't quite match the debit/creditors view. For personal
finance tracking (like you are doing) it's hard to think of your bank
account as a debt owed to you (it seems almost nonsensical, doesn't it?).

If you can think of your books as representing an independent entity,
separate from you-as-a-person, that you have full financial control over,
it makes more sense to think of "Equity" as "what is owed to
you-as-a-person".

Double entry accounting requires that the sum of the debits in a
> transaction must match the sum of credits in that transaction.  (That
> has always made perfect sense to me.)
>
> If I buy groceries with a check, I want to "credit" my Assets:Checking
> account
> That will make the balance go down.  (Ouch -- how long will it take
> for that to sink in?  A "credit" will make my checking account go
> down!?!? -- That is what has lead to my fundamental disconnect, over
> and over again.)
>

Remember that your books are not your bank's books, and your bank has
trained you to think of your checking account from their point of view, not
yours.


> Since I want to track that expense, I must debit my Expenses:Food account
> That will make the balance go up.
> -- And here is where my view of the universe differs from everybody else's.
>
> I want the balance in my *:Food account to go _down_ when I debit it.
>

Why do you want it to go down when you debit it?

Keep in mind what you are modelling: putting money into buckets divided by
category, so you can spend money out of the buckets on items in that
category and then look in the bucket to see how much is left to spend.

A bucket of money is a Thing, not a Person, and thus (in the view of
Assets=Liability+Equity) an Asset, not a Liability or and Equity.

So a bucket of money is an Asset account, thus a debit account, thus it
should go _up_ when you debit it.


> Fundamentally, I think of that *:Food account as a bucket that
> contains money.  When I spend Food related money, I want the balance
> to go down.
>

Right, so you need to _credit_ it when you reduce the value of the bucket
of money.

>
> The only way I see to do this is to use a "credit" account to hold
> that bucket.  My choices for "credit" accounts (not be be confused
> with "credit card accounts") are Equity, Income, and Liability
> accounts.  The only one that makes sense here, given my view of the
> universe, is for my Food bucket to be an Equity account.
>

I think the problem is that you want to add money to *both* the
Asset:Checking account and the Bucket:Food account, and have the value go
up in both.

Part of the problem is that accounting tracks flows of funds. Money flows
from one location to another via transactions. If money ends up in
Assets:Checking, it had to come from somewhere, and the accounting system
is supposed to "account" for that flow.

I strongly suspect that what think you want to do is:

2015-01-01 Received Paycheck
  Debit (really?!? The CFO says so, all right) Assets:Checking $500
    Credit Bucket:Food $200
    Credit Bucket:Rent $200
    Credit Bucket:Car $100

The trouble is that this says that you received $200 from Bucket:Food, $200
from Bucket:Rent, and $100 from Bucket:Car, and put that $500 total in the
bank, when this does not match reality. I assume you got the $500 from your
employer. This is not represented in this transaction.

So let's add an account to track money you got from your employer. Your
employer is a Person supplying money to your books, not a Thing owned/owed
by your books, so they should be represented by a credit account. The money
you get from your employer is not expected to be payed back, so they aren't
a creditor, so it isn't a Liability account. Since we haven't talked about
Income and Expense accounts yet, that leaves Equity. So let's create an
Equity:Employer account.

This isn't ideal: the account name implies your employer is somehow an
"owner" of what's in your books, when in reality they just add money to the
system -- income. So let's add something to indicate this is income, and
call the account Equity:Income:Employer

So keeping in mind that the money is coming from your employer, we get a
revised (bucketless) transaction:

2015-01-01 Received Paycheck
  Debit Assets:Checking $500
    Credit Equity:Income:Employer $500

So let's see if we can put the buckets back.

If the money never goes to the checking account, but straight into the
buckets, then it's easy:

2015-01-01 Received Paycheck
  Debit Buckets:Food $200
  Debit Buckets:Rent $200
  Debit Buckets:Car $100
    Credit Equity:Income:Employer $500

If you still want the money to go into both the checking account and the
buckets, then it's (strictly) impossible: money can't be in two places at
once. However, subsidiary accounts (like Assets:Checking:Buckets:Food, etc)
provide much the same functionality for this. The A:C:B:Food account
entries get rolled up/included by reference into the Assets:Checking parent
account, so the parent balance includes all the child balances.

So that gives us

2015-01-01 Received Paycheck
  Debit Assets:Checking:Buckets:Food $200
  Debit Assets:Checking:Buckets:Rent $200
  Debit Assets:Checking:Buckets:Car $100
    Credit Equity:Income:Employer $500

This will mess up bank reconciliation, but that's the only major problem
with it.

Let's look at the other side: spending money on food.

When you spend money on food, from an accounting perspective, this is money
leaving the system. You spend $5 on a hamburger, but 15 minutes later
what's it's (monetary) value? Nothing. So spending money on food represents
(in an accounting sense) a loss from the system; money that has exited
tracking, and is no longer owed to the owners. it is expended. So when you
spend money on food, it must reduce your equity. We can create accounts to
track what funds are expended on with Equity:Expenses:Food,
Equity:Expenses:Rent, Equity:Expenses:Car.

