How should I enter values on a budget in gnucash ?

[Edward Doolittle]

On 6 March 2017 at 12:43, lejohnston <lejohnston at dccnet.com> wrote:

Thank-you for your detailed reply. I still have a few questions and I think
> you misunderstood some of my comments I will try to clarify below.
>

OK. I'm forwarding this message to the list, because I think others may be
able to contribute as well. I am really just a beginner, so I always like
to check whether I'm on the right track.


> First I think we both agree there is an inconsistancy between the 'budget'
> and the 'budget balance sheet report'. You seem to think it is in the
> 'budget' not the 'budget balance sheet report'. I lean to it being in the
> 'budget balance sheet report'.
>

I agree there seems to be an inconsistency, but I haven't reconstructed it
myself. I'm pretty convinced by your example, though. On the other hand, an
inconsistency is just that, and it doesn't mean that one or the other of
the budget or the budget balance sheet are incorrect. Arguments can be made
either way.

What I"m trying to say is that instead of arbitrarily saying one or the
other is right or wrong, we should come up with some principles which make
it easy to remember how it should work. Since the budget is more
fundamental than the budget balance sheet, we should think about how to get
the signs in the budget right. After that's done, we can correct the budget
balance sheet.

I gave a detailed set of principles about two messages back, but they were
too complicated, and still incomplete (I didn't take into account "Reverse
Balanced accounts"), and backwards. Some time soon I plan to sit down and
write up carefully how I think it should work, using principles that I hope
most can agree on, and which are easy to remember and "sensible".


> Let's go back to Geert's initial question: I want to budget a repayment of
> a credit card (from my bank account).



> How should I enter this in a budget:
> Bank: 100.00-
> Credit card: 100.00-
>

If we have "Reverse Balanced accounts" set to "Credit accounts", then that
is right. The balance in the asset is decreasing by $100, and the balance
in the credit card account is also decreasing.

Now go to Edit -> Preferences -> Accounts -> Reverse Balanced accounts and
set it to "None". Then the correct way to represent that transaction is
Bank: -100, Credit card: +100. (That is nice because the sum of the changes
is 0, which is exactly what it should be in double entry accounting, which
is why some people might prefer it that way. However, most people are not
used to seeing negative balances, which is why the default is "Credit
accounts" rather than "None".)

This shows that there should be an interaction between the "Reversed
Balanced accounts" setting and the signs in the budget. I believe the
interaction is not properly set up in the budget module now, so that's one
fix that has to be made.


> I see this as a transfer of $100 from checking to credit card. Leaving
> aside whether or not it makes sense to enter this transfer in the budget, I
> see doing this by budgeting $(100) in checking which would decrease my
> checking account balance and $(100) in my credit card account (which would
> decrease my liability). There should be no overall impact on my net worth
> (I am not clear on the relationship between net worth and Equity, as Equity
> seems only to be determined at the end of an Accounting Period). Since this
> action balanced my budget it leads me to believe that the Budget is working
> correctly.
>

Net worth and equity are approximately the same thing. Equity can be
determined at any moment; just run a balance sheet report at that moment,
and you will find a line for total equity at that moment.

There is perhaps some confusion between Equity and an Equity Account. Let's
just not worry about what happens with Equity Accounts in what follows,
since they're seldom used, only for special occasions.

Do you think that the Budget entries should have been handled differently
> and if so why?


I think we've nailed it down. The fundamental principle could be expressed
this way: if Reverse Balanced accounts is "None", then a debit to an
account in the budget should be positive. If Reverse Balanced accounts is
"Credit accounts", then a debit to Assets or Expenses is positive, and a
debit to Liabilities, Equity, or Income is negative. (And for completeness,
the third setting of Reverse Balanced accounts would be taken into account
as well.)

Now we need to know what a debit would be. I have found it helpful to think
about it this way: Increasing an asset is always a debit, and debits are
always paired with credits in a simple transaction, so earning income
(which would increase assets) is a credit to Income; borrowing money (which
would increase assets) is a credit to Liabilities; refunding an expense
(which would increase assets) is a credit to Expenses.

