Having trouble recording buy-ins

Benjamin Melançon ben at agaric.com
Mon Feb 1 12:18:29 EST 2016


Hi all!

Successfully using GnuCash for two years now!  But there's one thing i
haven't gotten right— how to properly track our buy-ins.  We are a worker
cooperative and want members to be able to receive a smaller payout each
month until each person builds up to an equal equity stake.

>From our accountant, who did manage to use GnuCash last year: "I'm trying
to view the years transactions in the bank account and I don't know how to
do it.  To me it looks like some of the buy ins are increasing the bank
account and some guaranteed payments."

And that's what i see also.  I was hoping he'd say we have to create some
intermediate account or something, but while i still think this must be
more an accounting question than a GnuCash question, it is at least one
that my *accountant* doesn't see the answer to right off, either.

Expenses:Guaranteed Payments:Benjamin  (Decrease) 300
Equity:Benjamin  (increase) 300

Ordinarily money goes into Expenses:Guaranteed Payments for each person
from Current Assets:Checking.  The problem is that instead of taking money
from the Guaranteed Payments account, above the Guaranteed Payments account
receives it from the Equity account just the same as from the Assets
account.

Trying to go directly from Assets to Equity again makes us gain money in
both accounts, or lose money in both accounts.  Which makes sense given the
equation Assets = Liabilities+Equity +(Income - Expense)— but there must be
a way to convert income which becomes an asset into equity.

What we want to happen with the buy-in process is Income -> Assets -> ?? ->
Equity

It's the ?? that i, and apparently also my accountant, need help filling in.

The equation would work if we go from Income to Equity, leaving it in
Assets (as it does stay in the bank account, though we'd happily move it
from checking to savings, but that would be immaterial to the main
questions here).  Is that what we should do?

Apologies for paraphrasing at length from this very helpful response
by David Cousens from 2014 August on this list when we were first setting
up, but it offers the clearest way statement of *a* way of doing this (i
think, will probably need accountant assistance for this if it is the way
to go):

"""
At the end of your financial reporting period, the temporary income
and expense accounts are "closed" usually to another temporary account
known as an income summary account. This is done normally by
decreasing (debit) the income accounts by their balance at the date of
closing and increasing (credit) the income summary account by the amount of
the balances. Your expense accounts are similarly closed to the
income summary account by decreasing (credit) the expense accounts by
the amount of their final balances and decreasing (debit) the income
summary account by the amounts of the final balances of the expense at
the closing date. At this point your income summary account balance
contains your raw profit/loss for the period and your income and expense
accounts should all have zero balances ready for the next financial
reporting period.

The final step is to close the residual profit/loss in your income summary
account to equity. If the income summary account is positive, i.e. you have
made a profit, you would debit the income summary account by the amount of
the balance and credit it to an equity account, reducing the income summary
account balance to zero. Similarly if you made a loss, the income summary
account would be credited by the amount of the loss and the equity account
debited.

An accountant would normally create a temporary equity account to receive
the profit/loss and then depending upon the distribution arrangements in
your co-op/partnership agreement distribute them to the members individual
equity accounts. The business may also retain some of the earnings for
reinvestment in the business.
"""

Are temporary accounts the way to do this?  So we should we account for our
monthly buy-ins annually?

How about if we were to switch to accrual accounting— still temporary
accounts?

I'm on irc.gnome.org #gnucash as mlncn if any kind soul has real-time
questions.

Thank you greatly!


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