What is the purpose of Equity account in GnuCash?
For example, I have income through Salary account $500, after I have expense by buying book for $5 (so in Expense:Books account is entry for $5). But Nothing in Equity account is changing (it was before $0 and it is now $0).
Questions:
The Equity balance is your Assets (stuff you own) minus your Liabilities (debts you owe to others). It represents your "net worth" - how much money you would have when you would pay all your debts. When you want anything to show up in Equity, you need to make use of the asset and liability sheets.
As long as you only manage Income and Expenses, your equity won't change. When you want to "save" money so the saved up money appears as an Asset and thus affects your Equity, book it as an expense to your Cash or Bank asset account.
For more information, check Chapter 3 of the GNUCash manual.
My current understanding is thus:
The accounting equation is
Assets = Liabilities + Equity
I take this from https://en.wikipedia.org/wiki/Accounting_equation. I think we take this as the definition of equity.
GnuCash agrees with that equation in its "static" equation. See https://www.gnucash.org/docs/v3/C/gnucash-guide/basics-accounting1.html#accounting_equation_static.
So far, this agrees with @Phillipp's answer from 2015.
But then they disagree with this when we get to their dynamic equation, at https://www.gnucash.org/docs/v3/C/gnucash-guide/basics-accounting1.html#accounting_equation_dynamic, which is
Assets - Liabilities = Equity + (Income - Expenses)
But for most of the year, this is what GnuCash's usage of equity actually obeys. So almost all of the time, GnuCash's definition of equity is in disagreement with the accounting equation, and @phillipp.
In other words, we have something like,
AccountingEquity = GnuCashEquity + (Income - Expenses)
They mostly only agree when GnuCash users have zeroed out their income and expense accounts. This could be situations such as, when users first add their opening balance, or, when they have closed out their books at end of year.
See also this answer, where they have pointed out the same issue: https://money.stackexchange.com/a/23996/90768
You'll find a similar point about GnuCash raised in http://gnucash.1415818.n4.nabble.com/how-to-automatically-update-equity-account-as-each-transaction-is-entered-td4684200.html.
Income and Expenses are actually temporary Equity accounts. At the end of the current period, they are normally closed( i.e. their balances are transferred) to an Equity:Retained Earnings account.
Another way to put all this might be, GnuCash's equity is your net worth, but missing any recent profits and losses that have not been closed.
Perhaps this is fine. Consider the following from https://en.wikipedia.org/wiki/Equity_(finance)#Shareholders'_equity.
Shareholders' equity is obtained by subtracting total liabilities from the total assets of the shareholders. These assets and liabilities can be:
- Equity (beginning of year)
- + net income
- - dividends
- +/− gain/loss from changes to the number of shares outstanding.
- = Equity (end of year) if one gets more money during the year or less or not anything
This suggests it is formal enough to interpret GnuCash's equity as the beginning of year equity.
I'm not sure how closing out is done in GnuCash, but compare this answer for ledger-cli, which presumably inherits the account structure from GnuCash. From https://ledger-cli.narkive.com/8fhP7Yhq/year-end-book-closing,
As the last entry of the year on the ledger file I want to do a standard book closing. To take total income and total expenses and use these to zero out the income and expenses accounts and add the total of these to the equity account.
So I think you want to add a transaction at end of year, which zeros out income and expenses, and adds their complement to equity.
As for how to do this in GnuCash, a search for "gnucash close books" gives me results such as,
equity accounts in Gnucash are not "your equity"
they are "transactions" of "equity nature"
basically if you lend something to someone you still "own" it. therefore the money (assets) you have is different but your equity is the same. you can think of equity account as a way to reflect transfers like opening balances (year to year) where you are basically adjusting your equity value whitout having "actually" gained anything.
you can use this for many transfers of assets where you did not spend the asset or did not gained any revenu but assets comming or going from/to outside of the "book" (if say you maintain a book for different enterprises you choose to have )
There are two "Equity" items you may be thinking of:
The Equity item on the balance sheet. As per the accounting equation Equity = Assets − Liabilities, the Equity item on the balance sheet is just equal to the value of the Assets account, minus the value of the Liabilities account.*
The Equity account of type "Equity" in the chart of accounts. The value of this account usually equals your equity at the start of the accounting period (that is, when the books were opened). As such, this account is typically only used to record opening balances; the default account Equity:Opening Balances is created and credited when initially creating your books, adding accounts to your chart of accounts, and setting the opening balances on your accounts. Transactions which increase or decrease your equity after the books have been opened are recorded in Income and Expenses, respectively. If you decide to close your books, the balances of Income and Expenses are transferred to Equity, thereby reflecting the change in your equity during the accounting period. However, closing the books is not necessary to see your change in equity reflected on reports such as the balance sheet, as those figures are calculated on the fly.
From the GnuCash Tutorial and Concepts Guide for version 4 — §6.4 Other Considerations for Expense Accounts:
One point to consider is that as your use of GnuCash continues, the balances in [expense] accounts will grow, since there are usually very few credit transactions that reduce the balances. There is nothing wrong with this situation, but some users may wish to clear the balances in their expense accounts periodically. Zeroing transactions can be entered that transfer the balance of the account to an Equity account. GnuCash includes a Closing Books procedure that includes zeroing out expense accounts. Keep in mind that this is not necessary, and that if you need to gather information on a given expense account, you can use various reports to extract that data without zeroing the account out.
From the GnuCash Wiki, Closing Books:
It should be noted that GnuCash reports should be able to provide accurate year-end data for accounting purposes without zeroing transactions, so book-closing may not be necessary. Leaving books unclosed does mean that account balances in the Chart of Accounts will not show Year-To-Date amounts.
Since 2.2.4, there has been a menu item for closing the books under Tools → Close Book. This item creates two zeroing transactions (one for expense accounts, one for income accounts). Each account in those portions of the accounts tree is reset to zero by transferring from the equity account of your choosing.
*Well, it should equal that — it is actually calculated as:
If this figure does not equal Assets − Liabilities, then something is wrong with your books! Perhaps you have generated the report by choosing a set of accounts which don't balance.
To add to the other excellent answers:
Your personal equity after the two transactions you mentioned is $ 450.
$ 500 income - $ 50 expense
GnuCash (and other accounting software) knows that, and reflects that in various reports (see below). But the actual equity account itself is only updated in the year-end close process.
During the year, your 'equity' is called 'Net Income' or other similar term. The way to see that is on an income statement.
Your income statement after the two transactions should show income of $ 450, expense of $ 50, and net income of $ 450.
Your balance sheet should show cash of $ 450 and 'Net Income' (or similar) for $ 50.
Transactions:
Debit Cash $ 500 Credit Salary Income $ 500
Credit Cash $ 50 Debit Book Expense $ 50
Results:
Cash - Debit (positive) balance $ 450 Net Income (running total) Credit balance $ 450
Salary Income - Credit (positive) balance $ 500 Book Expense - Debit (positive) balance $ 50
The year-end close process will clear all activity out of the revenue accounts, clear all activity out of the expense accounts, and put the net total of all those transactions (plus or minus) in the equity account.
Then with the new year, transactions will again show up in the income statement all year long, until the year-end close process at the end of the second year.
