Transfers Between Checking and Savings

Sun Mar 17 14:29:28 EDT 2013

On 15 Mar 2013, at 22:14, Ian Konen <iankonen at gmail.com> wrote:

> On Fri, Mar 15, 2013 at 12:35 PM, Michael Hendry
> <hendry.michael at gmail.com>wrote:
> 
>> 
>> On 15 Mar 2013, at 14:24, Mark Phillips <mark at phillipsmarketing.biz>
>> wrote:
>> 
>>> I make periodic transfers from savings to checking. However, I just make
>>> the transfers as deposit in checking and withdrawal from savings. When I
>>> run an income/expense report, those transfers do not show up, obviously.
>>> So, I created an income account called Transfers from Savings, and
>> whenever
>>> I transfer money I deposit in the checking account and credit the income
>>> account. But what is the corresponding transaction in the savings
>>> account? Or, is there a better way to do this?
>>> 
>>> The reason I want to do this is that I am managing my elderly parents
>>> accounts, and the other siblings want to see detailed financial reports.
>>> Since my parents are living off their savings and a few other income
>>> sources, I want to show the transfers from savings as income for them. Is
>>> there a better way to do this?
>>> 
>>> Also, once I figure out how to show the transfers as income, (unless
>> there
>>> is an accounting reason not to do this!), how do I change the reconciled
>>> transactions that go straight from savings to checking without the
>>> intermediate income accounts?
>>> 
>>> Thanks,
>>> 
>>> Mark
>> 
>> As an elderly parent myself, I have a similar problem to solve.
>> 
>> Some years ago, my wife and I invested some of our savings in a Loan
>> Trust, with our children as beneficiaries.
>> 
>> We take a regular monthly sum from this trust fund, calculated to return
>> our "loan" over a twenty year period, without interest. Any interest
>> generated by the fund is reinvested, and in practice it is keeping the
>> value of the fund level. Assuming we survive the twenty years, we'll have
>> recovered the loan we made to the trust, and the money remaining in the
>> trust will be outside our estates for Inheritance Tax purposes.
>> 
>> I have treated this fund as a Current Asset, receiving its opening balance
>> from the Opening Balances Account.
>> 
>> When the monthly payment of £x comes into my current account, I deal with
>> it as a split transaction, taking £x from the Loan Trust account (Current
>> Asset) into my current bank account, but at the same time taking £x from
>> Opening Balances and transferring it into an Income Account which I've
>> called "Pseudo Income".
>> 
>> As we're treating this regular transfer of cash into our current bank
>> account as part of our monthly income, this makes sense for budgeting, but
>> I suspect it doesn't follow standard book-keeping practice!
>> 
>> You obviously want to distinguish between income (which is subject to
>> income tax) and expenditure from savings (which isn't), which is why I've
>> called it "Pseudo Income".
>> 
>> Michael
>> 
>> 
> You need an income account from which you transfer funds to your asset
> account whenever the interest is compounded.  If you ran the home finances
> setup wizard, GnuCash created by default Income:Interest Income:Checking
> Interest as well as ...:Savings Interest and ...:Other Interest in addition
> to the corresponding asset accounts.  Earned interest is recorded by
> transfering funds from an income:interest account to an asset account.  You
> could use one of the default interest income accounts or create a specific
> Income account for the interest earned on the Loan Trust.

Unfortunately, this isn't going to work for the Loan Trust, because no interest is paid to me.

As the name suggests, I have made a loan to the trust, which is to be paid back to me in instalments over a twenty year period.

So if the loan was £12000 (to make the arithmetic easier!), I'll receive £50 every month for 20 years.

I think I've dealt correctly with the setting up of the Loan Trust as an Asset, from which a monthly transfer of £50 is made to my current (= US checking) account.

What I wanted to do was to see this money not as merely moving between two asset accounts, but also to treat it as though it were income. 

I hit on the idea of creating a "Pseudo Income" account, so that I could simplify monthly budget calculations, but I was faced with the need for a source account for the income. As the Opening Balances account is how the Loan Trust asset initially came into being in my GnuCash accounts, I reasoned that this would be the right source, but I now realise that this doesn't make sense from an accountant's point of view - the Opening Balances account is effectively being "charged" twice for the same sums of money - once for the setting up of the Loan Trust (£12000), and then in every subsequent month for the loan repayment (£50). 

As I've been able to get away with this for several years without causing any apparent problems with my accounts, and never have to show them to an accountant, I'm not too unhappy with this arrangement, but it would be desirable to clean the whole thing up.

> 
> If it seems odd to you that your one asset (the loan trust) needs two
> accounts in GnuCash (the asset account and the interest account) it's
> because you're not used to double entry book keeping and you're thinking of
> the word "account" in the vernacular...a thing you open at a bank that
> holds money.  In double entry accounting, income and expenses are also
> accounts and they are separate from the corresponding asset account even if
> there's a logical pairing (bank statements may add to the confusion because
> one letter from the bank tells you about both earned interest and current
> asset levels, but it's really just showing you the asset account side of a
> series of transfers, some of which may have come from an interest account).
> The balance in your Assets:CurrentAsset:Loan Trust should represent the
> current value of the asset, while the balance on the income account is how
> much interest you've earned since the beginning of the accounting period.

I think I have a reasonable grasp of double-entry book-keeping principles, and of the need for the value of Assets:CurrentAsset:Loan Trust to diminish as the loan is repaid.

> 
> I'm guessing you started moving money from opening balances into an income
> account because you thought the income account should show a positive
> balance over time.

My pseudo income account is a device which allows me to regard money transferred from an asset as income, as that is the way I'm managing my monthly budgets.

>  Income accounts acquire a red or negative balance when
> you input income correctly.  I found that counterintuitive as well when I
> started trying to keep my books, but it's correct.  The whole point of
> double entry is that every transaction is balanced, and if you add all
> sides of all transactions at any point in time they should all add to zero.
> So if all you had was one asset and one income stream, the asset balance
> goes up as the income balance goes down (or up in magnitude but red
> colored).  The balance you're probably interested in...the one you think of
> as "the balance" is only the balance on the asset account.  If I guessed
> wrong about how you cam up with "psuedo income", then I've got no idea what
> you're thinking :-).

There is no income stream - that's why it's "Pseudo Income"!

> 
> I'm not an accountant, so apologies to the pros if I've incorrectly
> conflated a "red" balance with a "negative" balance.

Nor am I!

I wonder if a real accountant can suggest a way this circle might be squared, or can suggest an approved way in which a monthly excess of expenditure over income can  be presented as a balanced budget.

Michael

> Ian Konen
> iankonen at gmail.com
> www.linkedin.com/in/iankonen
> 978-821-6498
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