2050-07 QB Equity Accrts and Retained Earnings ZZeod

From Onliner:TO Jim@bcidot.org :
    I'm the bookkeeper at a small church with a roughly $60,000 annual budget. We've been using Quickbooks and your 'Method One' type of fund accounting since about 2004, or we use QBs Equity accounts to keep track of our some 12 designated funds - most of which are donor restricted but a couple are funds that the Leadership Board has set aside for future anticipated needs. The accounting system doesn't really distinguish between these two types, and looking at this article I see that perhaps we should.
    The more immediate question I have though, is what to do about our Retained Earnings. I've never really closed the books at the end of a fiscal year, and our balance sheet includes an 'Opening Balance Equity' account and a 'Retained Earnings' account that appear to be automatically created and maintained by Quickbooks. I (and some members of the Leadership Board) are concerned that these figures are distorting our 'Net Income' line, which I'm using as the General Fund balance. Our fiscal year ends August 31.
    My understanding of the balance sheet is that our total assets, minus liabilities, minus equity accounts (money set aside for whatever reason) ought to equal our 'net income', which is what we have to spend on general operating expenses in our budget. It seems like those two fields ought to zero out somehow, but I'm not sure how to do it properly. Is it possible to do so before the end of our fiscal year?
    Any help would be greatly appreciated, even if it's just a link to an article that more directly addresses what to do with these.

From:   Jim
    Thank you for connecting up .... hopefully the suggestions below will provide answers to your questions re "Opening Balance Equity" and "Retained Earnings" within QuickBooks (QBs). You obviously have been referencing the 0659-02 web page content below:

    01> The "Opening Balance Equity" comes about as a result of your original entries as apparently posted in xxx0 upon starting QBs.
    02> The QBs "Retained Earnings" transaction occurs automatically on the first day of the new fiscal year. Your first fiscal year likely ended as of 08-31-X1 and let's say that your GPFund (see definition in 0041-01#2 below) Net Income, or surplus, was $500.00. As of 09-01-X0 the $500.00 automatically goes from "Net Income" to "Retained Earnings." Further, let's suppose that the posting of your beginning entries resulted in a remaining residual balance in "Opening Balance Equity" of $250.00.
    03> If it were me, I would set up a new QB Equity acct called "Beginning General Fund Balance as of 09-01-X0" and make a journal entry as of 08-31-X1 that transfers the $250.00 to this new "Beginning GPFund Balance as of 09-01-X0" account.
    04> Then I would set up a new QB Equity acct called "GPFund Surplus as of 08-31-X1" and likewise transfer the $500.00 residing in the "Retained Earnings" account thereto.
    05> Then, like you say, I would establish via your QBs Chart of Accounts structure two segments of the QB Equity Accts as they appear in your Balance Sheet report. The 1st segment would be the "Donor Restricted Funds" and the 2nd segment would be the "Board Discretionary Funds" and would contain the "Beginning GPFund Balance" and "GPFund Gain (of course, a year might be "loss", etc and you would so indicate) as of 08-31-X1" plus any other Funds that the Board has SetASide. Please see the 0088-01 web page content below as to "SetASides" from your current General Purpose Fund, etc. You set up such segments (via sub-accounts) as a part of the QBs "Chart of Accounts" process. Please see the sample report structure within the 5030-01 web page content below. REMINDER: the "Net Income" appearing within each "Balance Sheet" pertains only to this fiscal year's GPFund results/status and it reverts automatically to "Retained Earnings" on the first day of the new fiscal year.
    06> You apparently are not using the "QBs Class" feature which allows you to know about the status and activity within the SPFunds as explained within a portion of 0601-06. The beauty of using the "QBs Class" is that it allows you to recap the activity in both GPFund and the SPFunds that enables you to provide a "Big Pix" via an Excel Doc as shown within 5030-01 below. The way to bring forward the beginning balances as of 09-01-xx for the SPFunds via the "QB Classes" suggested "00" class identification and related matters is explained within 0659-02 below.
    07> If more specifics or help is needed, please feel free to arrange to view my desktop with a QBs sample before both of us per the explanation within 0130-06 below.
    08> As a "Small Church" you and your leaders might find the alternative budgeting system as explained within 0002-99 below of interest.

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        > Year end Issues: http://www.bcidot.org/qbb/0659-02.html
        > General Purpose Fund or GPFund: http://www.bcidot.org/all/0041-01.html#2
        > Special Purpose Funds or SPFunds: > http://www.bcidot.org/all/0041-01.html#1
        > QBs and Fund Acctg: http://www.bcidot.org/qbb/0601-06.html
        > An Alternative to the usual Budget System: http://www.bcidot.org/all/0002-99.html
        > Sample Church Reports via QBs: http://www.bcidot.org/chu/5230-01.html
        > SetASide Issues: http://www.bcidot.org/all/0088-01.html
        > Invite and view my Desktop: http://www.bcidot.org/hlp/0130-06.html

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From Onliner:
    Thanks very much for your reply and the above link info. Jim. I've read it through them several times over the last week, and I think I'm beginning to understand it. I plan to make a copy of our main Quickbooks file and make the adjustments you suggest there, so I can see what the effect is.
From: Jim
    GREAT IDEA !!!!

