Opening balance for an income or expense account?
Derek Mahar
account? What account would you specify for the other side of the
transaction? Would you specify "Equity:Opening Balances" as for
assets and liabilities, or "Equity:Retained Earnings", or some other
equity account? According to http://www.businesstown.com/accounting/basic-terms.asp,
at the end of the accounting period ((usually end of year),
accountants transfer the balances in income and expense accounts to
retained earnings which reduces the income and expense accounts to
zero. Given this operation, should the opening balance for income and
expenses account only for transactions since the beginning of the year?
Derek Mahar
> How do you specify an opening balance for an income or expense
> account?
opening balances as a result of a loan to a friend after that friend
has already made one or more payments, each of which includes both
interest and principal. For example, suppose that in January of this
year I loaned $500 to a friend and since then, my friend has already
repaid $200 plus $10 in interest. How do I specify the opening
balance transaction on May 1 so that I take both the principal and
interest payments into account?
Derek
Mark Carter
When you give the loan, the transaction will be something like:
Dr (debit) Loan $500
Cr (credit) Cash $500
So, you take $500 out of cash, and give it to your friend.
Suppose your friend pays you $210 at the end of April, being $200
repayment of principal, and $10 interest. The double-entry would be:
Dr Cash $210
Cr InterestRecd $10
Cr Loan $200
So, the Loan will show a debit balance of $300 - which is the
principal outstanding. This is correct.
Suppose, as at 1 Jan 2009, you had $1000 cash, and to balance this you
had an "equity" balance of $1000 to exactly match this. I doubt I
would call it equity if it were a personal set of accounts. I just use
the term Open for my own set of accounts ... it is an accumulated
balance brought forward.
Now, suppose I were to create an "extended trial balance" as at 30 Apr
2009. It would look like this:
Cash 710 (debit balance)
IntRecd -10
Loan 300
Open -1000
Debits are positive, credits are negative. Note that the sum total of
the above is 0. This is what we expect if we've done our double-entry
bookkeeping correctly.
If I wanted to "close off" the accounts at the end of Apr 2009, so
that I started with a fresh P&L account at 1 May, then I would shift
all the P&L items to the opening balance. So I would debit IntRecid
with 10, and credit Open. My new extended trial balance would look
like this:
Cash 710
Loan 300
Open -1010
The sum total is 0. Hurrah. My yin still balances my yang, and the
eternal Tao is in harmony.
In terms of a profit and loss account for the period 1 jan 2009 to 30
apr 2009, it might look like this:
Interest received 10
-----
Profit for period 10
====
... a fairly bland P&L. If I were to produce a balance sheet for that
date (meaning 30 apr), it might look like this:
Loans to friends 300
Cash on hand 710
------
Balance c/d 1010
====
Represented by:
Balance B/d 1000
Profit for period 10
------
Balance c/d 1010
====
The UK and US tend to show their balance sheets slightly differently,
and you can do all sorts of slicing and dicing depending on whether
you think loans/liabilities are long or short, whether you have equity
accounts, and all sorts.
Hope that helps.
Matthew Palmer
I'm no accounting genius, but I'm pretty sure the answer is "You Don't".
The process, as I understand things, is that you "open the books" at some
given date, and the value of all your assets/liabilities as at that date are
entered as your opening balances. There's no such thing as "pre-existing
income/expenses" -- if you want to record those, you open your books as at an
earlier date, and record the income or expenditure as it happened (in
accordance with accounting rules regarding when a revenue or expense is to
be recorded).
In the case of your loan, opening your books on May 1, you would record the
value of the loan as an asset of $310 ($500 principal + $10 interest - $200
in repayments). Revenue and expenses start at zero. My gut tells me that
repayments would be recorded as a reduction in the loan asset but a
corresponding increase in your cash or bank account asset, and interest
would be recorded as revenue and an increase in the loan asset -- but I'd
get an accountant's advice on that one if this is more than a hypothetical,
as when you can book the revenue on a loan (and how exactly it needs to be
accounted for in tax and such) would be a local legal thing.
The link posted here yesterday to a page about the accounting equation,
http://www.quickmba.com/accounting/fin/equation/ will probably help you a
little more here. I found it educational, at any rate.
- Matt
(Who charges a friend interest, anyway?)
--
When the revolution comes, they won't be able to FIND the wall.
-- Brian Kantor, in the Monastery
Derek Mahar
> If I wanted to "close off" the accounts at the end of Apr 2009, so
> that I started with a fresh P&L account at 1 May, then I would shift
> all the P&L items to the opening balance. So I would debit IntRecid
> with 10, and credit Open. My new extended trial balance would look
> like this:
>
> Cash 710
> Loan 300
> Open -1010
opening balances for Cash, Accounts Receivable (Loan), and Open and
ignore the details of the earlier repayment transactions because not
only are they in the past, but the opening balances effectively
already take those transactions into account.
Derek
Derek Mahar
> I'm no accounting genius, but I'm pretty sure the answer is "You Don't".
> The process, as I understand things, is that you "open the books" at some
> given date, and the value of all your assets/liabilities as at that date are
> entered as your opening balances. There's no such thing as "pre-existing
> income/expenses" -- if you want to record those, you open your books as at an
> earlier date, and record the income or expenditure as it happened (in
> accordance with accounting rules regarding when a revenue or expense is to
> be recorded).
to specify opening balances.
> (Who charges a friend interest, anyway?)
Cr Assets:Cash $10
Dr Expenses:Interest Adjustment $10
Correct?
Derek
Matthew Palmer
Well, in Ledger speak it'd be:
2009/05/02 Who charges a friend interest, anyway?
Assets:Cash -$10
Expenses:Interest Adjustment
- Matt
Mark Carter
Yes. The opening balance has all the profits and losses of previous
periods acuumulated within it. That way, when you create an "extended
trial balance" (just by typing ledger bal), your income and expenses
account will show the income and expenses for the current period,
which is what you want.
Mark Carter
>
> Okay, I'll give it back:
>
> Cr Assets:Cash $10
> Dr Expenses:Interest Adjustment $10
>
> Correct?
Yep. That works for me :)