In this tutorial, we are going to enter a simple transaction of withdrawing $300 cash from the checking account.
- From the menu, select Actions | Transfer to open the Transfer Funds window.
- In the Basic Information pane, enter 300 in the Amount field, leave today's date unchanged in the Date field, enter the check number 2073 in the Num field, and enter Withdraw cash in Description.
- Scroll down in the Transfer From list and select Checking Account. You may have to click on the + sign to open the tree, if the account is not visible.
- Scroll down in the Transfer To list and select Cash. At this point, the window should look like this:
- Select OK to commit the transaction.
- We will now confirm that the transaction has been entered in the respective accounts correctly. In the Account tab, double-click on the Checking Account. It will open in a separate Checking Account tab. This is known as the account register for Checking Account. You should now see an entry for the withdrawal of $300 cash and a new balance of $1,700.
- In the account tree window, double-click on Cash. It will open in a separate Cash tab. This is the account register for Cash. You should now see an entry for the withdrawal of $300 cash and a new balance of $300.
- When you have double checked all entries and everything looks hunky-dory, make sure you save the changes.
"Hey, I just created my first transaction in GnuCash"? Well, not quite. You already entered your first transaction in GnuCash while setting up accounts. You were having a blast creating a ton of accounts so fast, it didn't seem a good idea to slow you down by pointing out that when you entered an opening balance, you actually created your first transaction.
On the other hand, while opening balances are needed only occasionally, the Transfer Funds window gives you a handy tool to enter many business transactions. So, go ahead, celebrate.
The Merriam-Webster dictionary defines a transaction as an exchange or transfer of goods, services, or funds. As a business owner, you know that every transaction involves funds, directly or indirectly. You also know that the transactions only differ on the source of funds, where the money came from and the use of funds, or where it went. Yeah, I know what you are thinking. Sometimes it feels like that money seems to be going into black holes, never to be seen again. However, hold your hat; GnuCash is here to help you. Oh no, it can't prevent your money from disappearing into black holes. However, you will soon learn how to create reports in GnuCash, showing precisely which black holes it went into!
An example from outside the business world will help us compare business transactions with non-business ones. Non-profits, such as the Salvation Army or your local church, can get a donation without giving something else in return. This is an example of a non-business transaction.
Let us look at some examples of business transactions:
|
Item |
Transaction |
Source of funds |
Use of funds |
|---|---|---|---|
|
1 |
You pay cash to buy office supplies |
Cash |
Business expenses |
|
2 |
You sell products to get paid by check |
Sales |
Bank balance goes up |
|
3 |
You buy a part online and charge it to your credit card |
Credit card dues go up |
Business expenses |
|
4 |
You invoice a customer for services and allow them 30 days to pay |
Service provided |
Accounts receivable goes up |
|
5 |
You withdraw cash from the bank |
Bank balance goes down |
Cash balance goes up |
So, in business terms, we can say that every transaction can be split into its source of funds and use of funds. Thus, a single transaction must always consist of at least two parts, namely, an amount in the "from" account and an amount in the "to" account. Moreover, the two must be equal.
In the following diagram, the outer box in dotted lines represents the transaction and the inner boxes are splits of the transaction showing the sources and uses of funds:
As you can see, it is not very difficult to understand transactions. You just need to answer three basic questions:
- How much money changed hands? The value of the transaction.
- Where did the money come from? The source of funds or the "from" account.
- Where did the money go? The use of funds or the "to" account.
These are examples of simple transactions in which there is one account for each split. These are referred to as simple 2-account transactions in GnuCash.
Note
We showed a transaction with another party in the preceding diagram. However, there can be transactions without involving another party. Item 5 in the earlier table, withdrawing cash from the bank, is an example of an internal transaction. We moved funds from one account to another. The same rules of transaction apply even for internal transactions. We need a source of funds and a use of funds and the two must be equal.
When accounting was done manually, accountants used to post each side of the transaction separately in the books. This double entry bookkeeping, of course, requires twice the amount of work. So, why did they do it? It helped accountants catch arithmetic and data entry errors. As each transaction had to be recorded in two places, the results of additions and subtractions could be double-checked simply by seeing whether the accounts balanced. With computers, arithmetic mistakes are no longer a major issue, although data entry errors still are.
You will be happy to know that in GnuCash, you only need to enter the data once. GnuCash does the double entry bookkeeping for you behind the scenes. You still get all the advantages of double entry bookkeeping, namely, cross checking to see if accounts balance.
But, more importantly, you are now equipped with one more piece of jargon to throw at your accountant. During a lunch conversation, in a matter of fact tone, you can say, "It does double entry bookkeeping. That is another reason why I picked GnuCash."
- In a transaction, how do the source of funds and use of funds compare?
a. Source of funds is higher
b. Use of funds is higher
c. They must be equal to each other
d. They are unrelated