How to setup Owners Equity for things in a Business?

General
1

All, I have just started a new (and I use the term loosely, as it's not like I've sold anything) "business" making soap.

I have not done this in the past, and really it's just an exercise to learn more about business/accounting/book keeping and how it works.

I was doing computer programming before, and then Help Desk, and then IT, and all have been rudely interrupted and so now I'm trying to learn about business. Even though the first thought in my head when I took a business course in college was, "If you keep all your money invested in your business, how exactly are you supposed to make money, it seems like between the customers and software companies your just left holding an empty bag", of course ledger wasn't available back then and you just had to either do it in your head, or on paper, or pay a proprietary software company for Number Cruncher 1997 or whatever.

In the past I have used tools like Quicken and GNU Cash, and in college I took an accounting course, but it never quite clicked; though it's starting to with ledger.

I started looking at the Colin Dean Plaintext Accounting Workshop which lead to his video on the same topic.

What I really don't understand is how to count up the money and time from your bank account and history that you spent on your "business" and turn it into owners equity, that can in turn then be turned into Expenses, Commodity Assets, and taxes. (I hope I'm stating that correctly).

Can you please provide me with an example of this? Or do I need to setup a hierarchy of accounts first?

2

Welcome @Andrew_Leer!

What I really don't understand is how to count up the money and time from your bank account and history that you spent on your "business" and turn it into owners equity, that can in turn then be turned into Expenses, Commodity Assets, and taxes. (I hope I'm stating that correctly).

As a fellow amateur accountant, I often get unstuck by making things very practical and concrete: What's the biggest real finance problem I have right now ?

Keeping track of assets and liabilities ? Make the required accounts, record some balances.

Keeping track of spending and earning ? Make a few expense and revenue accounts, record those events.

Keeping this reliably up to date and trustworthy ? Develop a process and routine for updating, reconciling, and checking for errors.

Forecasting future balances ? Start adding some future-dated transactions or periodic transaction rules, in a supplementary journal, and play around with future balance reports.

What benefit would I get from tracking owner's equity for my brand new small business ? None ? Don't bother.

The transaction balancing rule, and the standard five account types, will increasingly push you in the direction of correct bookkeeping, which might require using equity as a balancing account once in a while.

Accounts can be set up and reorganised as you go. https://plaintextaccounting.org/FAQ#how-should-i-choose-account-names has some advice.

3

I thought the Owners Equity thing was a requirement in all accounting/book keeping.

Every accounting course I've ever taken has started off with the following equation or some variant of it:

Assets - Expenses = Liabilities + Owners Equity

And when I took it in college, they always told us that we had to start off by putting money into the Owners Equity Account with an Initial Balance, or that if the owner put more money into the business, that it would go in through the Owners Equity account. That's the reason I was starting there.

4

That's right, for some value of "required"..

Every PTA example does show the first "opening balances" transaction as a transfer from equity to assets/liabilities.

For some, that's the first and last time they need to use the equity account. Depending how deeply you want to go into technically correct bookkeeping... these may be interesting:

5

PS I didn't understand this entirely. I most often see people starting their accounts from scratch, ie on the day the business is created. Are you wanting to create retroactive entries, to build a full picture of past activity ? If so, that's a little more involved, and could be done incrementally.

7

Yes, it's retro actively at this point.

I am at the step where I have some prices on some items and a couple of receipts.

I know to add the sales taxes to them.

I know that I'd like to add these things as assets too.

I know that eventually I want to put them under expenses.

I know that eventually I want to put some of them as probably commodities as these things have prices that change, and most of them are measured in grams, kilograms, and pounds. And that eventually I have to convert some of these things into bars of soap, batches and how much I used to make the bars of soap.

Heck, I even know how to use git to push and pull this stuff from github or codeberg.

But what I don't know is how to add all of this together and initially put it in as Owners Equity into the accounting system from the beginning. There's all that business about things being on the left or right hand side of the equation, and some of the stuff comes out negative initially in the examples in Collin Dean's presentation including the initial balance in the Owners Equity Account, see below:

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2017-06-26 Opening Balances
  Assets:Cash:Bank:Checking     500.00
  Assets:Cash:Bank:Savings    1500.00
  Liabilities:CreditCards:Costco       -61.25
  Equity:OpeningBalances

2017-06-27 Commonplace Coffee
  ; cold brew
  Expenses:Restaurants:Coffee     3.00
  Liabilities:CreditCards:CostCo

2017-07-15 Spacley Sprockets
  ; payday!
  Income:SpacelySprockets      -2000.00
  Assets:Cash:Bank:Checking     2000.00

2017-07-15 Transfer to Savings
  Assets:Cash:Bank:Checking    -100.00
  Assets:Cash:Bank:Savings        100.00

exercise1.ledger

So these are the examples that he gives in the presentation, but I'm not sure I understand the Equity:OpeningBalances parts. And I'm not sure I understand how to do it again if I or someone else adds money to the business.

And that's coming from what you gave me to read which states that when someone puts money in they own a percentage of the business. And of course they can keep doing that, but I don't understand how; or how it moves from one place to another.

But looking again at it, I've noticed that in the first transaction in the text, not the report that Equity:OpeningBalances has been left to ledger to fill in a number, which I guess is 2000.00 - 61.25 which would equal 1938.75 for the Equity:OpeningBalances account? Or would that be more like -1938.75 for Equity:OpeningBalances?

They have another example transaction like that which is simpler, where someone buys a cup of coffee and they don't put the -3.00 for the Liabilities:CreditCards:CostCo even know they could have; but the transaction OpeningBalance transaction I'm looking at doesn't equate to a 0 zero sum transaction, so it doesn't make any sense.

8

See if you can persuade your app to show entries completely with those missing amounts filled in - it's better when learning. (I don't know how to do it with ledger; hledger print -x will do it.)
Yes that entry is interpreted as:

2017-06-26 Opening Balances
    Assets:Cash:Bank:Checking                    500.00
    Assets:Cash:Bank:Savings                    1500.00
    Liabilities:CreditCards:Costco               -61.25
    Equity:OpeningBalances                     -1938.75

In other words: These are my business's starting balances on this date, which come from my equity (wealth).

If other people will be investing in the business, or if you had multiple owners, you could subdivide the owners' equity:

2017-06-26 Opening Balances
    Assets:Cash:Bank:Checking                    500
    Assets:Cash:Bank:Savings                    1500
    Equity:OpeningBalances:Andrew              -1000
    Equity:OpeningBalances:Barbara             -1000

If the investment/ownership balance changes, you could adjust those equity balances.

2020-01-01 Barbara sells half her stake
    Equity:OpeningBalances:Barbara               500  ; =  -500
    Equity:OpeningBalances:Andrew               -500  ; = -1500

And if you closed down the business, you would probably redistribute any remaining assets (or liabilities) in proportion to the owners' equity.

2025-12-31 Close, distribute assets
    Assets:Cash:Bank:Checking                   -500  ; = 0
    Assets:Cash:Bank:Savings                   -3500  ; = 0
    Equity:OpeningBalances:Andrew               3000  ; 75%
    Equity:OpeningBalances:Barbara              1000  ; 25%

I don't know if this is helpful. Keep playing with entries and reporting commands, it will get clearer. Or read more examples. We also have some good chat rooms.

9

This is quite helpful!

Thank you!