Now the usual use case: If Reverse Balanced accounts is set to Credit
accounts (the default), then increasing an asset in the budget should be
positive; paying an expense should be positive; borrowing money should be
positive; and earning income should be positive. The unallocated (excess?)
amount in a budget would then be calculated as Change in Income - Change in
Expenses + Change in Liabilities - Change in Assets.

I won't detail how it should work if Reverse Balanced accounts is set to
None, but whoever patches the software will have to work it out.

I don't have Gnu Cash handy at the moment to check whether that's the way
the budget currently works. I'll check tomorrow.

On 03/05/17 09:58 PM, Edward Doolittle <edward.doolittle at gmail.com> wrote:
>


> > On 4 March 2017 at 13:56, lejohnston <lejohnston at dccnet.com> wrote:
>


> > > I have changed my opinion about how the figures should be entered.
> Essentially they are budgeting to transfer $100 from checking to credit
> card. Therefore both numbers should be entered as negatives. This would
> still balance in the budget but shows money leaving the checking account
> (an Asset) and moving to the credit card (a Liability).
>


> > What the change in balance sheets shows is the following: you have
> withdrawn $100 from checking, and withdrawn $100 from credit card. That
> leaves you with an overdraft of $100 in checking, and a balance of $100 on
> your credit card, and $200 "unallocated" cash in the virtual budget account.
>


> Here I disagree. I merely budgeted to move $100 from checking to credit
> card and so there should have been no 'unallocated' cash as a result.
>

You're right ... from the point of view of the budget. But the budget
balance sheet clearly shows an unallocated amount of $200. That means
(according to the scheme developed above) that the budget balance sheet is
wrong.


> I did another test today. I budgeted to move $100 from one checking
> account to another. That is: checking account1 $(100) and checking account2
> $100. Because these are two Asset accounts one would be negative and the
> other positive. The result is a balanced budget and a 'budget balance sheet
> report' that is all zero's. No 'unallocated' cash no change in Assets,
> Liabilities or Equity. This is the result is logical but contrary to what
> happened when I bugeted to transfer funds from checking to credit card.


Transfer from one asset to another will never be enlightening in this
scenario. It will always work as you expect. The issue is how liabilities
work, in particular the interaction between liabilities and any other type
of account.


> > > I did this in a new 'test' file and got the result I expected in the
> Budget itself. That is I ended up with a balanced budget.
>


> > It shouldn't be balanced, you now have $200 unallocated. If the budget
> and the budget balance sheet disagree on this point, then they are
> inconsistent in their interpretation of signs, which is bad, and which is
> what Geert is worried about.
>


> As I stated above I don't believe there should be $200 unallocated because
> I merely budgeted to transfer money between two accounts.


Yes, that was your intention, and you actualized it correctly in the
budget. The budget balance sheet is wrong because there is a bug in the
budget balance report software.


> What confuses me is that in this case I do not owe $100 on my credit card,
> I have actually budgeted to move $100 to my credit card account, so in fact
> my liabilities have been reduced.
>

I understand that is your intention, and that is what you accomplished in
the budget. My comments were based not on the budget, but on the budget
balance sheet images that you sent. The budget balance sheet is incorrect,
which is not your fault.


> It is important to note that the 'Budget Balance Sheet Report' does not
> include the balances of your accounts, It only reports the amounts you have
> budgeted in each of those accounts. For this reason I have not found it a
> useful report. My interest in it at this point is merely what it tells us
> about underlaying issues in the budgeting and budgeting reports in GNUCash.
>

I've never used the budget balance sheet myself, and I suspect that
literally no one in the world ever has, otherwise this bug would have been
caught earlier. I also wonder what use it is. I guess we should try to get
it right, and then maybe people will start using it, and a use for it will
become obvious?

Unless I'm hallucinating about all this ... it's getting late. I'd like to
run through this one more time in detail, with Gnu Cash running in front of
me, to check it all thoroughly.


> TIA for any insight you can provide,
>


> Larry


-- 
Edward Doolittle
Associate Professor of Mathematics
First Nations University of Canada
1 First Nations Way, Regina SK S4S 7K2

« Toutes les fois que je donne une place vacante, je fais cent mécontents
et un ingrat. »
-- Louis XIV, dans Voltaire, Le Siècle de Louis XIV, Chap. XXVI