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I'm trying to bring some organization to my personal finances. I'm looking at tools like GnuCash, but I'd like to really understand how they work, and after reading bits and pieces about double entry accounting I'm still confused on a few points.

Let's say I have a series of transactions that looks something like this:

Date Note Amount Debit Credit
1/1/2021 Opening balance 1000 Bank:Savings Equity:Opening balance
1/1/2021 Opening balance 1000 Bank:Checking Equity:Opening balance
1/2/2021 Lunch 10 Food:Eating out Cards:Visa
1/15/2021 Paycheck 2000 Bank:Checking Income:Paycheck
1/20/2021 Cash 100 Cash Bank:Checking

That gives me account balances that look like:

Account Type Balance
Equity:Opening balance Capital 2000.00
Bank:Checking Asset 2900.00
Bank:Savings Asset 1000.00
Cash Asset 100.00
Income:Paycheck Revenue 2000.00
Food:Eating out Expense 10.00
Cards:Visa Liability 10.00

Assuming I've categorized things correctly there, I can plug those values into assets = liabilities + equity (or assets = liabilities + capital + revenues – expenses) and get:

(2900 + 1000 + 100) = (10 + 2000 + 2000 - 10)

Or:

4000 = 4000

So that all seems to work, but is it correct?

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  • What is the reason you decided to use double-entry for personal finance?
    – Hart CO
    Aug 16 '21 at 22:28
  • I'm mostly just interested in whether or not I'm understanding this correctly, rather than engaging in a discussion about whether it's appropriate or not. If you think this is a terrible question please feel free to downvote and move on.
    – larsks
    Aug 16 '21 at 22:32
  • 5
    It's not a terrible question, I asked about the reasons because I want to know, not debate. Your setup appears fine, the fundamental accounting equation is satisfied. What are the few points you're confused by?
    – Hart CO
    Aug 16 '21 at 22:59
  • I'm not an accountant, but your coding in your examples looks pretty good to me. Aug 29 '21 at 4:09
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That's entirely correct!

I use GNUcash for my personal finance and would never ever use anything else than double-entry accounting.

About the only complaint of GNUcash is that its currency handling is a bit tricky: it required some trial and error to figure out how to do it for foreign stocks (I use it so that I create an EUR-based account "USD in EUR" under "Stocks", then a USD-based account "USD" under "USD in EUR", and then accounts under "USD" for the individual stocks that are not currency accounts but stock accounts), and it generates "imbalance" on stock purchases made using foreign currencies. I still haven't understood why the "imbalance" happens but its usually only few cents per transaction.

Once you start to use GNUcash more, you have to figure out some strategy to categorize every item you have as an "Asset" or "Expense". My current strategy is that I categorize everything that has a non-trivial cost (for example extension cords have a trivial cost) and that are likely to last at least few years (for example many clothes don't last more than a year) as assets, so I have a lot of asset accounts for different items I own, and everything else like extension cords and many clothes as direct expense at the time I buy them.

If some item is expected to last less than a decade and/or is quite expensive and/or depreciates rapidly due to prices of new items reducing quickly (for example computers), I also set up a monthly automatic depreciation rule to it, so its value goes to zero and the asset is gradually converted to an expense. For those items that are expected to last very long, and are not very expensive, and prices of new similar items don't reduce rapidly (for example many tools fit all these categories), I mark it as expense at the moment it breaks or at the moment I realize I won't need it anymore.

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Yes, that looks correct!

You could make a balance sheet for yourself as well:

Assets                           Liab
Cash: $   100                    Visa: $ 10
Ck:   $ 2,900
Sv:   $ 1,000                    Equity: 
                                 Opening Bal: $ 2,000
                                 Net income:  $ 1,990

Total Assets: $ 4,000            Total Liab & Eq: $ 4,000

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