[GNC] Equity Account "problem"

[David Cousens]

The answer is unfortunately it is both. I think Michael has already explained
that Income and Expenses are actually temporary Equity accounts which are kept
separate so that the profit/loss and other parameters of interest in running a
business can be calculated over a shorter term either for management and/or tax
calculation purposes. To get the cuurent equity at any point mid period you
would use the balance of the Equity account + Income balance - Expense Balances
at that date. A standard Balance Sheet report should give you the Equity 
balance and a Income/Expensereport to the same date as the balance sheet to get
the relevant Income and Expense balances for the calculation.

If your programming skills are up to it, you could create a customized net worth
report .

David Cousens

On Wed, 2023-07-12 at 17:35 -0400, Default User wrote:
> 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.]
> > > 
> > > : (
> > > 
> > > 
> > > 
> > > 
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> 
> 
> 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!
> 
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