[GNC] Handling of Equity and Retained Earnings

[David Cousens]

Michael

I don't think we are attempting to give accounting advice per se. GnuCash
has two ways of dealing with retained earnings:

1 Formal book closure operation in which income and expenses are closed to
an equity account which is most often referred to as Retained Earnings and
from which disbursements of the capital (with the associated entries to the
Assewt accounts).

2 Calculation of Retained Earnings in reports with no closure process to
equity with all transactions retained in the temporary accounts.

Christian's original question pertained to the requirement in Denmark for a
balance statements and a statement of results. I would identify these with
the GnuCash Balance Statement and either the  Income Statement and the
Profit and Loss Reports. He will of course have to check whether these
standard reports meet his jurisdictional requirements.

In his reply Adrien raised the issue of an Opening Balance for Retained
Earnings when transferring from another program or when creating a new book
and transferring balances from an existing book and whether this was
possible in GnuCash (creating the entry) and it is this issue I was
specifically addressing. 

The point I was making is that if you have entered the Opening Balances for
all Asset and Liability accounts from a previous set of books with
corresponding entries to Opening balances in Equity in a new book/file, the
equity entries implicitly include any retained earnings balance from the
previous book and there is no necessity to have a Retained Earnings balance
carried forward from the previous book/file. 

This is a matter of the fundamental process of accounting, independent of
any matters pertaining to any specific jurisdiction, although jurisdictional
practice may introduce further complications on top of this and independent
of whether a formal closure process is used or simply the reliance on the
report calculations. Any accounting program will have to be compliant with
this to meet the fundamental requirements of any accounting system set out
in the Fundamental Accounting equation or its extended version. I am very
confident that GnuCash has this implemented properly and meets this
requirement.

The new Account heirarchy, at least in some of the options (I think in the
Business Features option) creates a Retained Earnings account and quite
correctly sets its value to zero and that value cannot be edited in the
setup process.

Any user can of course create an opening transaction to that account
manually. Again I am making the point that in the specific circumstances
where only the Asset and Liability account balances with the appropriate
entries to equity have been transferred to a new book such an entry to
Retained Earnings is neither necessary or required and manually creating
one, if not done carefully with appropriate adjustments to the Opening
Balance values, will result in the new book/file starting balances not
correctly reflecting the balances of the old book/file at the end of its
use.

The intention is not to advise anyone of how a corporation should be
accounted for in a specific jurisdiction, but is to reassure Christian and
other users that GnuCash is operating in accordance with the fundamental
principles of  accounting practice that apply in all jurisdictions and has
the flexibility to implement manually any specific jurisdictional
requirements. 

We will on occasions have to venture into what such requirements may be to
ensure that they can be implemented. Any suggestions made should of course
be checked with a qualified practitioner in the jurisdiction in question and
not relied on as specific advice. Perhaps this needs to be a general
disclaimer on all and any posts to the list (and possibly already is).

While this is also not a discussion list for formal accounting procedures
per se, it is impossible to discuss GnuCash's operation totally
independently of those formal fundamental requirements that are common to
any and all jurisdictions.

For the record I hold a Masters degree in accounting but I am not a
registered practitioner in Australia (additionally required to offer
professional advice to the public). I have done the accounting for some
business operations in the past - currently retired). That is less relevant
though than what the accepted core fundamentals of all accounting systems
world wide are and the implications of them.

I am posting the above summary to clarify at least my perception of what was
being addressed which sometimes gets lost in the individual posts when we
get a little bit sidetracked on side issues from the original OP's question.

David




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David Cousens
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