Budget questions. (wordy)

[Derek Atkins]

Quoting Chris Shoemaker <c.shoemaker at cox.net>:

> On Tue, Nov 08, 2005 at 09:03:58PM -0500, Derek Atkins wrote:
>> Chris,
>>
>> most users I would bet enter a CC->Expense transaction when the
>> transaction occurs.  So you enter your $2000 HDTV expense when
>> you buy the TV, not when you pay off your credit card.
>
> Yeah, I expect this is normal usage.  Of course, that means that the
> CC payment is straight from assets to liability, e.g. checking account
> to CC account -- no expense accounts involved at payment time and you
> wouldn't need to budget for them anyway.

Why not?  If I make a $1000 salary in a budget period, I want to budget
to all my "expenses", and paying down a liability is an "expense" (even
though it is certainly not an Expense).  The idea is to budget Cash Flow,
not P&L or the Balance Sheet.

>> However
>> if you're maintaining a balance on your credit card (or house loan,
>> or student loan) you want to include that "cash flow" in your
>> budgeting process.
>>
>> No, paying down a house loan or a student loan is not an expense
>> per se, but it is cash flow..  And many people want to budget for
>> cash flow.  I consider this a must-have feature for a budgeting
>> system.
>>
>
> Well, the standard budgeting tool for planning cash flow is not the
> cash budget, but you can make this work in a couple of ways.

Honestly I'm trying to talk about functionality, not the tool.
If we have something that isn't a GAAP Cash Budget I certainly
think users will still be very happy.  If we cannot model cash
flow, cannot budget for paying down a liability, then I think
users will be very UNhappy.

> Let's say you "buy" a car with a CC and you want to budget paying it
> off.  (1) You could create a Car expense account and as you pay off
> the CC, you increase the Car expense account.  It's like you're buying
> it a little bit at a time.  or (2) You could pay the CC with an
> asset->liability transfer, with *no record* of what the actual expense
> was, and then use the CC liability account in the cash budget.
>
> Personally, in this case I would prefer (1), since it records the
> expense and (2) is a non-standard use of a cash budget.  (E.g. you'd
> have to budget negative values, something a cash budget doesn't
> usually have.)

Except (1) isn't true.  The car is an asset, not an expense.  Even as
you pay off the Liability (be it a CC or a Loan), the only Expense
involved is the interest.  The principal pays off the Liability, but
the car itself is still an Asset.  The value of the car only decreases
due to Depreciation.

> In any situation where your records actually *have* to record what you
> spend money on, (1) is mandatory.(*)  What I wonder is whether allowing
> (2) is worth the (possible) confusion.
>
> (*) Actually, a real accountant would probably do it a bit
> differently; count the whole expense up front, and pay down the
> liability account, but the point is, you *have* to use an expense
> account, and all liability accounts have to start at zero.  You can't
> just *create* liability by setting an opening balance on a liability
> account.

Um, see above.  The Car is not an expense.  It's an asset, so when you
buy the car it's

  Liabilities:Car Loan -> Assets:Car

then as you pay the liability it's:

  Assets:Checking -> L:Car Loan + Expenses:Car Loan Interest

The budgetting tool needs to keep track of this part and budget for this
periodic transaction.

The way to do it is to realize that a Liability is an "inverse" account
and just invert the numbers, so you're still budgeting a positive amount.
c.f. the "invert Credit Accounts" preference.

> -chris

-derek
-- 
       Derek Atkins, SB '93 MIT EE, SM '95 MIT Media Laboratory
       Member, MIT Student Information Processing Board  (SIPB)
       URL: http://web.mit.edu/warlord/    PP-ASEL-IA     N1NWH
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