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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:

  1. Why Equity account is not changing?
  2. What to do to make changes in Equity account? Please give me example.
  3. What for is used Equity account in GnuCash?
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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.

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  • 2
    Not bad. 4 upvotes for reading the manual of a program I have never used. – Philipp Mar 4 '16 at 14:36
  • I'm confused by your second paragraph. Why do you say "save"? Do you mean update equity with profits and losses? Shouldn't it be, rather than moving amounts from assets, it should be moving income/expenses to equity? – Brady Trainor Oct 13 '19 at 18:03
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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,

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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 )

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