[GNC] Handling of Equity and Retained Earnings

Adrien Monteleone adrien.monteleone at lusfiber.net
Thu Jan 16 18:56:05 EST 2020


David,

I agree that substitution and transposition doesn’t change the equation as long as all such moves are ‘legal’ for math, and in this case they are.

And I understand what you mean by Opening Balances reflecting the proper amount of Equity.

But I just did a new test book, entering various values for a range of common assets (bank, cash, savings, car, home, AR) and liabilities (mortgage, car note, credit card, AP)

Interestingly, there was a Retained Earnings account created, but its opening balance was noted as “zero” (explicitly, the word) and it was not editable.

After finishing the on-board wizard, I ran a Balance Sheet.

While Equity was technically correct, it listed everything under Opening Balances. (where else would it know to put some of it? It wouldn’t let me specify Retained Earnings in the wizard)

There was a Retained Earnings line, but it was $0.00

Presumably, One could edit the Opening Balances to reflect carried over Retained Earnings, but where would you pull it from? Would it *all* be retained earnings? (thus move everything off of Opening Balances)

But then of course the complication lies with other possible Equity accounts like Paid In Capital or stock accounts. (not uncommon with small C corps, LLCs, and/or partnerships -and maybe other forms I’m not thinking of right now, or different forms entirely in non-U.S. jurisdictions) How do you determine how much to take from each Opening Balance entry of the asset and liability accounts for each of those?

If at the end of the close of say 2019, your temporary accounts, that is, Income & Expense (and related contra accounts) are $0.00, there should be a way to transition to GnuCash by entering *all* existing balances in the exact amounts as of 12/31/19. Certainly, this is an enhancement, but one that would remove the strong suggestion (practically a requirement) to ’start fresh’ with GnuCash and not enter any previous history at all, even as balances forward. (because you can’t enter them all properly)

How does a small business properly carry over its Equity accounts when transitioning to GnuCash?

Regards,
Adrien

> On Jan 16, 2020 w3d16, at 3:10 PM, David Cousens <davidcousens at bigpond.com> wrote:
> 
> Hi Michael
> 
> An equation is not changed if terms are transposed from one side to another
> with a change of sign. It is still equally valid. I rearranged the extended
> fundamental accounting equation including  the temporary accounts from
> 
> Assets =Liabilities +Equity +( Income -  Expenses)
> 
> to
> 
> Assets - Liabilities = Equity + (Income - Expenses).
> 
> This is still the same fundamental accounting equation. The point of
> expressing it in this form is that any point in time if the books are
> correctly maintained, the total of the balances of Assets - Liabilities must
> equal the total of the balances of Equity, including the temporary account
> balances, the nett of which is the Retained Earnings balance. This is a
> mathematical reality. It is irrespective of whether the books have been
> formally closed or not as that only transfers the temporary equity account
> balances to the permanent Equity account balance and does not affect the
> Assets and Liabilities balances. A balance sheet at the time the old books
> cease operation must satisfy the accounting equation.
> 
> My basic assertion is that if all the balances of the Assets and Liabilities
> accounts are transferred to the new books (but not the Equity and Income and
> Expense account balances) the Opening Balance entries to Equity implicitly
> contain the total contributions to Equity in the old book at the time the
> balances are transferred, negating any need to separately have an explicit
> Opening Balance for a Retained Earnings account.
> 
> David



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