Linking liability and equity accounts

[jorja920]

I feel like I have a brain freeze with thinking about this problem. We're using PCP 10.4 on XP. I've set up PCP for or church and have input several months into the system with fixed assets and liabilities showing our obligations, etc. I have made regular payments to those liabilities, i.e., a pledge of $5,000 which we pay $85 per month; CR 01-1110 (Bank) and DB 01-2415 (Pledge Liability). I've noticed that our Unrestricted Net asset (3110) has not changed with these payments. Is this 3110 asset linked to the liability (2415) account so it decreases/increases our equity as we pay off this debt? Or is this a entry I must post to the equity account with each payment?
Any help would be appreciated.
Thanks

[JohnDMeyers]

No, it won't change your equity.

You owe $5000.00. You have assets and some equity.

Assets = Liability + Equity

When you make your payment, you decrease Assets by $85 and Liabilities by $85. The equation is still valid and Equity doesn't change.

(Assets - 85) = (Liability - 85) + Equity

Bear with me, I used to be a math teacher.

[jorja920]

Thanks again. You make it sound so simple. And maybe it is, I was just not thinking it through logically.

[Eric Herzog]

Hello,

Using John's excellent response as a basis; when you recorded the liability for the church (credit 2XXX) what account did you record the debit entry to?

For example, when we (deposit) cash receipts to an asset account (DB - 1XXX) we would (most often) record an increase to income account(s) for that period (CR - 4XXX). The CR entry to 4XXX closes to the fund balance/net equity account. When the church pledged to remit the $5k - we increased the balance of the liability account (credit 2XXX) - but the church also incurred an expense for that period (debit 5XXX). The DB entry to 5XXX closes to the fund balance/net equity account.

If this pledge liability was recorded as a "beginning balance" as of XX/XX/XXXX during the initial setup of PC+ it is assumed that the expense was recorded in a prior period and is therefore already reflected in the fund balance (net equity).

Peace,

Eric

[jorja920]

Thanks Eric,
I've had to ponder this one through, again. My college course of double-entry account was a life-time ago and I'm re-learning these concepts as well as this program. So, I apologize if I'm asking basic accounting questions.
We did post the pledge when initially setting up PCP. It was never recorded as an expense, just a liability. This is our first year in paying toward that pledge. I currently post the payment as: CR 1110 & DB 2415. I don't track this payment through an expense account. Since the payment on the liability closes to the net equity asset I thought this would reflect the right net equity balance.
Am I wrong?
Should I create an expense acct and what would the entries be to show this transaction's DB/CR's as expense & liablity?
Thanks,

[JohnDMeyers]

Following Eric's lead,

if you had a beginning checking balance of $10,000 and a beginning pledge of $5,000 owed (and nothing else)...

You're beginning equity is $5,000.

Over time, you transfer from checking to the liability until the liability is paid off.

You now have $5,000 in checking and $0.00 in liability and you still have an equity of $5,000. (following my previous equation, this is expected).

The only way to increase your equity is to get more income than expenses.

Remember, if you were a "for profit" business, you could substitute the words "net profit" instead of "net equity". The only way to make a profit is to have more income than outgo.

Paying down a debt from an existing bank account doesn't translate into "net profit".

In the "not-for-profit" world, the goal is to break even. There is no demand on increasing equity.