Accounts vs. Categories
Just getting started with Moneydance, so this is probably a naive question. I understand (I think) the notion of "ACCOUNTS". As a double-entry system, each transaction MUST relate to two ACCOUNTS - debit and credit - right?
And we can create a variety of ACCOUNTS.
I see that Moneydance also has a large set of CATEGORIES for both income and expenses.
So if each traction MUST have both a credit and debit ACCOUNT, why must it ALSO be assigned to a CATEGORY?
Are these redundant or are CATEGORIES and ACCOUNTS used for different things?
I've read the User Guide to try and discern the differences between ACCOUNTS and CATEGORIES. I find the text confusing. For instance, in Chapter 4 is the statement:
"For example, suppose you pay your $100 heating bill with money from a checking account, and that you keep track of your utility expenses through a utility expense category. The $100 will be subtracted from your checking account, and your utility expense account will increase by $100."
Well, checking is clearly an ACCOUNT. But this refers to both a utility expense CATEGORY and utility expense ACCOUNT. In this example are there really both an ACCOUNT and a CATEGORY for utility expenses? If so, why?
Related to this, I see that a split allows a transaction to be split among CATEGORIES. So is it also possible to split a transaction between ACCOUNTS?
Perhaps the way to organize my database is to have very few expense ACCOUNTS and rely on CATEGORIES to organize the expenses. Is that a common approach?
Sorry for all the newbie questions, and thanks for your assistance.
Enjoy!
Jim
2 Posted by Jim W. on 18 Apr, 2011 04:16 AM
Further confusing things for me, when I create a new account by selecting the Account > New Account command I see the following account types:
Bank
Credit Card
Investment
Asset
Liability
Loan
Expense
Income
But when I create a new account by selecting Tools > Edit Accounts then clicking New, the list is different:
Bank
Credit Card
Investment
Asset
Liability
Loan
Can anyone explain why Expense and Income appear in one place but not the other?
Thanks,
Jim
3 Posted by Jim W. on 18 Apr, 2011 04:22 AM
Well, I created a new ACCOUNT using the Account > New Account command, and selecting Expense as the ACCOUNT type.
Moneydance created a new CATEGORY, not a new ACCOUNT.
This adds confusion to the notion of ACCOUNT vs. CATEGORY...
Thanks,
Jim
4 Posted by -Kevin N. on 18 Apr, 2011 12:32 PM
Hi Jim,
Accounts and Categories are treated similarlly in Moneydance. Try to think of it this way and see if it helps.
Categories are designed to track Income & Expense transactions. Accounts are recepticles for these Income and Expense transactions.
As an example, if you enter a txn into your Checking Account for the purchase of groceries. The 'Category' field of the txn would be, Food: Groceries. When you fininsh entering the txn into your Checking Account, the 'other side' of the txn is automatically entered into the Expense Account for Food: Groceries.
Generally, you should have little exposure to the actuall Account of an Income or Expense Category. There are however certain times that you may need to delve into them.
Income and Expense are listed in the 'New Account' list because in actuality, you are creating an Account albeit, a 'behind the scenes' Account.
I hope this clears things up a little.
-Kevin N.
5 Posted by zeke on 18 Apr, 2011 01:49 PM
This is something that in my mind breeds confusion in moneydance. I'm far from an accounting expert, but in explanations of double-entry accounting I've seen, the "Categories" in moneydance are actually called "Accounts". For example I believe GnuCash labels them as such. Categories in moneydance act exactly like accounts as far as I can see. For example, you can enter transactions in them. I believe moneydance documentation discourages this, but I find it quite logical to do so. For example, when my paycheck comes in, I enter it into an income category and create the splits that send the total into several asset accounts and expenses like taxes. If I look at the other side of these transactions, they point back to my salary income account. This makes sense to me. The alternative is to enter the paycheck total into something like a checking account and create the splits there. Then if I"m not mistaken the other sides of transactions would point back to my checking account. This doesn't make sense to me, as these amounts have never actually seen my checking account. I don't know if this is the best way to use categories in moneydance, but so far it has worked for me.
6 Posted by Jim W. on 18 Apr, 2011 02:13 PM
Thanks, Kevin and zeke. Both are helpful comments. Zeke, I especially like your paycheck example. Frankly, I wish there were a compilation of such examples for how to structure the Moneyance database for various kinds of transactions (and reports).
