Accounting DIY

Screen Shot 2013 10 05 at 9 10 56 PM
Gnucash is available for free download for Windows, Mac and Linux

I have always found accountants and in general these “cash guys” quite like doctors. They seem to have their own lingo and jargon that at the same time amazes you and makes you feel left out; as if it is something you, a “normal” guy who just wants to know how much cash is coming and how much is going and how much is left, basically. They have this thing about tallying the accounts and the talk about cash flow and the so-called balance sheet which somehow is sacrosanct. I have of course been personally grappling with these terms and over the last few weeks, months and years have been slowly building up my own system of managing my finances.

Many of the small firms I know use Tally, an Indian enterprise resource planning software. Only today, I learnt that it sells to some 100 countries. And they seem to be doing quite well, until recently reporting doubling of revenues even! But, I cannot understand why anybody (or a firm) would pay MONEY for a simple accounting software. At least, for simple functions of accounting for small business and individuals, using the often-mystified (by these accountants) double-entry system, Gnucash performs amazingly well.

Anyway, a double-entry accounting system is a way of ensuring that there cannot be mismanagement of money. It basically means that every time you record an expenditure, say under entertainment, it gets reflected in two places. One place is of course under the expenditure head “Entertainment” and another is from “where” the money came; say from a head reading “Cash in wallet”, or an online payment debited to a given bank account. All transactions have this “double-entry”, which thus ensures that all expenditures can be verified and hence your equity is balanced by the play between your assets (all your bank accounts and cash in your wallet for example) and your liabilities (your expenses including the money owed to you by your friend). This, of course is the basic accounting equation, attributed to Leonardo da Vinci’s mathematician friend (and a Catholic priest too), Luca Pacioli. Pacioli also briefly taught Leonardo da Vinci, and they both seem to have collaborated a bit on the mathematics of the apparently “divine” golden ratio. Pacioli wrote a then popular book De divine proportione which was illustrated by Da Vinci.

Luca Pacioli´s book De Divina Proportione illustrated by Leonardo da Vinci. Photograph of the book from a museum in Milan

Remember its reference in The Da Vinci Code? Anyway, a quick intro to the golden ratio is here in this NYT Opinion pages article. And this extract from the Wikipedia article on the golden ratio:

The golden ratio has fascinated Western intellectuals of diverse interests for at least 2,400 years. According to Mario Livio:

Some of the greatest mathematical minds of all ages, from Pythagoras and Euclid in ancient Greece, through the medieval Italian mathematician Leonardo of Pisa and the Renaissance astronomer Johannes Kepler, to present-day scientific figures such as Oxford physicist Roger Penrose, have spent endless hours over this simple ratio and its properties. But the fascination with the Golden Ratio is not confined just to mathematicians. Biologists, artists, musicians, historians, architects, psychologists, and even mystics have pondered and debated the basis of its ubiquity and appeal. In fact, it is probably fair to say that the Golden Ratio has inspired thinkers of all disciplines like no other number in the history of mathematics

I digress of course. A double-entry system basically ensures that there is a “tally” between your debits and credits and in establishing such a “tally” through sources of expenses and credits made into two accounts at the same time, it ensures that there is no mismanagement of the money. If it doesn’t tally, then there is something wrong. A nice explanation of double-entry bookkeeping is here in this story about a day in the life of Dave, the dollar. Coming back to Gnucash, which is a free and open-source software. In terms of features, it is certainly comparable to Tally. I confess I have never really used Tally, but I have seen accountants using it for maintaining a double-entry bookkeeping system and generate balance sheets from time to time. This much, Gnucash does and more. It can generate some neat pie charts of your expenses if you need and schedule your transactions. I have now used it for managing my own finances (not that my PhD scholarship provides mountains to manage, but certainly a good learning opportunity). Among other things, for us non-salaried type people, it is easy to print out balance sheet at the end of each year, which is of course crucial for filing income tax returns. So, instead of looking goggle-eyed as the finance people confuse you with lingo and impress you with financial acrobatics, you can just do that yourself. And yes, a mobile version of Gnucash is available for Android devices….and NO, there is no iOS version. 🙂 And of course, there is plenty of good documentation around, the English manual for instance (download PDF).

Importing is easy: if you have a QIF file of your bank accounts, you can just import them directly into Gnucash. And it is only a minor glitch if your bank (like most banks I know) provides only a csv file. You can use this site for converting your csv into QIF. I am not so sure about security etc, but I do not have any identifying information such as bank account numbers in the csv files anyway. So, roughly the steps I follow:

Step 1: Download as MS-Excel

Step 2: Clean excel. Rm legend and unnecessary rows. Save as CSV. Remember to format the money cells such that thecomma is removed. Else you’ll have a problem while exporting to QIF. The fields will not map properly.

Step 3: Convert to QIF. Replace category as Imbalance. Tool now allows to save mapping locally and load at next export. Country localisations are available.

Step 4: Import to Gnucash

You can also use this new format called OFX. It allows review of the records while importing. Be sure to set the currency setting properly though (from the default USD). It creates a “New imbalance dated…” field which will have to be reassigned to any of your expenditure heads later.

If you are one of them who has never seen an accounting software before and would like a quick run-down on what to expect, this video by Quentin Stafford-Fraser is quite useful. In the related videos, you will find many other videos with a bit more advanced demonstration of the capabilities of this software.

And if you are wondering what accounting was like in ancient India like this (yet) unanswered question by some people in Quora, I didnt find much about the prevalence of double-entry system as such, although Kautilya seems to have put in place quite some accounting principles; some of them having made their way to Buddhist monasteries in Sri Lanka as well. However, he seems to have depended much more on the ethical behaviour of the accountant rather than devising some system such as double-entry.


One response to “Accounting DIY”

  1. I have been using gnucash for a year now. I agree with your assessment. Its really useful!

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