[GNC] Equity Account "problem"

[Default User]

On Wed, 2023-07-12 at 10:21 +1000, David Cousens wrote:
> The calculation of Equity is automatic and built into double entry
> accounting
> system. This is the purpose to a large extent of the two or more
> entries
> (referred to as splits in GnuCash documentation) associated with a
> single
> transaction. Income and Expenses are Equity accounts that are split
> off from
> equity with the primary purpose of measuring the short term loss or
> gain over a
> specific period and you will notice if you look through the examples
> in the
> GnuCash Help Manual and Tutorial Guide that most transactions involve
> one split
> to an asset or liability account and another to either an Income or
> Expense
> account except where the transaction is regarded as a capital
> purchase which
> will produce income over more than a single accounting period
> (usually annually
> but can be semi annually or monthly). 
> 
> It can be circumvented by not following the recommended procedures.
> First you
> need to understand the double entry accounting system basics and then
> GnuCash's
> implementation of it.There are on line resources on double entry if
> the
> introduction in the gude and help manual is too brief for your needs.
> 
> David Cousens
> 
>  
> On Tue, 2023-07-11 at 18:48 -0400, Default User wrote:
> > Hi! 
> > 
> > Is there a way to have Gnucash 4.13 (Debian GNU/Linux 12 Bookworm)
> > automatically calculate, and update "Equity" in the main accounts
> > tab,
> > to show the "real" value of total Equity, after any action (or at
> > least
> > transaction) that would affect "real" equity?  
> > 
> > Example: 
> > Start with the GnuCash "Common Accounts", as in gcashdata_1.gnucash
> > from the Tutorial and Concepts Guide, with all accounts set to
> > $0.00.
> > 
> > Now make a transaction so that Equity:Opening Balances starts with
> > $10.00, and Assets:Current Assets:Cash in Wallet starts with
> > $10.00. 
> > At this point, Equity = $10.00.  All good so far.
> > 
> > But now, enter a transaction such as Expenses:Auto:Fuel (increase
> > by
> > $5.00), paid by transfer from Assets:Cash in Wallet (decrease by
> > $5.00). 
> > 
> > So now: 
> > Assets = $5.00 
> > Liabilities = $0.00 
> > Equity = $10.00
> > 
> > So . . .  if Assets - Liabilities = Equity, then 
> > $5.00 - $0.00 = $10.00? 
> > 
> > Thus, Equity does not seem to include the $5.00 Expense
> > transaction. 
> > [Note: of course, the Balance Sheet in Reports does correctly show
> > Equity as $5.00.]
> > 
> > I assume that GnuCash has always been this way, from the beginning,
> > and
> > is not likely to change now!  
> > 
> > But is there a viable "workaround"?  I am pretty sure I understand
> > what
> > is going on, and maybe why it was done that way (so that the
> > account
> > ledger tabs show legitimate transactions" only?) 
> > 
> > But it does bother my sense of "correctness".
> > 
> > [Note: I did see somewhere online a link to a web page that may
> > have at
> > one time shown the desired solution, but the web page has since
> > been
> > 404'd.]
> > 
> > : (
> > 
> > 
> > 
> > 
> > _______________________________________________
> > gnucash-user mailing list
> > gnucash-user at gnucash.org
> > To update your subscription preferences or to unsubscribe:
> > https://lists.gnucash.org/mailman/listinfo/gnucash-user
> > -----
> > Please remember to CC this list on all your replies.
> > You can do this by using Reply-To-List or Reply-All.
> 
> _______________________________________________
> gnucash-user mailing list
> gnucash-user at gnucash.org
> To update your subscription preferences or to unsubscribe:
> https://lists.gnucash.org/mailman/listinfo/gnucash-user
> -----
> Please remember to CC this list on all your replies.
> You can do this by using Reply-To-List or Reply-All.


Hi, David!

Thank you for your reply.  Especially the suggestion to "read up" on
double-entry accounting.  In that regard, I am reminded of the ancient
Greek or Roman commentator who said (approximately):

"Much study is a great weariness, and of writing books there is no
end". 

Anyway, may I just say by way of explanation, that I think the
fundamental basis of my frustration is that the definition of Equity
seems to be inconsistent and even contradictory. 

It seems that one can say: 
Assets - liabilities = Equity

But in the next breath, they can say:
Assets - liabilities = Equity + (Income - Expenses)

Well, which is it?  Does Equity include (Income - Expenses) or not?

The cognitive dissonance here is astounding!  

It would seem to me that the only times [Assets - liabilities = Equity]
and [Assets - liabilities = Equity + (Income - Expenses)] are in
synchronization are when Equity consists of, perhaps, only the opening
balances of its component accounts, OR when the balances of Expense and
Income accounts are at some specific point in time, transferred to
Equity, in which case both definitions of Equity are true.

May I suggest that such transfers are usually only done, say, every
fiscal year (or quarter, or whatever), normally when the "books are
closed", at the end of a designated accounting period. 

May I further postulate that such behavior was because historically, in
an ink pen and paper world, this was a real chore, not to be done every
day (let alone every hour, minute or second!).  Once upon a time, it
made sense.  

But that was then.  This is now.  In the modern computerized,
networked, split-second world, Perhaps the concept of the Balance sheet
being for an instant frozen in time, connected to another balance sheet
, for another instant frozen in time, connected only by Income
Statements explaining how we got from the earlier Balance Sheet to the
later Balance sheet, is at best a quaint anachronism, that may no
longer be necessary.  

Now, I am not saying that Income Statements are not of value.  Indeed,
they are of the greatest value, showing trends and the how and why we
got from one arbitrarily chosen point in time to any other arbitrarily
chosen point in time.  

So, Why NOT have Balance sheets update instantly in time with every
transaction, so that [Assets - liabilities = Equity] ALWAYS = [Assets -
liabilities = Equity + (Income - Expenses)]?  It would seem to be more
immediately useful, and of course, more rationally consistent. 

SO, why not?  Well, for the sake of argument, let me suggest a few
possible reasons:

1) Resistance to change.  The movements of physical objects in space
are not the only things subject to inertia.  Human behavior is, of
course, subject to inertia as well.  Consider: nothing changes unless
something makes it change. One form of this is known as "appeal to
tradition.  ("We've always done it this way, why change")?  Also
sometimes expressed as the (sometimes valid), "If it ain't broke, don't
fix it"!

2) Vested Interests.  There are people who have a vested interest in
the promulgation of, and the enforcement of the promulgation of, the
status quo, as do many others, further down the "food chain".  To quote
from the movie "The Sand Pebbles", "It's his rice cup!".  

3) Desire to conform.  "Everyone else is doing things a certain way, so
I should, too".  For many people, conformity to existing norms is not
just a survival mechanism, but is so deeply inculcated that they may
not even be aware of it.  And pardon me for suggesting that the
quintessential stereotype of the conformist is the accountant.  (In
evidence: the "Accountancy" skit from the comedy television show "Monty
Python's Flying Circus".

I didn't mean to run so long, but when I get going, I get going.
(Remember "inertia"?) 

Well, that's my story, and I'm sticking to it.  Comments are welcome,
but No Bully, please!  

Have a good day!