With the little I've seen so far, and your comments support it, I wonder why Moneydance doesn't just do away with CATEGORIES entirely, and manage everything as ACCOUNTS. It seems this would be far less confusing!
As it is, are there things which CATEGORIES can do that ACCOUNTS cannot, and vice versa?
Thanks,
Jim
Support Staff 7 Posted by Ben Spencer on 18 Apr, 2011 03:01 PM
Categories are accounts. They are accounts with type income or expense.
The use of the term category is to provide a middle ground between users who are not accountants who just want to categorize their transactions and to still provide a fully function double entry book keeping system for those users who understand the concept.
The way I like to think of things is that when you select the category for a transaction you are stating where the balancing entry for the transfer should go. This is typically an income or expense account and it could be any type of account. Which is to say the word category means two distinct things. It means the other side of the transaction and it is a general term to used to refer to income and expense accounts.
Ben Spencer
Moneydance Support
8 Posted by Jim W. on 18 Apr, 2011 03:08 PM
Thanks, Ben. That's helpful, and consistent with what others are saying.
So to be clear, when you say that categories are accounts, are they truly the same (aside from being limited to type of income or expense)? Or are there other things in Moneydance which differentiate the two? In other words, when I use Moneydance commands (e.g. to set up a report) can I use the accounts and categories interchangeably?
Thanks!
Jim
Support Staff 9 Posted by Ben Spencer on 18 Apr, 2011 03:48 PM
Income and expense account are truly accounts however there are some reports options which are specifically for not income an expense account. For example the source accounts for the income and expense report or the source account for the new transfers report in the MD2011 preview are restricted to non income and expense accounts.
Ben Spencer
10 Posted by paleolith on 19 Apr, 2011 03:04 PM
Just a small addition to this discussion. Categories are accounts, and accounts are also accounts. It's the latter that's confusing, and obviously it would be better if we had separate terms for "normal account" and "bookkeeping account", but we don't -- "account" is the word that people normally use for both. IIRC, MD started with more of the bookkeeping viewpoint, but this was found to be confusing to people not accustomed to it, and so the somewhat separate "categories" were introduced.
So categories are sockets to the outside world, and "other accounts" are the things in your own world.
Account->New Account doesn't know which kind you want, so it offers all the possibilities, and then puts the result in either the "account" or "category" higher-level classification depending on the specific type you choose. "New" in the accounts list assumes you are dealing with "my world" accounts and only offers those types. The part you probably missed (being new to it) is that if you do Tools > Edit Categories and then click New, you will be offered Expense or Income as possibilities, completing the symmetry.
Or let me see if I can show this as an outline (double spacing because it looks like this forum removes single line-ends):
Accounts (bookkeeping)
--- Accounts (my world)
------ Bank
------ Credit Card
------ Investment
------ Asset
------ Liability
------ Loan
--- Categories
------ Expense
------ Income
Also note that the list of types of "my world" accounts is not exhaustive. In most respects MD treats them the same anyway. Investment accounts have the most detailed special treatment, to allow lists of securities held within. Loan accounts allow setting various loan parameters and automatic payments ("transaction reminders" in MD terminology). Credit cards warn you if you try to reconcile a positive balance, since credit cards normally have negative balances in the bookkeeping sense even though the statement shows it as positive. I don't think there's any difference at all between income and expense accounts except how they are selected for reports -- if I return something I bought and get a refund, I will enter that refund in the same expense category as the original purchase, creating a credit in a category that normally has only debits. Etc.
Edward
11 Posted by avp2 on 19 Apr, 2011 06:24 PM
They may be handled very similarly (not identical - no initial balance for categories and reconcile works different, for instance) in MD, but an "accounting" category is a special kind (temporary - zeroed, when "closing" on a chosen accounting period) of account.
Hopefully, MD's design/operation will be modified, at some future point, to acknowledge this fact and we will get less confusion and year-end closing.
By the way, I would advise entering all "originating" transactions into regular accounts, vs categories, as good accounting practice.
I also would like to see "clearing" of an account transaction generate an auto-clearing of its balancing transaction/s.
12 Posted by paleolith on 19 Apr, 2011 07:26 PM
By the way, I would advise entering all "originating" transactions into regular accounts, vs categories, as good accounting practice.
Plus in general this is simply less likely to lead to errors.
I also would like to see "clearing" of an account transaction generate an auto-clearing of its balancing transaction/s.