From Onliner
    I do have just one more question. It's been my understanding from your web site that the "Net Income" line on our balance sheet represents the balance in our GPFund, which is what we have available to spend on our regular budget expense items. Will that still be the case after I've transferred money to the "GPFund Beginning Balance as of 09-01-2004" and "GPFund Surplus as of 8/31/2005" accounts? Or will I need to add a couple of these lines together to get our current GPFund balance?
From: Jim
    "Net Income" always is the "during the current fiscal year" difference between the GPFund Income and Expenses. The transfers I suggest above have to do with the "GPFund" residuals of previous years, etc.

From Onliner:
    I am using classes for income and expenses related to "SPFunds" and avoiding them for "GPFund" activity, and producing the separate Income/Expense reports for each as your site outlines. I haven't done a 'Big Pix' report though; I'll take a stab at that soon.
From: Jim
    I believe that all concerned will appreciate a one page recap of what has happened in both GPFund - SPFunds ; including a synopsis of �Actual to Budget� happenings within the "GPFund."

From: Onliner
    The "envelope system" at 0002-99 looks like it could be helpful for us; I'll have to see what our Board thinks of using it. My guess is they'll feel it's too constraining,
From: Jim
    �Constraining� is the operative word. The intent of this system is to "constrain" buying to only what is clearly available, etc. REMINDER: If you use 0002-99 system, you should continue to use the QB Class feature for GPFund types of Income and Expense, etc. I doubt if the management of the accounting system structure itself would be "constraining," etc.

From Onliner:
    I made the two changes you suggested in a separate "test" file, and then compared the balance sheet reports in the test file and the 'real' untouched file. It looks like the net effect is that "Opening Balance Equity" was renamed "GPFund Beginning Balance as of "09/01/X0" and "Retained Earnings" was renamed "GPFund Surplus on 8/31/X01"; the numbers remained the same, and the Net Income for "today" is the same. As of 09/01/01, of course, the Net Income is zero, whereas I don't believe it was before.
    I should mention that our "GPFund Surplus on 08/31/01" is negative, as is our GPFund Net Income 09/01/01 forward. My question now is, how do I determine how much money we have (or don't have) to spend on GPFund routine budget expenses? And, what does it mean to have a negative number in a QBs equity account? Doesn't that increase or inflate the net worth/net income bottom line number? Before I was just using the Net Income figure to ascertain this. In your email below, you said that the 'GPFund Surplus or Deficits of previous years would be in the 'discretionary' part of the funds, as opposed to the donor restricted funds. That would seem to suggest that positive numbers in those represent money that could be spent by the board, but negative numbers money that can't be, and should probably be subtracted from something else so they get zeroed out; either from another discretionary equity account, or from new unrestricted giving.
From: Jim
    You are right on, my friend. As to how much money you have within your GPFund to spend, etc., you would come up with a Actual to Budget report of the GPFund that would look like this example. Let me know if you have questions about the supposed Balance Sheet sample and comments shown below.

Common Bank Balance $    604.00

Donor Designated

    Benevolence Fund $ 560.00

    Approved Mission Fund $   80.00

         Total $    640.00

Discretionary Fund Balances

    ABC as SetASide from GPFunds $ 150.00

    XYZ as SetASide from GPFunds $ 750.00

    09-01-x0 Opening Balances $ 250.00

    08-31-X1 Annual GPFund (Deficit) $(350.00)

        Total $    800.00

Net Income (Deficit) from 09-01-X1 Forward $   (836.00)

     Total $    604.00

    Per the above sample, the Church has a serious problem .... the GPFund has spent all of the Discretionary Fund Balances and $36.00 of the Donor Designated Fund Balances - not good!!!!    Even if the GPFund deficit had only eaten into the $800.00 Discretionary Fund Balance amount it would not be good .... but to also spend Donor Designated money is bad. Even last year's GPFund for the year ended 08-31-X1 operating at a deficit of $350.00 and no doubt borrowed from the SetASide fund balances. Sounds to me like the GPFund MUST only spend what comes in for the GPFund -- see method to do this per the 0002-99 link contents above.

Common Bank Balance		$ 604.00

Donor Designated
Benevolence Fund	$ 560.00
Approved Mission Fund	$ 80.00
Total		$ 640.00
Discretionary Fund Balances
ABC as SetASide from GPFunds	$ 150.00
XYZ as SetASide from GPFunds	$ 750.00
09-01-x0 Opening Balances	$ 250.00
08-31-X1 Annual GPFund (Deficit)	$(350.00)
Total		$ 800.00

Net Income (Deficit) from 09-01-X1 Forward		$ (836.00)
Total		$ 604.00