<ARTICLE ID="XACC-DOUBLEENTRY">
<ARTHEADER>
<TITLE>Understanding Double-Entry Accounting</TITLE>
</ARTHEADER>

<SECT1 ID="XACC-DOUBLEDEF">
<TITLE> What is Double-Entry Accounting?</TITLE>

<PARA>
You've probably heard the saying, "Money doesn't
     grow on trees."  It means that money must come from
     somewhere---it doesn't just "appear."  Double-entry accounting is
     a method of record-keeping that lets you track just
     <emphasis>where</emphasis> your money comes from and <emphasis>
     where</emphasis> it goes. </para>

<para> Using double-entry means that money is never gained nor lost---it
     is always transferred from somewhere (a source account) to
     somewhere else (a destination account).   In GnuCash, this
     transfer is known as a <EMPHASIS>transaction</emphasis>, and each
     transaction requires at least two accounts. </para>

<para>     An <emphasis>account</emphasis> in GnuCash is a record for
     keeping track of what you own, owe, spend or receive.   For
     example,  if you pay a phone bill with a check, money transfers
     from checking to the phone company.  In GnuCash, this is a
     transaction transferring money from a checking account to a phone expense
     account.  You probably already think of your checking account as
     a  bank "account," but your expenses (such as phone bill) are
     also "accounts" in GnuCash.  </para>

 <para>This double-entry concept has been around since the 13th century,
      and its purpose has always been to reduce the likelihood of 
      data-entry errors.  Fortunately, GnuCash makes it a lot easier
      to enter transactions than it was in those early days of
      accounting!  
    </PARA>

<sidebar><title>Insider knowledge:</title>
<para>
    Calling this 
   <EMPHASIS>double</EMPHASIS>-entry bookkeeping is a bit misleading; 
    it would be somewhat more accurate to call it <EMPHASIS>multiple-
    </EMPHASIS>entry bookkeeping, since a transaction can affect more
    than two accounts. Unfortunately, there's 700 years of
    history of use of the term, which sufficiently discourages
    changing it. 
</para>
</sidebar>

</SECT1>

<SECT1>
<TITLE>Why Use Double-Entry Accounting?</TITLE>
<PARA>
    Double-entry accounting helps you avoid mistakes.  This is why
    professional accountants use it.  A double-entry
    system provides a good check-and-balance benefit, by making
    it easier for you to trace the source of any entry errors. </para>

<para>It also provides more useful and complete information to you than
    you would get with just a single-entry "checkbook" approach.  Because each
    transaction contains both a source and destination, double-entry
    provides valuable details that can be sorted and viewed in report
    form later.  Reports allow you to see things like how much money
    you made for the year and where it all went, what your net worth
    is, and what your taxes might be for the year.</para> 

<para>GnuCash offers an advantage over traditional accounting packages
    because it does a lot of the double-entry work for you while still
    giving you the accuracy benefits of double-entry accounting. 
    </PARA>

 
</SECT1>


<SECT1 ID="XACC-DOUBLEENTRYRULE">
<TITLE> The Rule of Double-Entry Accounting</TITLE>

<PARA>In a double-entry transaction, an equal amount of money is
    always transferred from one account (or group of accounts) to
    another account (or group of accounts).  Accountants use the terms
    <emphasis>debit</emphasis> and <emphasis> credit</emphasis> to
    describe whether money is being transferred <emphasis>
    to</emphasis> or <emphasis> from</emphasis> an
    account. </para>

<para> Money is recorded in the debit column, which is the left
    column, when it is being transferred <emphasis>to</emphasis> an
    account.  Money is recorded in the credit column, which is the
    right column, when it is being transferred
    <emphasis>from</emphasis> an account. For every transaction, the
    total of debits (left column entries)
    must equal the total of credits (right column entries).

    </PARA>

<para> You don't have to use the terms "debit" and "credit" to use
    GnuCash, however.  GnuCash registers default to "common" column
    headings such as "deposit" and "withdrawal"---if you are more
    comfortable with those headings, use them.  If you prefer the
    credit and debit headings, you can change the column headings to
    "use accounting labels" from the menu item
    <guimenuitem>Settings|Preferences...General</guimenuitem>.</para>

    <para>The main concept to remember, regardless of terminology, is
    that all transactions involve a transfer of some amount of money
    from a source to a destination. For example, if you write a check
    for $50 to buy groceries, you record that as a transfer of $50
    from the checking account to the groceries expense account.  In
    accounting terms, this is a credit to checking and a debit to
    groceries expense:</para>
     
  <literallayout>
      Debit Groceries   50
      Credit Checking        50</literallayout>


