[GNC] Handling of Equity and Retained Earnings

Tue Jan 21 10:36:59 EST 2020

I thank you all for the discussion, it has been very interesting.

What I am trying to do is to establish a workflow with GnuCash that provides some decisions on the three somewhat intertwined questions:
How to handle the transition from one year to the next
What reports provide the information I need
How my account tree should look to support the above

Just for context, I am starting from scratch and have only a very modest number of transactions in 2019, so it is quite easy for me to make some experiments.

I am tempted to go the route of not closing books, as that seems to be both recommended and the easiest to handle, but I still have some problems understanding how to make that work.

The requirement from the danish tax authorities on a small single person company is quite modest. One is required to do book keeping but there are not strict requirements on how that is done, basically the only thing is that the books should make it clear how the result of the business has been derived. For taxation, only the result should be reported and the books should only be sent in to the authorities if explicitly requested. The taxation year follows the calendar year.

In my current attempt, I have one equity sub-account for the money I put into (or take out) of the business and thus no equity accounts for neither retained earnings or opening balance as one would get from the account wizard.

I am struggling a bit to find out how to get this to work in the rolling model.

It does seem as if the balance sheet contains all the information I need, however have I understood it correctly that one only specifies a single date (as opposed to an interval)? In other words, does the balance sheet always produce the accumulated result from the beginning of the book to the selected date? There is another report called Equity Statement that works on periods and while it has the end result, it lacks all of the individual account details that the balance sheet has.

Somewhat related to this, I am also still struggling to figure out to handle the equity. On the Balance Sheet, I see the equity sum and the result, but the two are not combined. Are there any alternative to closing the book or do some manual transaction to get equity rebalanced?

Let me try to provide an example.

In year 1, I put 1000 into the company which is added to the equity sub-account “Founder Deposit”, the company buys a computer for 100 and does some work that pays 200. On the Balance Sheet for year 1, this is listed as equity of 1000 and result (income - expense) of 100. Lets say the company in year 2 also does work that pays 200, how do I handle that year 2 starts with equity of 1100, rather than equity of 1000 and a result of 100? I can move the result to equity by closing the book, but is there any report that takes this into account without actually doing the close?

/Christian

> Den 18. jan. 2020 kl. 00.34 skrev David Cousens <davidcousens at bigpond.com>:
> 
> 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
> 
> 
> 
> 
> -----
> David Cousens
> --
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