I would see this as occasionally useful as long as the other side (balancing transaction) were only cleared when it's in a category. If it's in a "real" account (for example a bank account), then this must not happen. If for example I transfer funds from a bank account to an investment account at another institution, I need to reconcile those separately and independently. If there were a separate value for the cleared flag meaning "other side cleared", then that could be useful.
And with this restriction, I have not run into cases where it would be useful. Every now and then I notice that the transactions in categories are not cleared, but I have no reason to need to see them cleared. There's usually someone who has a good reason for something that I don't need, and in this case I'd be interested in what that is.
Edward
13 Posted by zeke on 19 Apr, 2011 08:23 PM
Categories are "accounts", but they aren't identical to "Accounts" in moneydance. They are income and expense accounts, as opposed to asset and liability accounts. There is no initial balance in Categories because there is no "balance". They aren't something in which you hold value, they are a measure of value that comes in and goes out.
14 Posted by avp2 on 20 Apr, 2011 01:09 AM
I was thinking primarily of Categories being auto-cleared, but I would like the option for other accounts as well. Perhaps the double-flag idea is a better idea for most.
Where I see the main value of an "auto-clear" function is in doing an archive. Transactions left un-cleared by accident, or neglect, can cause big problems in archive balances.
15 Posted by Leky on 07 Jul, 2011 09:50 AM
Hi, I'm using a trial version of MD 2011 (Build 791) and I see that in the New Account Category, Expense & Income are removed, leaving the other six but appearing in the New Category list...
My question then is, under what Account Group should they be created? I mean should Income come under Asset or Bank while Expense comes under Liability?
Leky
16 Posted by Leky on 07 Jul, 2011 10:10 AM
Aside personal set of accounts & categories, how does one track a business with the same set of accounts & categories IN THE SAME FILE like in Quicken without having to create two separate files one each for business and personal?
17 Posted by paleolith on 07 Jul, 2011 02:05 PM
Leky,
Expense and Income are categories rather than accounts. Yes, bookkeeping practice says they are just variations of accounts, but for the vast majority of us who are not trained in bookkeeping, it's easier to separate them. So to create a new Expense or Income category, do Tools -> Categories, then click the New button. (From reading the discussion above, obviously this changed between MD2010 and MD2011, possibly because of the confusion shown in this discussion.)
Accounts and categories are strictly hierarchical, so to get the same set of details under a different top heading, you have to duplicate them. However, there's no forced link between accounts and categories. If you don't need to (for example) track expenses separately, you could use the same hierarchy of expenses for both personal and business. (In most cases, however, it's important to be able to track business expenses separately, and the categories of business expenses usually differ from the personal categories.)
In my case, for example, I have quite a few personal accounts, mostly at the top level (no hierarchy). I have only one business account (a checking account), though for tax purposes I'm running three businesses (only one consistently profitable). For categories, though, I have a separate hierarchy for each business, because they are sufficiently different to require that.
Or perhaps the answer you needed was simpler: MD allows you to create hierarchies of accounts and categories, so you can use hierarchies instead of separate files to keep personal and business (or anything else) separate. Usually it's much easier to keep everything in one file, if only because you can transfer between accounts and categories within a file but not between files. Despite the various complications I have, the only time I've created a separate file was for managing my mother's estate.
Edward
18 Posted by avp2 on 07 Jul, 2011 02:26 PM
I keep a business (set of accounts & categories) in addition to two personal sets (my & my wife's retirement stuff) in the same data file. I do it just like I did in Quicken, Quickbooks and Mind Your Own Business (over the last 20+ yrs)- by using the hierarchical structure mention.
Under each kind of account or category you need/want, you name a parent as "business x", or whatever, and put its accounts or categories there. I also started naming mine in a way that would group them together easily too, say starting each of my retirement accounts with Ra-; it is not so important in MD, but helped in other programs and I have just gotten used to it.
19 Posted by Jim Warthman on 07 Jul, 2011 02:27 PM
Paleolith makes some good points - but Moneydance treats accounts and categories very similarly. If you read to the start of this thread, Ben Spencer from Moneydance Support said the following:
Categories are accounts. They are accounts with type income or expense.
The use of the term category is to provide a middle ground between users who are
not accountants who just want to categorize their transactions and to still provide a
fully function double entry book keeping system for those users who understand the concept.
Enjoy,
Jim