[GNC] Handling of Equity and Retained Earnings

David Cousens davidcousens at bigpond.com
Tue Jan 21 17:58:56 EST 2020


Christian,

>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?

The balance sheet is just the state of the balances of the accounts at a
specified date. 

The Retained Earnings/Losses calculated there, if the books have not been
formally closed, is what the balance of a Retained Earnings account under
Equity would be if the balances of Income and Expenses had been transferred
to Equity in a closing procedure (assuming there are no other transactions
affecting that balance (e.g distributions to shareholders, company taxes etc
which are normally recorded against the Retained Earnings in most cases for
a business).

If the books have been formally closed the balance of the Retained Earnings
account  as a sub account of Equity should be displayed ( the transactions
doing this will have reset the Income and Expense account balances to 0 so
any retained earnings calculated from the temporary accounts should be 0) as
the Retained Earnings (and not be listed as a separate sub account of
Equity). Presumably if you have closed the books in the past but not for
some periods, the sum of the Retained earnings/Losses in Equity and the
calculated sum from the Income and Expense accounts should be displayed.
AFAIK this is how it should work and does.

I haven't personally checked out that it works for all possible cases
however, but we have enough users who formally close their books and those
who don't, that any discrepancy would likely have been reported long ago. 

>Income statement from the beginning of year 2 to the end of year 2. Income
statements *don't* contain equity items (someone prove me wrong?).

While in GnuCash Income and Expense accounts are assigned their own type
they are still formally equity accounts and their difference is included in
the Retained Earnings under Equity on a balance sheet. In principle your
Income and Expense accounts could exist as strict subaccounts of Equity and
appear in the account heirarchy as such. This is not the practioce in
accounting though.  They are maintained separately mainly as a matter of
convenience (and partly as a hangover from the days of pen and paper
accounting) so from their balances you can see how you are performing in the
current period (assuming you have done a closing operation for previous
periods). If you haven't closed the temporary accounts formally, the Profit
and Loss Statement which only includes transactions from the period set in
its options (which should default to the current period from your book
options) will give you the current position of these accounts.

Historically the current Income and Expenses for a business were recorded in
a separate physical book as were the asset and liability accounts for the
current period (current assets and liabilities)  for each financial
year/accounting period while the permanent accounts were maintained in
separate physical books with a journal tying the entries in the various
physical books together. With computer recording this is no longer necessary
but accountants like most of us tend to be happiest in the paradigm that
existed when they were trained. Even Einstein who turned physics on its head
was not happy in his heart with some aspects of quantum mechanics he helped
to create, primarily for this reason.

David Cousens



-----
David Cousens
--
Sent from: http://gnucash.1415818.n4.nabble.com/GnuCash-User-f1415819.html


More information about the gnucash-user mailing list