<br><br><div><span class="gmail_quote">On 9/27/05, <b class="gmail_sendername">Greg Novak</b> <<a href="mailto:novak@ucolick.org">novak@ucolick.org</a>> wrote:</span><blockquote class="gmail_quote" style="border-left: 1px solid rgb(204, 204, 204); margin: 0pt 0pt 0pt 0.8ex; padding-left: 1ex;">
I'm looking for suggestions about how to solve a basic accounting<br>issue--perhaps there's a standard solution, but my attempts so far have<br>failed to produce a silver bullet.<br><br>I simply need to know if I'm living beyond my means by keeping day-to-day
<br>cash flow rigidly separate from infrequent, large bills and purchases.<br>Here I define "short term" as being entirely contained within one month<br>(the frequency with which I balance my checkbook). These things happen
<br>often enough that one month is fair average of the expense. "Long term"<br>means that the transaction extends over several months. It could be<br>semi-annual car insurance payments or the process of saving up for several
<br>months with the goal of buying, say, a bike.</blockquote><div><br><br>The answer for the car insurance (and any other bill which you pay in advance) is to set up the initial transaction as a prepaid expense, and expense the monthly portion each month. This would look like:
<br><br>Initial payment of car insurance:<br>Assets: Chequing 1,200 (Cr)<br>Assets: Prepaid expense 1,200 (Dr)<br><br>Entry each month to expense that months expense (assumed 1,200 is for 12 months):
<br>Assets: Prepaid expense 100 (Cr)<br>Expenses: Car insurance 100 (Dr)<br></div><br><blockquote class="gmail_quote" style="border-left: 1px solid rgb(204, 204, 204); margin: 0pt 0pt 0pt 0.8ex; padding-left: 1ex;">
What I've done for some time now is balance my checking account to exactly<br>1000 at the end of every month, transferring the excess/shortfall to/from<br>my savings account. That works pretty well, but fails in two cases:
<br>1) Say I've saved up $1000 to buy a new bike--I can't spend the money<br>directly out of my savings account, so I have to transfer it to the<br>checking account and then spend it. This makes the account look funny for
<br>the month because I've spent so much more than the "nominal" amount. 2)<br>Credit card purchases. It's easy to rack up debt and still (incorrectly)<br>feel good about myself because I don't realize that I've overspent until
<br>the bill comes.<br><br>I fixed problem #1 by getting a savings account that allows me to write<br>checks. Then I can spend saved money straight from the savings account.</blockquote><div><br>Sounds like this is ok, then?
<br></div><br><blockquote class="gmail_quote" style="border-left: 1px solid rgb(204, 204, 204); margin: 0pt 0pt 0pt 0.8ex; padding-left: 1ex;">Problem #2 is still giving me trouble. I can see three solutions:<br>1) Cut up the credit card
<br>2) Keep a separate tree of expense accounts for "day-to-day expenses" and<br>"long term expenses." Then I could infalliably see if I've spent too much<br>on day-to-day expenses in a given month by checking the expense accounts
<br>rather than the asset/liability accounts. However, this is horrendously<br>inelegant.<br>3) Group asset/liability accounts into "Day-to-day cash flow" and "Long<br>term cash flow." That is, the account tree would look like:
<br><br>--Short Term<br>----Checking<br>----Cash<br>----Credit Card<br>--Long Term<br>----Savings<br><br>This would go against the seemingly near universal practice of grouping<br>accounts by asset/liability. However, it would have the nice effect that
<br>credit card purchases couldn't sneak in and wreck the books. The down<br>side to this scheme is that it may clash with the physical bank accounts.<br>Ie, I couldn't use the _same_ credit card for both short and long term
<br>purchases.</blockquote><div><br>Do you have a liability account set up for your credit card? When you incur and expense on the credit card you enter it as:<br><br>Liabilities:Credit Card 100 (Cr)<br>Expenses: Whatever 100 (Dr)
<br><br>Then when you pay the credit card, you enter:<br><br>Assets:Bank account 100 (Cr)<br>Liabilities:Credit card 100 (Dr)<br></div><br><blockquote class="gmail_quote" style="border-left: 1px solid rgb(204, 204, 204); margin: 0pt 0pt 0pt 0.8ex; padding-left: 1ex;">
Thoughts and suggestions are welcome, up to and including "You should just<br>do X, that's what everyone does and it works fine."<br><br>Thanks a bunch,<br>Greg<br></blockquote></div><br clear="all">Hope this helps
<br><br>-- <br>David Harrison, BAccS, CGA