<ARTICLE ID="XACC-INCOMEEXPENSE">

<ARTHEADER>
<TITLE>Using Expense/Income Accounts</TITLE>
</ARTHEADER>

<SECT1>
<TITLE> What are Incomes and Expenses?</TITLE>

<PARA>The words "Income" and "Expense" are beguilingly simple;
everyone <EMPHASIS>thinks</EMPHASIS> they know what they mean.
<EMPHASIS>The money I get is income, the money I spend is
expense</EMPHASIS>, right?  Right!  However, there are subtlties.
The time that you make your income is ofen different than when you
actually get the money: to ease the recording of these types of
transactions, the concept of 'accounts payable' and 'accounts
receivable' has been invented. Click on that link to go there. This
section deals with the more basic recording of incomes and expenses.
</PARA>
</SECT1>

<SECT1 ID="XACC-RECORDING-INCOMEEXPENSE">
<TITLE> Recording Income and Expenses</TITLE>

<PARA>In a double entry system, two kinds of accounts must be
    created: some of type "Income" and others of type "Expense."
    (There tend to be a lot more different kinds of expenses than
    there are of incomes.)
    Income such as salary, wages, bank interest and stock
    dividends are then recorded as transfers from an income account
    to a bank (or, in general, some asset) account. Similarly,
    expenses are recorded as transfers from a credit card account
    (or, in general, a liability account).

    </PARA>
<PARA>Another way of describing the requirement for "double entry"
    is that when you receive an income, two things happen:

    <ITEMIZEDLIST>
<LISTITEM>
<PARA>You receive a sum of <EMPHASIS>money,</EMPHASIS> and must record that
      effect on your bank account.

      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>You have received an income, and must record that effect
      on an income account.
    </PARA>
</LISTITEM>
</ITEMIZEDLIST>

    </PARA>
<PARA>When, for instance, salary is deposited in a bank account,
    the bank account is debited, and the income account is
    credited, thus:

    <TABLE>
<TITLE>Accounting for Salary</TITLE>
<TGROUP COLS="3">
<THEAD>
<ROW>
<ENTRY>Account</ENTRY>
<ENTRY>Debit</ENTRY>
<ENTRY>Credit</ENTRY>
</ROW>
</THEAD>
<TBODY>
<ROW>
<ENTRY>Chequing Account</ENTRY>
<ENTRY>1,600.00</ENTRY>
<ENTRY>        </ENTRY>
</ROW>
<ROW>
<ENTRY>Salary</ENTRY>
<ENTRY>        </ENTRY>
<ENTRY>1,600.00</ENTRY>
</ROW>
</TBODY>
</TGROUP>
</TABLE>

    </PARA>
<PARA>This may be readily extended to a greater number of "split"
    items thus:

    <TABLE>
<TITLE>A More Complex Paycheque</TITLE>
<TGROUP COLS="3">
<THEAD>
<ROW>
<ENTRY>Account</ENTRY>
<ENTRY>Debit</ENTRY>
<ENTRY>Credit</ENTRY>
</ROW>
</THEAD>
<TBODY>
<ROW>
<ENTRY>Chequing Account</ENTRY>
<ENTRY>1,300.00</ENTRY>
<ENTRY>        </ENTRY>
</ROW>
<ROW>
<ENTRY>Income Taxes</ENTRY>
<ENTRY>200.00</ENTRY>
<ENTRY>        </ENTRY>
</ROW>
<ROW>
<ENTRY>Health Plan</ENTRY>
<ENTRY>100.00</ENTRY>
<ENTRY>        </ENTRY>
</ROW>
<ROW>
<ENTRY>Salary</ENTRY>
<ENTRY>        </ENTRY>
<ENTRY>1,600.00</ENTRY>
</ROW>
</TBODY>
</TGROUP>
</TABLE>

    </PARA>
<PARA>There may be a whole lot more than two entries in the
    transaction, but the total sum of the Debits, $1,600.00, still
    equals the total sum of the credits, $1,600.00.

