GnuCash is easy enough to use that you do not need to have a
complete understanding of accounting principles to find it useful.
However, you will find that some basic accounting knowledge will prove to
be invaluable as
GnuCash was designed using these principles as a
template. It is highly recommended that you understand this section of the
guide before proceeding.
Basic accounting rules group all finance related things into 5 fundamental types of “accounts”. That is, everything that accounting deals with can be placed into one of these 5 accounts:
Things you own
Things you owe
Overall net worth
Increases the value of your accounts
Decreases the value of your accounts
It is clear that it is possible to categorize your financial world into these 5 groups. For example, the cash in your bank account is an asset, your mortgage is a liability, your paycheck is income, and the cost of dinner last night is an expense.
With the 5 basic accounts defined, what is the relationship between them? How does one type of account affect the others? Firstly, equity is defined by assets and liability. That is, your net worth is calculated by subtracting your liabilities from your assets:
Assets - Liabilities = Equity
Furthermore, you can increase your equity through income, and decrease equity through expenses. This makes sense of course, when you receive a paycheck you become “richer” and when you pay for dinner you become “poorer”. This is expressed mathematically in what is known as the Accounting Equation:
Assets - Liabilities = Equity + (Income - Expenses)
This equation must always be balanced, a condition that can only be satisfied if you enter values to multiple accounts. For example: if you receive money in the form of income you must see an equal increase in your assets. As another example, you could have an increase in assets if you have a parallel increase in liabilities.
The accounting equation is the very heart of a double entry
accounting system. For every change in value of one account in the
Accounting Equation, there must be a balancing change in another. This
concept is known as the Principle of Balance, and
is of fundamental importance for understanding
GnuCash and other double
entry accounting systems. When you work with
GnuCash, you will always be
concerned with at least 2 accounts, to keep the accounting equation
Balancing changes (or transfers of money) among accounts are done by debiting one account and simultaneously crediting another. Accounting debits and credits do not mean “decrease” and “increase”. Debits and credits each increase certain types of accounts and decrease others. In asset and expense accounts, debits increase the balance and credits decrease the balance. In liability, equity and income accounts, credits increase the balance and debits decrease the balance.
In traditional double-entry accounting, the left column in the
register is used for debits, while the right column is used for credits.
Accountants record increases in asset, expense, and equity accounts on the
debit (left) side, and they record increases in liability, revenue, and capital
accounts on the credit (right) side.
follows this convention in the register.
This accounting terminology can be confusing to new users,
which is why
Common use of the words debit and credit does not match how accountants use these words. In common use, credit generally has positive associations; in accounting, credit is associated with decreases in asset, expense and equity accounts.