Confused by "Reverse"

Adrien Monteleone adrien.monteleone at gmail.com
Sun Feb 25 12:44:19 EST 2018


> On Feb 25, 2018, at 7:16 AM, Stan Brown <the_stan_brown at fastmail.fm> wrote:
> 
> 
> Adrien, thanks for replying, but I'm talking about a problem in a
> report.  Please see below.
> 
> -- 
> Regards,
> Stan Brown
> Tompkins County, New York, USA
> http://BrownMath.com
> http://OakRoadSystems.com
> 
> 
> On 2018-02-25 02:43, Adrien Monteleone wrote:
>> 
>> 
>>> On Feb 24, 2018, at 6:51 PM, Stan Brown <the_stan_brown at fastmail.fm> wrote:
>>> 
>>> On 2018-02-24 14:09, Adrien Monteleone wrote:
>>>> Set that preference for Reverse Balanced Accounts to ‘credit’.
>>> 
>>> Yes, that's what I did. As I said, it fixed the Balance Sheet, but it
>>> broke the General Ledger.
>> 
>> If you mean the General Ledger register under Tools menu, mine looks just fine - everything is positive as I expect it to be.
> 
> No, I don't mean that.  I know there are multiple things with similar
> names, so I wrote:
> 
> "but I can't find any way to have it in both the Assets & Liabilities »
> Balance Sheet report and the Assets & Liabilities » General Ledger report."
> 
> Everything is fine in the General Ledger _tool_ (at least with respect
> to this issue). It's one of those two _reports_ that has the problem.
> 
>> If you mean the General Ledger Report under the Assets & Liabilities reports menu, there’s a report specific option to reverse the sign for Credit Accounts (as well as Income/Expense) just for that report, but that only seems to work for the final total for each account, not the running balances.
>> 
>>> BTW, why should we have to set "Reverse Credit Accounts" to get a report
>>> such as Balance Sheet NOT to reverse them? It seems something is
>>> backward there.
>> 
>> You don’t. The ‘normal balance’ of Credit Accounts is negative. (Liabilities, Equity & Revenue) If you don’t set that option, they show up as negative (individually) on the Balance Sheet. If you want to Reverse Balance those accounts, then set the option, and they’ll show up as positive. (the opposite, or reverse of their ‘normal’ balance)
> 
> Okay, I understand now, but I definitely did not get that from the
> documentation. In fact, if I'm not mistaken, the documentation goes the
> other way, saying that a credit to a liability account increases the
> account balance and a debit reduces the balance. That matches how I
> learned it when I worked for an accounting firm.

Both the documentation and your experience are correct.

A credit to a liability increases that liability. ‘Increase’ does not necessarily mean ‘larger in the positive direction from zero’. In the case of a liability, it means ‘larger in the negative direction from zero’. The same goes for Equity and Income(Revenue), all of which are ‘credit’ balanced accounts, that is, accounts whose normal balance is a net credit.

This discussion is an example of why the preference is offered in the first place. Most people can usually wrap their heads around a liability increasing by becoming a larger negative number but they can have a difficult time with Equity and Revenue. Generally you’d think of receiving more money as a positive and retaining earnings as a positive and retaining losses as a negative. But the signs in this case have everything to do with what side of the accounting equation the accounts lie on, not their psychological meaning.
> 
> If it's a programming convenience to have all liability, equity, and
> income accounts negative, I guess I can sort of see that. And I can
> reverse that in Edit » Preferences, so it's a one-time adjustment. 

It is somewhat of a programming convenience, but even before computers the accounting equation could be written different ways. I was originally taught it looked like this:

Assets = Liabilities + Equity

or expanded:

Assets = Liabilities + (Revenue - Expenses)

But you can also write it this way (and this form was also in my textbook):

Assets - Liabilities - (Revenue - Expenses) = 0

If you distribute the signs and change all the operands to addition, you get this:

Assets + (-Liabilities) + (-Revenue) + Expenses = 0

If Revenue is a larger absolute value than expenses the shortened form is this:

Assets + (-Liabilities) + (-Equity) = 0

If Expenses were a larger absolute value (a retained loss) then Equity would be ‘contra balanced’ and thus have a positive sign:

