The idea of accrual accounting is primarilyto tie income earned to the timing of activity that generates it and expenses to when the timing of the activity that incurred them and not when the actual payments are received.
A typical example might be a prepayment payment of an insurance premium at the start of the year but where the cover provided by the premium is spread equally over the whole year. That is a necessary expense to protect your income earning capacity. If it is expensed at the time the payment is made, i.e. date of Payment Asset:Bank Cr xxxx date of payment Expense:Insurance Dr xxxx it may occur at the same time as a lot of similar prepaid expenses and will skew the profit or loss for that initial sub accounting period for the year which can give a false impression of the businesses viability because then the relationship between the incurring the expense and the income earned from it is lost. To spread the expense, it might become in accrual accounting 1/1/24 Asset: Bank Cr xxxx 1/1/24 Asset:insurance prepayment Dr xxxx and each Month 1/x/24 Asset:insurance prepayment Cr xxxx/12 1/x/24 Expense:insurance Dr xxxx/12 Similarly with income. You might be paid at the end of a three month contract in a lump sum but the activity that earned the income occurs fairly evenly over that three month period starting on 1/2/25. 28/2/25 Asset:A/R Dr yy 28/2/25 Income Cr yy 31/3/25 Asset:A/R Dr yy 31/3/25 Income Cr yy 30/4/25 Asset:A/R Dr yy 20/4/25 Income Cr yy 30/4/25 Asset :Bank Dr 3*yy 30/4/25 Asset:A/R CR 3*yy Where you have reserved funds but the funds are still in a single bank account, one strategy would be to create sub accounts which total into a parent bank account. You would then debit the requisite sub-account when specific funds are received and/or allocated and credit appropriate income account and/or the top level bank account by the amount of the allocation respectively. Then as you spend funds on the reserved activity you would credit the appropriate subaccount for that activity and debit the relevant expense account. GnuCash has the facility to include sub-accounts in a reconciliation which makes reconciling such an arrangement easy. Using a liability account for this purpose instead of the sub account of the bank account has the disadvantage that the funds are transferred out of the Asset:bank account when the liability account is created and subsequent transactions are against the liability account. NOw try and reconcile your bank statement which has payments recorded as they are made and your GnuCash copy of the bank account which has a single payment. OK if you remember to match all the individual debits to the single credit. For personal accounting as long as it works and gives you the records you want and need and makes sense to you, then no problem. For businesses however you regulatory authorities might not approve and may even penalize you for not doing it the correct way and your accountant is gong to have to make more adjustments to your books before submitting returns so his share of your income goes up and your profit decreases. David Cousens On Fri, 2025-01-17 at 22:17 +0000, briancady413--- via gnucash-user wrote: > Hi folks, > > Another beginning bookkeeper here. Derek's advice sounds like what I > gathered as I tried to learn how to account for a operating reserve. > But explaining this to our group of non-accountants, at every > quarterly meeting, over and over again for years on end, has > convinced me that I now prefer the cash accounting method because I > just can not stomach another round of repeatedly answering the same > question, every quarter, for the rest of my bookkeeping service. > Brian- > When rich pool their money via a corporation, rich-owned media say > 'entrepreneurial' and 'fair'.When poor pool their labor via a union, > rich-owned media say 'restraint of trade' and 'unfair'.Who pays the > piper, calls the tune.Let's form a global, interfaith, multi-union, > democratic, community media powerhouse. > > > On Friday, January 17, 2025 at 04:58:44 PM EST, Derek Robinson > via gnucash-user <[email protected]> wrote: > > This sounds like what an accountant would call an accrual and is in > fact the fundamental transaction in accrual accounting. If I > understand correctly: > - You know you owe the money- You do not immediately have to pay the > money > The accountant would debit an expense and credit a liability, so that > the expense is incurred now (in general expenses are recognized when > you know you owe, not when you actually pay them) and the liability > appears on the balance sheet, decreasing your net worth at the time > you recognize the expense. When you pay the money you would credit > your bank account and debit the liability, so that the liability is > erased as you pay the money. Net worth does not change - both assets > and liabilities are decreased by the same amount in this second > transaction. > Contrast this with cash accounting, where you just know in your head > that you owe the money, but you only record the transaction when you > pay it. This is bad! > In practical terms consider a separate bank account for situations > like this, so you don't accidentally spend money you in fact owe. > > > This is more accounting/procedural than about Gnucash=2E > > Suppose I had an amount of money that I needed to protect so that it > was a= > vailable for a future occasion=2E What would be the "preferred" way > to do t= > his=2E > > I could create the transaction in the account ledger and future date > it=2E > > I could create an expense transaction, but not future date it, and > then wh= > en the time comes, repay it=2E > > I could transfer it to either an asset or liability account, and when > the = > time comes, repay it=2E > > I'd be interested in your thoughts=2E > > > > _______________________________________________ > gnucash-user mailing list > [email protected] > To update your subscription preferences or to unsubscribe: > https://lists.gnucash.org/mailman/listinfo/gnucash-user > ----- > Please remember to CC this list on all your replies. > You can do this by using Reply-To-List or Reply-All. > > _______________________________________________ > gnucash-user mailing list > [email protected] > To update your subscription preferences or to unsubscribe: > https://lists.gnucash.org/mailman/listinfo/gnucash-user > ----- > Please remember to CC this list on all your replies. > You can do this by using Reply-To-List or Reply-All. _______________________________________________ gnucash-user mailing list [email protected] To update your subscription preferences or to unsubscribe: https://lists.gnucash.org/mailman/listinfo/gnucash-user ----- Please remember to CC this list on all your replies. 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