In Finances money is collected in accounts. The sum of the money in an account is called account balance. Debiting or crediting an account changes the account balance.
There are 5 different account groups.
- Assets represent the money you have (e.g. cash).
- Liabilities is what you owe somebody (e.g. credit card).
- Income accounts are where you get money from (e.g. salary).
- Expenses accounts are where you spend money for (e.g. food).
- Equity represents the value of something (e.g. existing assets).
In Finances there are no categories like in other apps. Instead there are Income and Expense accounts. Everything is an account – this is the fundamental idea in double-entry bookkeeping.
Not every account has an account balance.
Finances shows the balances for the Assets, Liabilities and Equity accounts. Balances for Income and Expense accounts are not shown because they don’t make sense.
For Income and Expense accounts only the total over a period of time is useful, like the sum of all expenses from last month.
The opening entry defines the opening balance.
The account balances in an empty journal are zero. The first thing to do is to set the opening balance of your accounts. For example if you have $45 in cash and $1,200 in your checking account, the
Assets:Bank accounts should have that balance as well. For this case you create the following opening entry.
12017-01-01 Opening Balance 2 Assets:Cash $45 3 Assets:Bank $1,200 4 Equity:Opening Balance -$1,245
You may need to read about transactions first to better understand opening entry.
As you can see the money for the opening balance comes from the
Equity:Opening Balances account. The account balances are now as follows.
1Assets 2├── Cash $45 3└── Bank $1,200 4 5Equity 6└── Opening Balances -$1,245
Why does the Opening Balances account have a negative balance?
Money for the opening balances has to come from somewhere. You don’t want to enter all previous transactions of your bank account to match the actual balance. It’s easier to define an account balance at a specific point in time. This is done with the opening entry. You can ignore the negative account balance – it’s not important.
From traditional double-entry bookkeeping you may know the accounting equation Assets = Liabilities + Equity. Which means that the money on the debit side has to be same as on the credit side. Instead of debit and credit, Finances uses positive and negative value and therefore uses the accounting equation Assets + Liabilities + Equity = 0. It means exactly the same.