3.2. Types of GnuCash Accounts
<<< Prev | Chapter 3. Organizing Your Accounts | Next >>>

## 3.2. Types of GnuCash Accounts

Each account must have a unique name (that you assign) and one of the account types defined in GnuCash. In accounting, the five main types of accounts are Assets, Liabilities, Equity, Income and Expenses. As mentioned earlier, the first three types, assets, liabilities and equity, are balance-sheet accounts. You are generally more concerned with the balances of these accounts than you are in the activity going on in them, because the balances in these accounts determine your net worth at a specific point in time. The purpose of a Balance Sheet report (covered in section 10.2) is to provide a snapshot of the balances in these accounts.

On the other hand, income and expense accounts are much more dynamic, and you are generally more interested in the movement that takes place in these accounts. On a regular basis, money moves into your GnuCash environment through one or more income accounts. Also on a regular basis, money moves out of your GnuCash environment through several expense accounts. The report that tracks this movement over a period of time is the Profit & Loss report, which we will discuss in section 10.2.

(Insert a graphic of a circle containing balance sheet accounts, with an incoming arrow for income accounts and an outgoing arrow for expense accounts.)

### 3.2.1. Balance sheet accounts

Assets refer to things you own. Specifically, assets are things you own for which you want to track the value, such as bank accounts, investments, cash or your house. In theory, assets can be converted to cash, although you might not get what you originally paid for them. Tracking the asset balances accurately, then, lets you know how much these assets are worth in cash at a given point in time.

| Tip
For all assets, a debit (left-column value entry) increases the account balance and a credit (right-column value entry) decreases the balance. (See note later in this chapter.)

To help you organize your asset accounts and to simplify transaction entry, GnuCash supports several types of asset accounts:

1. Cash Use this account to track the money you have on hand, in your wallet, in your piggybank, under your mattress, or wherever you choose to keep it handy. This is the most liquid, or easily traded, type of asset.

2. Bank This account is used to track your cash balance that you keep in institutions such as banks, credit unions, savings and loan, or brokerage firms - wherever someone else safeguards your money. This is the second most liquid type of account, because you can easily convert it to cash on hand.

3. Stock Track your individual stocks and bonds using this type of account. The stock account's register provides extra columns for entering number of shares and price of your investment. With these types of assets, you may not be able to easily convert them to cash unless you can find a buyer, and you are not guaranteed to get the same amount of cash you paid for them.

4. Mutual Fund This is similar to the stock account, except that it is used to track funds. Its account register provides the same extra columns for entering share and price information. Funds represent ownership shares of a variety of investments, and like stocks they do not offer any guaranteed cash value.

5. Currency If you trade other currencies as investments, you can use this type of account to keep track of them. The register is similar to the stock register, except that you enter exchange rates instead of prices.

6. Asset For personal finances, use this type of account to track "big-ticket" item purchases that significantly impact your net worth. Generally, you can think of these as things you insure, such as a house, vehicles, jewelry, and other expensive belongings. Smaller, less consequential purchases are tracked as expenses, which we will cover shortly.

Liabilities refer to what you owe, money you have borrowed and are obligated to pay back some day. These represent the rights of your lenders to obtain repayment from you. Tracking the liability balances lets you know how much debt you have at a given point in time.

| Tip
Liabilities in accounting act in an opposite manner from assets: credits (right-column value entries) increase liability account balances and debits (left-column value entries) decrease them. (See note later in this chapter)

GnuCash offers a couple of liability account types:

1. Credit Card Use this to track your credit card receipts and reconcile your credit card statements. Credit cards represent a short-term loan that you are obligated to repay to the credit card company. This type of account can also be used for other short-term loans such as a line of credit from your bank.

2. Liability Use this type of account for all other loans, generally larger long-term loans such as a mortgage or vehicle loan. This account can help you keep track of how much you owe and how much you have already repaid.

Equity is the same as "net worth." It represents what is left over after you subtract your liabilities from your assets, so it is the portion of your assets that you own outright, without any debt. In GnuCash, use this type of account as the source of your opening bank balances, because these balances represent your beginning net worth.

| Tip
In equity accounts, credits increase account balances and debits decrease them. (See note later in this chapter)

| Note
The accounting equation that links balance-sheet accounts is Assets = Liabilities + Equity. Another way to look at this is: Assets - Liabilities = Equity. So, in common terms, the things you own minus the things you owe equals your net worth.

### 3.2.2. Income and Expense Accounts

Income is the payment you receive for your time, services you provide, or the use of your money. When you receive a paycheck, for example, that check is a payment for labor you provided to an employer. Your employer tracks your paycheck as an expense to the company, but you track it as personal income. Other examples of income include commissions, tips, dividend income, and interest income. In GnuCash, use an Income type account to track these.

| Tip

Credits increase income account balances and debits decrease them. As described in Chapter 2, credits represent money transferred from an account. So in these special income accounts, when you transfer money from (credit) the income account to another account, the balance of the income account increases. For example, when you deposit a paycheck and record the transaction as a transfer from an income account to a bank account, the balances of both accounts increase.

Expenses refer to money you spend to purchase goods or services provided by someone else. When you buy something, you are either incurring an expense or investing in an asset. So how should you record purchases in GnuCash? In general, if the purchase involves an item that increases or decreases in value over time, such as a car, house, or stock, you should record this purchase in one of the asset type accounts listed in 3.2.1.

All other purchases of goods and services involve expense accounts. Expenses include such things as utilities, rent, food, loan interest, taxes, and car repair. When you buy food, for example, you are paying someone else for that item. The grocery store records this payment as income, but to you it is an expense. In GnuCash, use an Expense type account to track your expenses.

| Tip
Debits increase expense account balances and credits decrease them. (See note later in this chapter.)

| Note
When you subtract total expenses from total income for a time period, you get net income. This net income is then added to the balance sheet as retained earnings, which is a type of Equity account. (Insert a chart that shows common accounts and recommended account types for these)

<<< Prev | Home | Next >>>
3.1. Using Accounts vs. Categories | Up | 3.3. Putting It All Together