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210 lines
6.5 KiB
210 lines
6.5 KiB
<!DOCTYPE html PUBLIC "-//W3C//DTD HTML 3.2//EN">
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<html>
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<head>
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<link rel="stylesheet" title="normal" type="text/css" href=
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"gnucash.css">
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<title>Using Expense/Income Accounts</title>
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</head>
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<body>
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<h1>What are Incomes and Expenses?</h1>
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<p> The words "Income" and "Expense" are beguilingly simple;
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everyone <em> thinks</em> they know what they mean; this <em>
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usually</em> is that <b> When I spend something, this is an
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expense, and when I get money, this is an income.</b></p>
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<p> This oversimplifies things somewhat; it is often a <em>
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good-enough</em> approximation when doing personal accounting,
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but when running a business, incomes and expenses often have be
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recognized as having occurred when some "critical event" takes
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place that may not perfectly correspond to "when cash comes in
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or goes out."</p>
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<p> For instance, companies usually have to recognize income
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<em> when the sale occurs.</em> That may mean that I have to
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recognize a $100,000 sale <em> at the moment I and the customer
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shake hands on the deal.</em></p>
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<p> Since the money hasn't come in, the sale has to be
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estimated in other way; the way this is done is to <b>
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accrue</b> a sale at that time, and in making the transaction
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balance, rather than adding something in to cash, I'd add the
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$100,000 sale to <b> Accounts Receivable.</b></p>
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<p> In a double entry system, two kinds of accounts must be
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created: some of type "Income" and others of type "Expense."
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(There tend to be a lot more different kinds of expenses than
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there are of incomes.)</p>
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<p> Income such as salary, wages, bank interest and stock
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dividends are then recorded as transfers from an income account
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to a bank (or, in general, some asset) account. Similarly,
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expenses are recorded as transfers from a credit card account
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(or, in general, a liability account).</p>
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<p> Another way of describing the requirement for "double
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entry" is that when you receive an income, two things
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happen:</p>
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<ul>
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<li>You receive a sum of <em> money,</em> and must record
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that effect on your bank account.</li>
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<li>You have received an income, and must record that effect
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on an income account.</li>
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</ul>
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<p> When, for instance, salary is deposited in a bank account,
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the bank account is credited, and the income account is
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debited, thus:</p>
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<table>
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<tr>
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<th>Account</th>
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<th>Debit</th>
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<th>Credit</th>
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</tr>
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<tr>
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<td>Chequing Account</td>
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<td>1,600.00</td>
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<td>
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</td>
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</tr>
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<tr>
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<td>Salary</td>
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<td>
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</td>
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<td>1,600.00</td>
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</tr>
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</table>
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<p>This may be readily extended to a greater number of "split"
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items thus:</p>
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<table>
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<tr>
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<th>Account</th>
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<th>Debit</th>
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<th>Credit</th>
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</tr>
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<tr>
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<td>Chequing Account</td>
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<td>1,300.00</td>
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<td>
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</td>
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</tr>
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<tr>
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<td>Income Taxes</td>
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<td>200.00</td>
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<td>
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</td>
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</tr>
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<tr>
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<td>Health Plan</td>
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<td>100.00</td>
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<td>
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</td>
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</tr>
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<tr>
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<td>Salary</td>
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<td>
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</td>
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<td>1,600.00</td>
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</tr>
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</table>
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<p> There may be a whole lot more than two entries in the
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transaction, but the total sum of the Debits, $1,600.00, still
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equals the total sum of the credits, $1,600.00.</p>
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<p> If, as with <b>GnuCash,</b> everything is forced onto one
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column, so that <b> debits</b> are represented by positive
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values, and <b> credits</b> are represented by negative values,
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the income/expense accounts do a slightly non-intuitive thing
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and you see incomes as <em> negative</em> values. That <em>
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appears</em> contrary to intuition, but is nonetheless
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necessary in order for the <a href="xacc-double.html#IDENTITY">
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double-entry bookkeeping identity to hold true.</a></p>
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<p> Another way in which income and expense accounts are
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special is that their account totals do not directly appear on
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a balance sheet. A balance sheet shows "Net Worth": the sum of
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all assets minus all liabilities.</p>
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<p> Income and expenses are neither assets nor liabilities, and
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so do not appear on the balance sheet. What appears on the
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balance sheet is their effects on <b> equity.</b></p>
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<p> There is a separate report, a "Profit and Loss" (P&L)
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report, to analyze income and expenses. The total profit (or
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loss) is calculated as total income less total expenses. In a
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nicely symmetrical fashion, since assets and liabilities are
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neither income or expenses, <em> they</em> correspondingly do
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not appear on a P&L statement.</p>
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<p> Even though these accounts may be somewhat "special", you
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do not need to do anything particularly special to use income
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and expense accounts. GnuCash handles the values automatically,
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so that if you record properly the effects of the transactions
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on your bank account or credit card, the income/expense side of
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the transaction should also be handled correctly.</p>
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<p> The time when things get "peculiar," and when you need to
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more deeply understand this, is when amounts are transferred
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between income/expense accounts. (The <i> causes</i> for such
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transfers tend to be somewhat peculiar, so it's pretty fair for
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this to be a pretty odd situation.)</p>
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<h1>Using Income/Expense Accounts</h1>
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<p> To use an income/expense account, simply create one from
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the "New Account" dialogue window, and then be sure to transfer
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income/expenses to it as you record paychecks, interest,
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etc.</p>
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<p> You will doubtless wish to create quite a number of income
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and expense accounts; it may be worth looking at the <a href=
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"xacc-groups.html#SAMPLECHART"> Sample Chart of Accounts</a>
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for ideas.</p>
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<p> This partitioning of incomes and expenses is likely to
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prove particularly useful for North Americans when <i>income
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tax time</i> rolls around.</p>
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<h1> Use of Terminology In Other Software</h1>
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<p> If you have used other personal finance software, be aware
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that <a href="xacc-quicken.html#QUICKENCATS"> Quicken calls
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them "Categories."</a></p>
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<hr>
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<p> Return to <a href="xacc-main.html"> Main Documentation
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Page.</a></p>
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</body>
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</html>
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