The accounting equation says that the difference between total assets of a business and its total liabilities equals its net worth (equity).
Assets – Liabilities = Equity
This can further be expanded when we consider the income and expense. The equity (net worth) increases when receiving an income and decreases when money is spent for something (expense).
Assets – Liabilities = Equity + Income – Expenses
The above equation has five accounting entities (accounts):
|Assets||Things that are owned. For example, money in the bank, car, building, etc. that the business owns|
|Liabilities||Obligations owed to other businesses and people are considered liabilities|
|Equity||Overall net wealth, the shareholders of a business can claim at any point in time after paying off debts|
|Income||Money earned through sales, interest from bank deposits, etc.|
|Expense||Money spent on rent, utilities, repair of vehicles, insurance, etc.|
As GnuCash can be used for personal as well as small business accounting, we need to decide which accounts to be created initially. As time goes by, new accounts can be added, existing accounts modified or deleted based on requirements.
Chart of Accounts
The accounts being used for a business have to be arranged in a hierarchical, tree structure called a chart of accounts. GnuCash provides much flexibility in the organization of the accounts within the chart of accounts. The chart of accounts can be created from a predefined set of accounts using the “New Account Hierarchy Setup” wizard or manually by creating each of the required top-level accounts and the subaccounts.
When the GnuCash program starts, a popup window will appear, showing Tip of the day. It can be disabled by unchecking the “Show Tips at Startup” checkbox and then the Close button.
Creating Chart of Accounts using Wizard
1) Open GnuCash Application
2) From the top menu select File -> New File which will open the wizard
3) Click Next at the account setup wizard
4) Enter the business details such as Company Name, Company Address, contact, Company ID (Business Tax Number), etc. and click next
5) Select the default currency for the business depending upon the country where it is located and click Next.
6) Select the language and region-specific categories as relevant to the business. Also select the account types. For example, “Common Account” and “Business Accounts” have been selected in this case as we are planning to create the chart of accounts for a small business. Additional accounts can be added / deleted and also existing accounts modified later if needed. Click next.
7) The next dialog box displays the accounts created. If the name of any account needs to be changed, it can be done by clicking on the row containing the account and clicking on the account name and changing it. The accounts marked as “Placeholder” do not usually have opening balances or transactions. The placeholder accounts are meant for creating the account hierarchy. All accounts other than Equity and placeholder accounts can have opening balance. The opening balance can be entered by clicking on the specific row of the account and entering the value at the corresponding field. Once the accounts have been updated, click Next.
8) Click Apply at the Finish Account Setup” dialog box.
9) The top-level accounts are listed and a dialog box pops up asking for the name of the file which will contain the new chart of accounts. Select the correct folder, enter the file name and then click “Save As”.
10) The file is saved and the accounts tree is displayed.
Deleting an account from the chart of accounts
If an account is not needed, it can be deleted by right clicking on the corresponding row and then selecting the “Delete Account…” popup menu option. The following screenshot shows, the “Recreation” account being deleted.
Adding a new account to the chart of accounts
A new account can be added by right-clicking at the parent account and selecting “New Account…” from the popup menu option. A new dialog box will prompt for the details such as the name of account, description, account number, etc. The opening balance can also be entered at the corresponding field at the “Opening Balance” tab. Click OK to finish adding the new account.