Then it's obvious what should be done (or it should be):

2015-01-02 Lunch at Joe's Pizzaria
  Debit Equity:Expenses:Food $5
    Credit Assets:Checking:Buckets:Food $5

2015-01-02 Car wash
  Debit Equity:Expenses:Car $8
    Credit Assets:Checking:Buckets:Car $8

2015-01-02 Pay landlord
  Debit Equity:Expenses:Rent $800
    Credit Assets:Checking:Buckets:Rent $800

(presumably, if rent is due monthly, and buckets are allocated weekly, this
will balance out over time).

One step is left to bring this to "modern" accounting practice:
introduction of Income and Expense accounts.

If you look at Equity:* in the built up chart of accounts, we have a bunch
of Equity:Income:* accounts, and a bunch of Equity:Expense:* accounts.
These, as used above, properly increase total equity when income is
received, and properly decrease total equity when expenses are made, but
it's a bit of a mess.

First off, Equity:Income:* is full of People who aren't owners of the
business/your finances -- they don't have any equity at stake. Lumping them
there is a bit weird.

Second, Equity:Expenses:* is full of Things which also aren't owners, so
it's weird to lump them under Equity. More strangely, if you've been paying
close attention, we are (mostly) only debiting these accounts, so they will
almost always have a debit balance, even though as equity accounts they
normally should have credit balances. 15th Century accountants didn't
believe in negative numbers, so let's pretend that Equity:Expenses:* are
debit accounts, and are thus subtracted, not added, from equity.

Expanding out the Fundamental Equation again, we have something like

Assets:* = Liabilities:* + (Equity + Equity:Income:* - Equity:Expenses:*)

or (in the Things/People version):

Things = People + (People + People - Things)

We have a mix of People and Things on the right, and the Things are
subtracted. We can make everything addition only by moving
Equity:Expenses:* to the left thusly:

Assets + Equity:Expenses = Liabilities + Equity + Equity:Income
Things + Things = People + People + People

And there you have Income and Expense accounts, with Income on the
right/credit side, and Expenses on the left/debit side.


> That way, when I _debit_ my Equity:Food account, (to match the
> corresponding _credit_ in my checking account) it's balance will go
> down.
>

In accounting parlance, this is saying that Food is an "owner" of the money
in the checking account, and removing money from the checking account
reduces Food's stake in your finances.


> Whew!
> Why am I doing this?  Because I want things to match what I have always
> done.
>

I don't think it matches what you've always done; I think you *think* it
does, but are getting tripped up on new vocabulary and practices (confusion
over debit and credit, etc). I'd like to hear how you eventually did it in
Quicken, as we may be able to (a) tell you how to do the same thing in
GnuCash, and (b) Tell you if there's a better way.


> I went through a similar experience when I first started using Quicken
> -- I couldn't figure out how to make a Food "Expense" account and
> track a balance with it that when up when I put money in ( and down
> when I took money out.  Actually, I don't think I could even figure
> out how to "put money into an "Expense" account way back then.
>

If I recall, Quicken doesn't have income and expense "accounts", but rather
calls them "categories". I suspect it also calls equity "net worth", and
doesn't have more than one equity account (and may not allow you to
directly interact with it).

>
> Way back then, I didn't have a community I could ask.  So I made up my
> own system where I used classes to track balances, and gave up on
> using categories.
>
> Why do I want to match what I have always done?
> Do I _have_ to match what I have always done?
> Nope.  But if it works for me, why change?  What benefit would I get
> by switching to a different approach?  Yes, its the way all the cool
> kids do it, but I've never been a cool kid, so that doesn't work for
> me.
>

Rarely are accountants and bookkeepers accused of being "cool" ;-)

Here's the thing: You are switching from one tool (Quicken) to a very
different tool that uses different language, different processes, etc to
accomplish the same task. It's like switching from driving with an
automatic transmission to driving with a standard transmission after
reading the owners manual that uses terms in ways that seem wrong to you
(despite experts saying it's correct). You are going to have to learn to
use a clutch (and why do the books talk about "double-clutching"? Isn't
there only one clutch?), you are going to have to learn shift while
driving, and not accidentally shifting from 5th to reverse. It's not easy,
and you will stall out in the middle of an intersection many times before
it's smooth driving.

(BTW, switching from manual transmission to an automatic has it's own
challenges. Stepping on the clutch in an automatic is a good way to
suddenly stop fast.)

Assuming that your way is not standard bookkeeping practice, switching to a
different way would allow you to benefit better from the collective
knowledge of this group, to benefit from the trials and tribulations of
approximately 700 years of accounting history, to get the reports in
GnuCash to work as designed, etc.

What has happened over the past couple of days, through this thread
> and my "Old Dog, New Tricks" thread, is that it has forced me to ask
> myself the question, "What do I _really_ want my financial management
> software to do for me?"  I don't know the answer to that yet.
>
> What I want to do (and will do momentarily in a new thread) is to ask
> the community how they (you) use GNUCash to manage your personal
> finances.
>
> Perhaps as I read about real world experiences, instead of theoretical
> experiences in the manual, the light will finally dawn on my marble
> head.
>
> --wpd
>