<PARA>What about your paycheck?  You can see that money goes into a bank
      account, but where does it come from?  In double-entry, the
      money has to have a source, and the source of your paycheck is
      an income account.  So to enter the deposit of a $500 paycheck
      in your checking account, you record a transfer of $500 from an
      income account to a checking account.  In accounting terms, this
      is a credit to income and a debit to the bank account:</para>
      
   <literallayout>
      Debit Checking  500
      Credit Income          500</literallayout>

     

      <sidebar><title>Insider knowledge:</title>
      <para>
        Bank statements are often written up from the bank's
        perspective, which is exactly <emphasis>opposite</emphasis> to
        yours.  When you deposit that paycheck in the bank, you are
        giving the bank money which they promise to pay you back
        someday.  So to the bank, your deposit is a loan; it is money
        they owe you.  Since that money is a
        <emphasis>source</emphasis> of funds to the bank, they show a
        <emphasis>credit</emphasis> to your checking account when you
        deposit money in it.</para>
      </sidebar>
  
      
      
    </SECT1>
    
    <SECT1 ID="XACC-DOUBLEUSE">
      <TITLE>Using Double-Entry in GnuCash</TITLE>
      <para>Let's try an example that applies double-entry accounting to
        using GnuCash.  We will record the deposit of a $500 paycheck. </para> 
      
      
      <SECT2>
        <title>Creating Accounts</title>
        <para>
          To enter a paycheck deposit, you first need to create two
          accounts.  The first account is a checking account.  Click
          the <guibutton>New</guibutton> button in the main window
          toolbar to create a new account, then enter the following
          account details in the dialog box that appears:

<literallayout>
 Account Name:   "Checking"      
 Account Type:    Highlight "Bank"   
 Parent Account:  Highlight "New top level account"
</literallayout>
  </para>
        
      <para> Click "OK" to complete setup, then create a second income
        account.  Click the <guibutton>New</guibutton> button again, and enter these
        details in the dialog box:

<literallayout>
 Account Name:   "Salary"      
 Account Type:    Highlight "Income"      
 Parent Account:  Highlight "New top level account"</literallayout></para>     

<sidebar><title>Insider knowledge:</title>

   <para>
    GnuCash provides several different types of accounts, discussed in
    the <LINK LINKEND="XACC-ACCTYPES">Account Types </LINK>
    section. Debits increase your asset and expense accounts, while
    credits increase your income, liability and equity accounts.
    Income and expense accounts are also discussed in more detail in
    the <LINK LINKEND="XACC-INCOMEEXPENSE">Income/Expense</LINK>
    section.</para></sidebar>
    
</sect2>
<SECT2>
<TITLE>Creating Transactions</TITLE>
<PARA>To create a double-entry transaction for the paycheck deposit:

<orderedLIST>
<LISTITEM>
<PARA> Open the Checking account register you just created by double-clicking
                on the account name in the main window.
      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>Tab to the Description field and enter "Paycheck Deposit." 
      
    </PARA>
</LISTITEM>
<LISTITEM>
<PARA>Tab to the Transfer field and select the Salary account from the
                pull-down menu. 
      
    </PARA>
</LISTITEM><LISTITEM>
<PARA> Tab to the Deposit column and enter "500," then hit "Enter" to
                record the transaction. Now your Checking account
                shows a debit entry of 500. 
    </PARA>
</LISTITEM>
<LISTITEM>
<PARA>Highlight the transaction again and click the "Jump" toolbar
                button to see the transaction's effect on the Salary
                account.  Notice that in the Salary account, you now
                have a matching credit entry of 500 that GnuCash entered
                automatically for you. 
    </PARA>
</LISTITEM>

</orderedLIST>
    </PARA>

</SECT2>

<SECT2>
<TITLE>Changing Transactions</TITLE>
 <PARA>
        What if you want to edit this transaction to increase the
        paycheck deposit to $600?  To <EMPHASIS>change</EMPHASIS> a
        double-entry transaction, simply select the transaction in any
        register in which it appears, then make your changes and
        record the transaction.  In this case, you can either edit the
        transaction from the Checking account register or the Salary
        account register.  Any changes made will be automatically
        reflected in both accounts and all windows displaying the
        transaction.
    </PARA>
      <PARA>
        To change the transfer account, simply select a new account
        from the pull-down menu. When you record the transaction, this
        account change will be reflected in all affected accounts.
        Similarly, when a double-entry transaction is deleted, entries
        will be deleted from all affected accounts, and balances will
        automatically be recalculated for those accounts.

      </PARA>

</SECT2>


</sect1>
</ARTICLE>

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