    </PARA>
<PARA>If, as with <EMPHASIS>GnuCash,</EMPHASIS> everything is forced
onto one column, so that <EMPHASIS>debits</EMPHASIS> are represented
by positive values, and <EMPHASIS>credits</EMPHASIS> are represented
by negative values, the income/expense accounts do a slightly
non-intuitive thing and you see incomes as
<EMPHASIS>negative</EMPHASIS> values. That <EMPHASIS>
appears</EMPHASIS> contrary to intuition, but is nonetheless necessary
in order for the <LINK LINKEND="XACC-DOUBLEENTRYRULE">double-entry accounting
rule to hold true.</LINK>

    </PARA>
<PARA>Income and expense accounts are also special, in
    that their account totals do not directly appear on a
    balance sheet. A balance sheet shows "Net Worth": the sum of
    all assets minus all liabilities.
    Income and expenses are neither assets nor liabilities, and
    so do not appear on the balance sheet. What appears on the
    balance sheet is their effects on <EMPHASIS>equity.</EMPHASIS>

    </PARA>
<PARA>Another report, the "Profit and Loss" (P&amp;L)
    report, analyzes income and expense. The total profit (or
    loss) is calculated as total income less total expenses. In a
    nicely symmetrical fashion, since assets and liabilities are
    neither income or expenses, <EMPHASIS>they</EMPHASIS> correspondingly do
    not appear on a P&amp;L statement.

    </PARA>
<PARA>While these accounts may be somewhat "special", you do
    not need to do anything particularly special to use income and
    expense accounts. GnuCash handles the values automatically, so
    that if you record properly the effects of the transactions on
    your bank account or credit card, the income/expense side of
    the transaction should also be correctly handled.
</PARA>
<PARA>
    Things only get "peculiar" when amounts are transferred
    between income and expense accounts.   If you feel you need
    to make such a transfer, then you will need to learn the 
    more sophisticated concepts behind "accounts payable"
    and "accounts receivable".  Such transfers typically 
    occur in businesses, when income and expenses may occur at a
    moment that is different from the moment when cash actually moved 
    into or out of the business's bank accounts.

    </PARA>
<PARA>For instance, companies usually recognize income
    <EMPHASIS>when the sale occurs.</EMPHASIS>
    That might mean that you recognize a $10,000 sale 
    <EMPHASIS>at the moment you and the customer
    shake hands on the deal.</EMPHASIS>
    Since the money hasn't actually come in, the sale has to be posted
    in another way.  You must <EMPHASIS>accrue</EMPHASIS> a sale
    at the time of the handshake.  To make the transaction balance, 
    you add the $10,000 sale to <EMPHASIS>Accounts
    Receivable</EMPHASIS>, rather than adding something in to cash.
    </PARA>
<PARA>
    <EMPHASIS>Insider Knowledge:</EMPHASIS> When a sale is recognized
    and how its recorded is governed not only by accepted accounting
    principles, but also by local and national laws.  In the United
    States, accepted accounting practices are determined by FASB,
    the Federal Accounting Standards Board.
</PARA>
<PARA>
(The documentiation should state  that 
for more info, click to the a/r and a/p page).
</PARA>

</SECT1>
<SECT1 ID="XACC-INCEXPUSE">
<TITLE> Using Income/Expense Accounts</TITLE>
<PARA>To use an income/expense account, simply create one from the
    "New Account" dialogue window, and then be sure to transfer
    income/expenses to it as you record paychecks, interest,
    etc.
    You will doubtless wish to create quite a number of income
    and expense accounts; it may be worth looking at the 
    <LINK LINKEND="XACC-SAMPLECHART">Sample Chart of Accounts</LINK> for
    ideas.
    This partitioning of incomes and expenses is likely to prove
    particularly useful for North Americans when <EMPHASIS>income tax
    time</EMPHASIS> rolls around.

    </PARA>
</SECT1>
<SECT1 ID="XACC-TERMSOTHER">
<TITLE> Use of Terminology In Other Software</TITLE>
<PARA>    </PARA>
<PARA>If you have used other personal finance software, be aware
    that <LINK LINKEND="XACC-QUICKENCATS">Quicken calls them
    "Categories."</LINK>


</PARA>
</SECT1>
</ARTICLE>

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