[GNC] Handling of Equity and Retained Earnings

[Adrien Monteleone]

Christian,

Welcome to GnuCash!

> On Jan 15, 2020 w3d15, at 9:56 AM, Christian Lynbech <clynbech at gmail.com> wrote:
> 
> Inspired by a recent discussion I would like to understand better how to handle the Retained Earnings equity sub account, as I am new to both Gnucash and accounting.
> 
> In a world where books are closed at year end, I would understand Retained Earnings as sort of the surplus of the year that is then added to the equity so one starts the next year with a higher equity than the year before.
> 

Correct. (well, hopefully ‘higher equity’. If you retained a loss, it would reduce your Equity)


> When using Gnucash the recommended way of just keep going, there is not any real need to distinguish the year end result, it just goes into the rolling development of the accounts.

Yes.

> 
> However, at least here in Denmark, it is required for a company to produce a statement of balance and result, how could one handle that? Just make a report at year end that extracts the relevant numbers or simulate the closing of the books by moving the appropriate amount to Retained Earnings and then move it out again when the new year starts up?

Always follow the advice of a local CPA who knows the laws and requirements of your jurisdiction. We can’t give accounting advice here. But we can help with how to implement accounting advice using GnuCash.

For example, as you noted, your accountant may require a Balance Sheet as of the end of year. (where Retained Earnings is reported) The GnuCash Balance Sheet report should satisfy this requirement without needing to ‘close the books’. It will calculate Retained Earnings from the beginning of the book until the date of the report, just as if you had done so for the previous year, and then added that result to the other previous year’s results of closing. (in other words, just as if you maintained an actual Retained Earnings account under Equity) So there is no need for temporary or simulated closings. (but there is a Trial Balance report you should use just like the pen and paper days before running that final Balance Sheet, and should always be used prior to using the ‘close book’ procedure if you go that route.) If you decide to do a ’test run’ and close the books, reversing that is simply a matter of deleting the transactions put into Equity:Retained Earnings. (the expense one in particular will contain many, many splits, but just delete the whole thing) This will restore your Income & Expense accounts as if you had never closed them.

Also note that your accountant or local jurisdiction may require reports in a certain form, to look a certain way, include only certain accounts, etc. This can mostly be accomplished from within GnuCash, but if you run into a roadblock, you can always export or copy/paste the resulting report into a spreadsheet and further refine from there.

Finally, if you started your books with a balance forward in Retained Earnings (from a previous accounting app or from physical paper) then you might need to either continue closing the books manually, or else just combine the calculated Retained Earnings line on the Balance Sheet with the actual account called Retained Earnings on the report in a spreadsheet. (the actual account would in this case likely only contain the balance forward) It would be nice if GnuCash offered a means to declare an opening balance for this account and then combine it for you from then on. There might even be an RFE filed for this already. (I’ll have to check Bugzilla)

Regards,
Adrien