Balancing the accounting equation

Common problems
An improved accounting equation report

The Accounting Equation states that Assets and Liabilities always match Equity. Eg: A - L = E.

This suggests that a balance report showing all Asset, Liability and Equity account balances should show a zero grand total. With hledger you can check this with a balance report like:

$ hledger balance ^assets ^liabilities ^equity

or more easily with the balancesheetequity command, which is designed for this:

$ hledger bse

Note, checking the accounting equation is different from checking a trial balance. A trial balance just checks that the total inflows and outflows over all accounts are equal, which can be seen by a zero grand total for hledger balance. Normally this is ensured by hledger's requirement that each individual transaction is balanced, but some of the same problems noted below apply to this also.

Common problems

In practice, you will find quite a number of things in real-life journals can disrupt the accounting equation and cause a non-zero total. Note, this does not interfere with most day-to-day reporting, and many PTA users won't notice it as a problem. But, seeing the correct zero total gives added confidence in your bookkeeping, for yourself and others you might be sharing reports with.

Here are some things that disturb the accounting equation, and their solutions:

1. Unclosed revenue/expenses

Revenues (income) and expenses are technically part of equity. In traditional accounting, they should be transferred to an account like equity:retained earnings at the end of each reporting period.

You could record such transfers in your journal, either manually or using close --retain. Most PTA users don't bother with this.

More conveniently, you can use an account alias to convert revenue/expense accounts to equity temporarily. Eg:
--alias '/^(revenues|income|expenses)\b/=equity'

However, that doesn't work if you have declared your account types with type: tags. Alternatively, you could try including close --retain's output on the fly (which is probably what the bse command should have built in). Eg if you are using bash:

hledger -f $LEDGER_FILE -f <(hledger close --retain) bse

2. Unbalanced conversions with cost notation (@/@@)

Currency/commodity conversions using @/@@ notation and no equity conversion postings are unbalanced. You can rewrite them in balanced form, eg combining costs and equity conversion postings.

Or, use --infer-equity to do this temporarily at report time.

Or, converting amounts to cost may be another solution - try adding -B.

3. Rounding error with unit costs (@) and --infer-equity

--infer-equity is convenient but it tends to expose inaccuracies in the recorded @ prices, causing small non-zero values in the total. You can ignore this, or try to fix it by making @ prices more accurate, or replace your uses of @ with @@ (?) or equity postings.

4. Posting dates

Postings dates different from their transaction's date (; date:DATE or ; [DATE] notation) cause an imbalance in the accounting equation between the transaction date and posting date. Usually these unbalanced periods are short and do not cross a file boundary, so you can just avoid them when testing the accounting equation.

If they do cross a file boundary, or are inconveniently long, you can fix that by splitting the transaction into two transactions which use a pending account, as in close and balance assertions.

5. Unbalanced postings

Unbalanced virtual postings (with parenthesised account names) create an imbalance by definition; just exclude them from the report with -R/--real. This also excludes balanced virtual postings (with bracketed account names), but that will probably be harmless.

6. Partial reports

Many kinds of report query exclude some data, which can disturb the accounting equation. So, it's best to avoid queries when checking the accounting equation. If you specify a report start date, be sure to include balances from previous transactions by adding -H/--historical. (Or use the bse command, which does this automatically.)

$ hledger bse -R --infer-equity --alias '/^(revenues|income|expenses)\b/=equity' not:desc:'closing balances' --layout tall

-R - (--real) excludes any unbalanced virtual postings
--infer-equity - adds equity postings where needed to balance transactions using @/@@ cost notation
--alias ... - recategorises all revenues/expenses as equity
not:desc:... - excludes any final closing balance transactions that would hide ending balances (suitable for checking a single journal file)
--layout tall - improves readability when there are many commodities
-f ... - optional, specifies a file other than the default $LEDGER_FILE.

Merging RX with close

$ hledger bse -R --infer-equity -f $LEDGER_FILE -f <(hledger close --retain) -I not:desc:'closing balances' --layout tall

<(...) - bash syntax, puts the command's output in a temporary file
hledger close --retain - generates transactions transferring revenues & expenses to equity
-I - ignores any failing balance assertions

Trial balance report

You could also just use the balance command to show a full trial balance report involving all accounts, which may be simpler.

$ hledger bal type:ALERX -R --infer-equity not:desc:'closing balances' --layout tall

type:ALERX - consider only asset/liability/equity/revenue/expense accounts, not any non-standard accounts you might be using

hledger