[GNC] envelope method, equity sub-accounts, cash vs. hybrid vs. accrual accounting

[doncram]

Okay i think i understand more, from Marilyn Kimple's case and now from
searching about "envelope method" in gnucash-user postings (which Adrien
Monteleone pointed me to, thanks!), where Adrien and David Cousens and
Micheal Novack have a number of postings, including in responses to Eric
Bowen.  Envelope amounts seem to me to mean equity subaccount amounts,
which are displayed to remind one that there are purposes/dedications of
funds/obligations out there which need to be remembered.

My new take on this:  the issue is that Marilyn and Eric and others have is
that they are generally following cash accounting and are not explicitly
adopting accrual accounting.  But they see/know that there are significant
real-life requirements/purposes out there (e.g. accumulated obligation to
tithe, perceived requirement within a nonprofit to keep a contingency fund,
accumulated requirement to pay taxes eventually related to activities of
current and earlier periods), which aren't covered in their implementation
of Gnucash accounting so far.   What some want to do is to use subaccounts
within equity to indicate those obligations.  I think this is because they
feel that the obligations are not precise enough or legal enough or
otherwsise real enough yet to recognize expenses and liabilities for them
(which would be accruals, i.e. recognitions of expenses (or revenues)
before cash has changed hands).  And these users and some advisors here are
not yet onboard about full adoption of accrual accounting in these cases.
So then some come in with ideas about "virtually" recognizing "virtual
liabilities", i.e. to partition out an equity subaccount for tithing
obligation or tax obligation or otherwise, out of the entitiy's equity.  So
that the Balance Sheet will show the obligation, reminding them that the
full amount of their assets less explicit liabilities (if any) is not
available for spending on other purposes.   Okay, there are numerous
practical problems with this.  For one, it seems that a separate accounting
system (e.g. a spreadsheet) has to be run offline to keep track of what
these "virtual obligations" are.  That side spreadsheet might also keep
track of "virtual expenses" being incurred for given periods, i.e. it is
recognizing the changes of obligations.  The Gnucash accounting system will
only sort of recognize that real expenses have been incurred, and that
cumulative obligations have grown, when at some future date the tithing or
tax or whatever obligation is actually paid.  On that date there will be a
huge tithing or tax expense recognized.  No one else has complained AFAIK,
but I think it is a problem that Income Statements for any given period do
not show the growth "virtual liabilities" as as expenses, and that Balance
Sheets should show the "virtual liabilities" as real liabilities, which
they are.  And it is, in my experience anyhow, totally non-standard to have
equity subaccounts this way.

The solution is simple:  recognize that those circumstances are exactly
what accrual accounting addresses, and adopt accrual accounting relating to
these purposes, so maybe ending up with a hybrid between "pure" cash
accounting and pure accrual accounting.  You don't have to be perfect in
recognizing all other types of potential accruals (say, you don't have to
recognize capital asset purchases and then follow a depreciation schedule
for them), in order for you to choose to use accrual accounting to do what
it does well, on a matter or two that are of significant importance to you.

For Marilyn, please see that recognizing tithing expense and tithing
payable (liability) does exactly what you need.  You don't need a separate
spreadsheet, I am pretty sure.  Your Balance Sheet will show your regular
assets, any liabilities that you already recognize, and now also this
Tithing Payable.  In exactly the amount that you were contriving to have an
equity subaccount report.  I further understand you were, in your previous
system, allocating out all of your equity to a few purposes, i.e. more or
less in your words you were dividing out any new net income (which
increases equity) into tithing and a couple other purposes.  Whatever those
other purposes are, probably they could be recognized as liabilities too.

To Eric (and to myself in my role with a nonprofit), simply set aside the
contingency fund requirement amount as a liability.  This is slightly
informal, but achieves the reporting goal of showing it, and of reducing
the equity which appears to be available for other purposes.

Is this about right?  --Don