NEWBIE: Lendning money to people...

[Benjamin Carlyle]

On Tue, 2004-06-01 at 06:35, juman wrote:
> I'm just starting to use this program and is curious if somebody could
> me a hint how I should use gnucash when lending money to other people?
>   I don't take interest or anything just having some smaller loans I
> have given to friends and want to track of.

Nils' suggestion of an asset account is the correct one (at least under
my country's gaap). When you lend money with the expectation of getting
it back it is an asset to you, and a liability to them. Your accounts
show it as an asset. Theirs as a liability. When you lend money that
asset increases while your cash asset decreases by the same amount. Your
net worth doesn't change. As people pay you back you record the money
flowing back into your cash reserves, and again your net worth doesn't
change. If you charge interest or fees they are counted as income.

This method of accounting is really flexible. The loan asset account
shows how much is left outstanding on the loan, but you can create other
accounts to go with it. You can create a receivable asset account for
the person you've loaned money too and schedule (or enter ahead of time)
transactions that transfer money from the loan asset and to the
receivable asset for when you've agreed your repayments will be. That
way you can see a running total of when they were supposed to pay you,
and when they actually did. You can also charge interest on a regular
basis automatically and easily.

Something I do with my home loan is keep a second loan account for extra
repayments. The main loan account carries the transactions that I agreed
I'd pay the bank when the loan was established, while the extra
repayments accounts tracks how much extra I've put on the loan. This is
important because I can redraw from the extra amount, but while it is
sitting on the loan it offsets the interest I otherwise would have paid.
By separating the totals I have easy access to information about how
good an investment the extra repayments are, as compared to shares and
other holdings.

Now, if you want to go really hardcore you could do one more thing. I
started this reply by saying "if you expect to get the money back...".
If that's not the case, obviously you wouldn't lend the money in the
first place, but if you're just not quite sure you can choose to put in
a "doubtful debts" provision account from the outset. Say that 90% of
the time people paid you back as they were supposed to... you might
record an expense of 1/10th of the loan value (or 1/10th of each
transfer to payables) as a transfer to doubtful debts. At the end of
each business cycle you would try to figure out exactly how many of your
outstanding debts are in fact bad (probably using ageing of accounts
receivable), and deduct that figure as an expense from your provision
for doubtful debts.

Whenever you figure that a specific debt is bad, you transfer its entire
balance to reduce your provision for bad debts. They still owe the money
but you're not going to see it, and you now know which of your debts
have gone bad. If they ever do come up with the money, you can transfer
it back to that customer's receivable account before transferring it
again back into your cash accounts.

Ok. That's enough accounting fun for the day. I hope I've only confused
myself.

Benjamin.