Budget questions. (wordy)

[Andrew Sackville-West]

Not to jump in the middle but I think you guys are trying to compare 
apple to cars. I don't think it really matters how a person developed a 
liability (car loan, mortgage, CC, whatever), what does matter from a 
Personal Budgeting standpoint is how you can afford to pay that sucker 
down. If I bring in $1000 a month, pay $300 for groceries, $150 for 
utilities, $50 for cable (gotta have TV man!), $$100 for beer and $400 
to the loan for that shiny new car that I sleep in, I need to be able to 
reflect ALL those items in my budget. This may not be *B*udget, but it 
is budget. It should be intuitively easy to include money paid to a 
liability in a budget. I think most people understand, if you explain it 
to them, that they are either expensing the car over time or 
depreciating it or whatever, but that is immaterial when it comes time 
to figure out how to pay the bills. People want to just list that $400 
along with all the other monthly "expenses" (that is, things that suck 
up my money) regardless of whether it is actually an Expense or is 
reducing a liability.

Granted there are users that want to be able to do capital budgets and 
cash budgets and all that, but I imagine the vast majority don't give a 
fig.

my .02.

thanks as always for the great work.

Andrew

Chris Shoemaker wrote:
> On Tue, Nov 08, 2005 at 09:46:58PM -0500, Derek Atkins wrote:
> 
>>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.
> 
> 
> Is your question "why wouldn't you need to budget for the CC payment"?
> If so, the answer is because you already budgeted for every expense
> when the liability was incurred.  (At least, that's what I thought you
> meant by "enter a CC->Expense transaction when the transaction
> occurs.")  You don't need to budget for the same thing twice, once when
> you "charge it" and again when you "pay it off".  You only need to
> budget for one or the other.
> 
> 
>>>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
> 
> 
> Umm... If you *bought* the car (vice getting it for free) then it's
> both.  You pay money (any decrease in an asset account *may* be
> considered an expense) for the car.  But, you *may* instead consider
> the paid money to be decreasing a liability which you traded for a
> real asset.  One is not more or less "true" than the other.  Each
> achieves a different record-keeping purpose.  They both are zero-sum,
> balanced views.
> 
> 
>>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.
> 
> 
> Don't forget that the car actually cost you something.  Depreciation
> is a real expense.  You have to account for the expense somewhere,
> either when you buy it or when it rusts to dust or somewhere in
> between.  One very common method is to count the expense up front,
> when you buy it.  If you prefer, this is like depreciating the asset
> to zero the day you buy it, except you skip the zero-sum entries in
> the asset account.  The reason this is so common is because it's
> tedious to create an asset account for everything you buy.
> 
> 
>>>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
> 
> 
> :) Where are you getting all these free cars from?  Can I have a
> couple?  Just kidding...
> 
> Seriously, this is a false dichotomy.  Any increase in a liability can
> correspond to *either* increased assets or a delayed expense.  The
> decision is up to the discretion of the record keeper and is
> influenced by peoples' particular objectives.  One person can consider
> a car as a relatively liquid asset because they plan to sell it and
> make a profit.  Someone else can consider the same car as a
> non-recoverable expense, because they plan on driving it into the
> ground.  Likewise, I tend to consider student loans as an expense, but
> I could imagine someone who was extemely proud of their education
> creating a corresponding asset account for their education, and saying
> "Education isn't an expense! It's an investment!"  They could pay for
> their entire education without hitting an expense account.
> 
> I guess the budgeting tool should support all kinds, huh?  You've
> convinced me the non-Income/Expense accounts need to be available.
> 
> 
>>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.
> 
> 
> I saw that and may have actually implemented it.  (It's trivial.)
> But, there's an abuse of intuition here either way you go.  If you
> know what it means, you may be very annoyed at a budget that showed
> account value decreases as positive numbers.  OTOH, if you're
> *thinking* about the expense when you budget for the decreasing
> liability (which I think many people would) you might be disconcerted
> by the negative values.  But, it's a preference setting IIRC, right?
> 
> -chris
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