Owner's Draw setup under Equity group

[DaveC49]

Ina private email Brian Hagen asked:

David,
 In the thread, you mentioned having the Draw
account set up as a contra account. That is
just what I have read in Accounting texts
as good practice. However, I have yet to
locate a way to do this. I had thought that
there might be something akin to a
"Properties" element for the account.
However (in GNUCASH 2.6.14 which I
have) I do not see a way to set this up.

Comment is invited.

Hi Brian,

For the record it is usual practice to ask questions which arise from forum
discussion via the forum so that others can also participate/learn from the
discussion (if it is a bit tangential to the original discussion - you can
always put it in as a new topic ). I have taken the liberty of posting your
question and my reply to the forum

A contra account is one that is set up in conjunction with another major
account.  The two accounts are usually sub-accounts of a header account
which sums their balance and this is how you can typically set them up in
Gnucash. 

A fairly typical example of the use of a contra account is a depreciating
asset e.g. a car. For an asset one usually needs to record the initial
purchase price  the depreciation on of the vehicle and the current
depreciated value. An account structure to achieve that would be:

    Asset:Car

   Asset:Car: Depreciation
The depreciation account Asset:Car:Depreciation is a sub account of
Asset:Car and its balance sums into the balance of Asset:Car.  

When you purchase the car for $20,000 the transaction would be:

Asset:Bank                                                      
Credit/Decrease     $20000 
Asset:Car              Debit/Increase  $20000

and following   that transaction the balance of Asset:Car  is $20000. Each
of the two lines which compose a transaction recording an event is referred
to in Gnucash parlance as a split.

If we record the depreciation a month later  by $200 the transaction
recorded will be:

Asset:Car:Depreciation                                    Credit/Decrease   
$200
Expense                 Debit/Increase  $200.

The value of the balance of Asset:Car is now a debit balance of  $19800  
and the value of the balance of Asset:Car:Depreciation is a credit balance
of $200.  

The initial purchase price is easily recovered by adding the values of the
two balances.  (One could also have a header with 2 subaccounts summing into
it, one to record the purchase and the second to record the depreciationso
that all three values appear in your account structure but this is probably
overkill. You can control which account balances appear or do not appear in
reports separately.)

Asset:Car:Depreciation is called a contra account in accounting terms. the
reason for this is in accounting practice an increase in the value of an
asset account is always recorded by a debit transaction split to that
account and a positive balance value is known as a debit balance. Even
though the Asset:Car:Depreciation is an asset account, however an increase
in the value of the depreciation is recorded by a credit split to that
account in a transaction. The resulting balance is actually a negative
balance, but accountants never deal with negative signs, so it is referred
to as having a credit balance.

Another way of putting this is that Asset:Car:Depreciation uses the same
rules to record an increase in its balance as a Liability account does which
is why the term contra account is used to describe it.

Cheers

David Cousens



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