[GNC] How to "Reserve" money?

[David Cousens]

The idea of accrual accounting is primarilyto tie income earned to the
timing of activity that generates it and expenses to when the timing of
the activity that incurred them  and not when the actual payments are
received.

A typical example might be a prepayment payment of an insurance premium
at the start of the year but where the cover provided by the premium is
spread equally over the whole year. That is a necessary expense to
protect your income earning capacity. 


If it is expensed at the time the payment is made, i.e.
date of Payment   Asset:Bank            Cr xxxx
date of payment   Expense:Insurance     Dr xxxx

it may occur at the same time as a lot of similar prepaid expenses and
will skew the profit or loss for that initial sub accounting period for
the year which can give a false impression of the businesses viability
because then the relationship between the incurring the expense and the
income earned from it is lost. 

To spread the expense, it might become in accrual accounting 

1/1/24   Asset: Bank                 Cr xxxx
1/1/24   Asset:insurance prepayment  Dr xxxx

and each Month
1/x/24   Asset:insurance prepayment  Cr xxxx/12
1/x/24   Expense:insurance           Dr xxxx/12

Similarly with income. You might be paid at the end of a three month
contract in a lump sum  but the activity that earned the income occurs
fairly evenly over that three month period  starting on 1/2/25.

28/2/25  Asset:A/R                   Dr yy
28/2/25  Income                      Cr yy

31/3/25  Asset:A/R                   Dr yy 
31/3/25  Income                      Cr yy

30/4/25  Asset:A/R                   Dr yy
20/4/25  Income                      Cr yy

30/4/25  Asset :Bank                 Dr 3*yy
30/4/25  Asset:A/R                   CR 3*yy

Where you have  reserved funds but the funds are still in a single bank
account, one strategy would be to create sub accounts which total into
a parent bank account. You would then debit the requisite sub-account
when specific funds are received and/or allocated and credit
appropriate income account and/or the top level bank account by the
amount of the allocation respectively.

Then as you spend funds on the reserved activity you would credit the
appropriate subaccount for that activity and debit the relevant expense
account.

GnuCash has the facility to include sub-accounts in a reconciliation
which makes reconciling such an arrangement easy.

Using a liability account for this purpose instead of the sub account
of the bank account has the disadvantage that the funds are transferred
out of the Asset:bank account when the liability account is created and
subsequent transactions are against the liability account. NOw try and
reconcile your bank statement which has payments recorded as they are
made and your GnuCash copy of the bank account which has a single
payment.  OK if you remember to match all the individual debits to the
single credit.

For personal accounting as long as it works and gives you the records
you want and need and makes sense to you, then no problem. For
businesses however you regulatory authorities might not approve and may
even penalize you for not doing it the correct way and your accountant
is gong to have to make more adjustments to your books before
submitting returns so his share of your income goes up and your profit
decreases.

David Cousens

On Fri, 2025-01-17 at 22:17 +0000, briancady413--- via gnucash-user
wrote:
> Hi folks,
> 
> Another beginning bookkeeper here. Derek's advice sounds like what I
> gathered as I tried to learn how to account for a operating reserve. 
> But explaining this to our group of non-accountants, at every
> quarterly meeting, over and over again for years on end, has
> convinced me that I now prefer the cash accounting method because I
> just can not stomach another round of repeatedly answering the same
> question, every quarter, for the rest of my bookkeeping service.
> Brian-
> When rich pool their money via a corporation, rich-owned media say
> 'entrepreneurial' and 'fair'.When poor pool their labor via a union,
> rich-owned media say 'restraint of trade' and 'unfair'.Who pays the
> piper, calls the tune.Let's form a global, interfaith, multi-union,
> democratic, community media powerhouse.
>  
> 
>     On Friday, January 17, 2025 at 04:58:44 PM EST, Derek Robinson
> via gnucash-user <gnucash-user at gnucash.org> wrote:  
>  
>   This sounds like what an accountant would call an accrual and is in
> fact the fundamental transaction in accrual accounting. If I
> understand correctly:
> - You know you owe the money- You do not immediately have to pay the
> money
> The accountant would debit an expense and credit a liability, so that
> the expense is incurred now (in general expenses are recognized when
> you know you owe, not when you actually pay them) and the liability
> appears on the balance sheet, decreasing your net worth at the time
> you recognize the expense. When you pay the money you would credit
> your bank account and debit the liability, so that the liability is
> erased as you pay the money. Net worth does not change - both assets
> and liabilities are decreased by the same amount in this second
> transaction.
> Contrast this with cash accounting, where you just know in your head
> that you owe the money, but you only record the transaction when you
> pay it. This is bad!
> In practical terms consider a separate bank account for situations
> like this, so you don't accidentally spend money you in fact owe.
>   
> 
> This is more accounting/procedural than about Gnucash=2E
> 
> Suppose I had an amount of money that I needed to protect so that it
> was a=
> vailable for a future occasion=2E What would be the "preferred" way
> to do t=
> his=2E
> 
> I could create the transaction in the account ledger and future date
> it=2E
> 
> I could create an expense transaction, but not future date it, and
> then wh=
> en the time comes, repay it=2E
> 
> I could transfer it to either an asset or liability account, and when
> the =
> time comes, repay it=2E
> 
> I'd be interested in your thoughts=2E
> 
> 
>   
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