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

[Adrien Monteleone]

The virtual accounts should not be included in a Balance Sheet. Neither 
will they affect an Income Statement.

Trying to include them in either would of course, make those reports 
incorrect.

Once again, I'm not advocating putting these in the tree under Equity.

Let's take the example of Envelope Budgeting. (since that was the 
original case)

I 'allocate' my earnings periodically to various envelopes based on a 
formula to meet my needs for various categories of expenses. The money 
doesn't physically go anywhere, is not paid to anyone and is neither an 
expense or liability at this point. It is still my asset. I just want to 
remind myself it isn't available to spend on anything but the intended 
purpose. (leaving any remainder open for contingencies)

The virtual accounts allow me to do this. (and they should be asset 
accounts as noted)

When I make the real-world expenditure (or incur the expense if accrued) 
is when the expense gets recognized just as if the virtual accounts 
never existed. And yes, that might be in one lump, because that is what 
really happened.

That's the entire point of the virtual tree. To specifically *not* 
record that expense until I'm really suppose to when it actually 
happens. ('happens' here might be paid, or it might mean incurred)

I don't think cash vs. accrual has any bearing on this. I can follow 
accrual methods and still want to earmark assets but not want actual 
liabilities or expenses to be overstated, or assets to be understated at 
any point in time.

Certainly, a built-in budgeting option along these lines would be nice. 
I use the Budget Module as-is, but it doesn't quite work the way I need 
it to for this method.

Regards,
Adrien

On 8/9/20 5:25 PM, doncram wrote:
> 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.