We are going to create the account hierarchy for our sample business, Mid Atlantic Computer Services (MACS). This will give you the hands-on feel to create accounts for your business, when you are ready to do that.
- Select from the menu File | New | New File. This will launch the New Account Hierarchy Setup assistant.
Note
GnuCash uses the term assistant to describe what you may have seen in other Windows applications called a wizard. Assistants help you perform tasks that are complex or not frequently performed. Assistants present you with a sequence of dialog boxes that lead you through a series of well-defined steps.
- Click Forward to go to the Choose Currency screen.
- You will find that US Dollar is selected by default. You can leave it as it is and click Forward to go to the Choose accounts to create screen.
- You will find that Common Accounts is checked by default. This option is for users who want to set up personal accounts. We want to set up a business account. So, uncheck this and check Business Accounts, as shown in the next screenshot and then click Forward:
- In the Setup selected accounts screen, click on the Checking Account line and it will become highlighted. Click under the Opening Balance column in this line, a text box will appear allowing you to enter data. Enter an opening balance of 2000, as shown in the next screenshot, tab out, and click Forward.
- In the Finish Account Setup screen, click Apply.
- With the previous step, the New Account Hierarchy Setup assistant has completed its job. You should now be back in the GnuCash main window showing the freshly minted set of accounts with the title Unsaved Book - Accounts.
- The Save As dialog should open. If it doesn't, select File | Save As change the Save in folder to your desired folder, put in the filename MACS without any extension, and click Save As. If your screen looks like the following screenshot, you have now successfully created the default business account hierarchy for MACS:
Note
Most Windows applications require you to save files with a 3 or 4 letter extension. Microsoft Word, for example, requires a .docx or .doc file extension. However, GnuCash uses the longer .gnucash extension. If you fill in the file name, GnuCash will automatically add the .gnucash extension.
There you are. With a small amount of effort, you have not only created a complete set of accounts that would be needed for a typical small business, but you have also learned how to enter opening balances as well. Now that we have that under our belt, let us discuss the key aspects of setting up accounts.
As you can see in the previous figure, the account named Assets contains two sub-accounts, Currents Assets, and Accounts Receivable. The sub-account Currents Assets in turn contains three sub-accounts, Checking Account, Savings Account, and Petty Cash. Arranging our accounts in this sort of a tree structure is why it is known as the Account Hierarchy.
A GnuCash account can contain transactions as well as other sub-accounts. To extend the example of a book that we used earlier, this is similar to how a chapter in a book can contain some introductory text, several sections, and some summary text.
This Account Hierarchy window is the GnuCash main window. We will also refer to this as the Account Tree window or the Accounts tab.
"What is the minimal set of accounts that I need, if I want to keep my business accounts simple?" If you want to start small or if you want to practice with a set of starter accounts, here is a minimal set of accounts:
- Assets: All that your business owns will go under this account
- Checking Account
- Cash
- Liabilities: All that your business owes will go under this account
- Credit Card
- Income: All your business income, including sales and any other income, will go under this account
- Sales
- Expenses: All your business expenses will be recorded under this account
- Rent
- Car
- Travel
- Entertainment
- Meals
- Office expenses
- Equity: The money brought in to the business by the owner or partners as equity as well as money taken out of the business by owners or partners as salary, bonus, dividends, and owners' draw will all go under this
- Opening Balances
Under Expenses, feel free to change the accounts to suit the kind of expenses your business has.
Here is one way to visualize your accounting system. Think of transactions as business documents. Accounts are like manila folders. Parent accounts are like hanging folders. The top level accounts are like the drawers. And your accounting system is like a five-drawer filing cabinet. Visualize the five drawers labeled Assets, Liabilities, Income, Expenses, and Equity. Once you have arranged and labeled your hanging folders and manila folders inside the drawers, your task is to then put each document that comes in into the appropriate folder in the filing cabinet.
Depending on the size of your business and your need for granular control, you will have to decide how detailed you want your set of accounts to be. You may also want to run it by your accountant and tax consultant to make sure they are comfortable with it. Setting up too few accounts will make it difficult for you to analyze the numbers and take corrective actions. For example, let us say you have travel, entertainment, and office supplies lumped together under a Miscellaneous account. You find that your Miscellaneous expenses for this month are 50 percent higher than last month. What next? You have to spend a lot of time analyzing what caused this unexpected increase in expenditure. On the other hand, setting up too many accounts may overwhelm you, especially if you are a new user.
Tip
Can I add and delete accounts as I need them?
Yes, GnuCash lets you do that as and when you want. However, it is not a good idea to keep adding and deleting accounts often. An important aspect of maintaining accounts is to be able to compare expenses, revenue, and so on from month-to-month and from quarter-to-quarter. If the basis has changed, such comparisons with past periods will not be valid.
- Accounts can contain which of the following?
a. Only transactions
b. Only sub-accounts
c. Both transactions and sub-accounts
Create a new account hierarchy which includes the following three templates:
- Business Accounts
- Car Loan
- Fixed Assets