Assets + (-Liabilities) + Equity = 0


So if you set the preference to ‘reverse balance accounts’ as ‘credit accounts’ than those which are normally ‘negative’ signed will be positive signed instead. Increasing any account in your tree will lead to a ‘larger from zero in the positive direction’ value. (but those accounts still have more value in credits than debits)

With this setting, only those accounts which are normally contra-balanced are shown as negatives, e.g.—

Assets:
Allowance for Doubtful Accounts
Accumulated Depreciation/Depletion
Reserve for Obsolete Inventory

Liabilities:
Discount on Bonds/Notes Payable
Bond/Debt Issue Cost
Gain on Debt Reduction (usually a revenue account nowadays)

Equity:
Owner’s Draw
Treasury Stock
Dividends

Revenue:
Sales Returns/Allowances/Discounts

Expenses:
Purchase Returns/Allowances/Discounts
Re-imbursed Expense

Since most people aren’t going to be using such contra accounts, the ‘credit account’ setting results in all positive balances in a normal situation.

Note, this setting is only for display purposes for your sanity. It doesn’t change the underlying math or the Accounting Equation.


> But
> then a problem arises when the reports don't follow that.
As noted, that report does follow the preference. You have to set it within the report though, and it only works for the total for each account. Turn off the running balance, play with the setting between ’none’ and ‘credit accounts’ and you’ll see what I mean.

As also noted, the Budget module doesn’t honor the setting, or have one of it’s own. Signage can be quite a mess there.

> 
> Something you said earlier made me think you were thinking about
> removing the General Ledger report. please don’t

I don’t have the power to remove anything, but I did mention it appears to be nearly identical to the Transaction Report. I see now, there are some differences. The General Journal Report is probably least useful because it has so few options. I think in Gnucash-3.0 the General Ledger tool is going to be renamed General Journal with all documentation updated accordingly. I’m not sure what is going to happen with respect to these two related reports, but I hope the attempt at consistency is carried through there as well.

Regards,
Adrien

> -- I find it useful and
> the General Journal report not so useful, not at this time anyway. I'd
> just like to see the General Ledger Report follow the Edit » Preferences
> setting for reversing signs of accounts.
> 
>>>> That’s the way I have mine set and every account with a ‘normal’ balance is positive. Only contra-balanced accounts show negative.
>>> 
>>> Not in General Ledger.  (I looked at General Journal, but I really
>>> loathe the format, and since it doesn't have most options I can't fix it.)
>> 
>> As noted above, for that report, the total should have the correct sign, though the running balance amounts will always be negative. (not sure why that is) So with the setting set to ‘none’ you’d have a negative credit account balance under a normal circumstance. (that is, Liabilities, Equity & Revenue) But if you choose to reverse that balance, those will all show as positive.
> 
> 
>>>>> On Feb 24, 2018, at 11:36 AM, Stan Brown <the_stan_brown at fastmail.fm> wrote:
>>>>> 
>>>>> Using 2.6.18.
>>>>> 
>>>>> I want credit balances to be positive in liabilities, equities, and
>>>>> income, and debit balances to be positive in assets and expenses. I'd
>>>>> think this was standard, but I can't find any way to have it in both the
>>>>> Assets & Liabilities » Balance Sheet report and the Assets & Liabilities
>>>>> » General Ledger report. (The latter appears on a tab called Transaction
>>>>> Report.)
>>>>> 
>>>>> In Edit » Preferences » Accounts, I set "Reverse Balanced Accounts" to
>>>>> None, but then all my credit accounts we backwards in the Balance Sheet.
>>>>> (Exception: Retained Earnings is not backwards.) There's no "Reverse"
>>>>> option in Edit » Report Options, so I figure I must be misunderstanding
>>>>> the setting in Edit » Preferences » Accounts, and change it to Credit
>>>>> Accounts. That fixes the Balance Sheet, but now the amounts are
>>>>> backwards in credit accounts in the General Ledger report (though the
>>>>> totals of credit accounts in that report are not backwards). There's no
>>>>> reversing option for that report either.
> 



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