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I've just started accounting and entering initial balances for my personal finances with GNUcash and I'm curious about the proper way to account for interest charged on student loans and credit cards.

To enter an initial balance I would usually balance the amount against Equity:Opening Balances. However, if I enter an expense in my loan interest expenses account, my equity increases. This seems intuitively wrong to me. The way I see it, I can solve this one of two ways.


Let's say I have the following structure (Equity:Loan Opening Balance is only used in the first scenario)

Equity
-> Loan Opening Balance
Expenses
-> Interest
  -> Example Loan Interest
Liabilities
-> Loans
  -> Example Loan
  1. I enter the initial amount (and future interest charged) as a rebate in Expenses:Interest:Example Loan Interest against Equity:Loan Opening Balance. This results in a decrease in my equity as I would expect. However, charged interest is now reflected as a negative balance Expenses:Interest:Example Loan Interest, which also seems wrong.

  2. I enter the interest as an expense in Expenses:Interest:Example Loan Interest against Liabilities:Loans:Example Loan. This increases the amount of the liability account while the interest account also remains positive. In this situation, though, the liability account reflects the principal and interest charged. Is this right, or should that liability account only reflect the principal amount?

I feel like #2 is the way to go, counting payments towards the loan as decreases in Liabilities:Loans:Example Loan. When the loan is paid off, this account will have a balance of 0 and Expenses:Interest:Example Loan Interest will end with a balance reflecting the total amount of interest charged and paid. Does this sound right?

1

Keep the Opening Balances account for recording actual opening balances of other accounts.

The opening balance is the amount of funds in a company's account at the beginning of a new financial period. It is the first entry in the accounts, either when a company is first starting up its accounts or after a year-end. - debitoor

Your approach 2 looks reasonable. Interest payable is an expense. If you incur both tax deductible and non-deductible interest, you might even want to have a separate expense accounts for each to help with tax reporting.

When you roll over to a new year, the (old) year’s entries get zeroed and transferred to Retained Earnings.

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