Recoding money I "owe" myself?

[David Harrison]

On Sat, 12 Mar 2005 21:03:35 -0500, Jason Ahrens
<jason.ahrens at rogers.com> wrote:
> On March 11, 2005 11:35, David Harrison wrote:
> > For the purchase of the house, you should have something like this:
> >
> > Withdrawal from RSP
> > Asset:Bank                          $ x,xxx.xx
> >      Asset:RSP                                         $ x,xxx.xx
> >
> > Purchase of house:
> > Asset:House                        $ x,xxx.xx
> >      Asset:Bank                                        $ x,xxx.xx
> 
> That part I understand, and have done already.
> 
> > That side is pretty straight forward.  Here's how I think you would
> > set up the liability:
> >
> > Equity:Retained earnings      $ x,xxx.xx
> >      Liability:Owing to RSP                         $ x,xxx.xx
> > This would be for the full amount of what you borrowed.
> 
> Ok, this gives me an equity account with -$xxxx.xx in it.
> 
> > If you repay a portion:
> > Liability:Owing to RSP         $ x,xxx.xx
> >     Equity:Retained earnings                      $ x,xxx.xx
> > And:
> > Asset:RSP                         $ x,xxx.xx
> >    Asset:Bank                                          $ x,xxx.xx
> 
> This is the part I don't understand. I am now recoding the movement of this
> money twice? Once  from the RSP Loan liability back to the Equity account
> (moving it back towards 0), and once from the back to the RSP?
> 
> I can see the logic behind each step individually, but does this not do
>  really funny things with the reporting? Right now GNUCash reports my net
>  assets to be in the red after setting up the loan/equity accounts.
> 
> Thanks
> 
> Jason
> 
Let me try to explain my thought process on this one.

First, the money that is withdrawn from the RSP will either have to be
repaid, or taken into income.  In my mind, this makes it fit the
definition of a liability.  Therefore it should be recorded as a
liability.

Now, there are a few options with the original entry (when you
withdrew the money from the RSP).  The first would be to record the
transaction as so:

Asset:Bank            $ x,xxx.xx
  Asset:RSP                           $x,xxx.xx

This is what you did, and seems the most logical.  But it also ignores
the liability, so more is needed.

Another option is:

Asset:Bank                   $x,xxx.xx
   Liability:Owing to RSP                     $x,xxx.xx

This sets up the liability, but leaves the asset account for the RSP
unchanged.  Again, this entry needs something else.

A third option is (all the dollar amounts are the same in this transaction):

Asset:Bank                   $x,xxx.xx
?????:???????              $x,xxx.xx
   Asset:RSP                                      $x,xxx.xx
   Liability:Owing to RSP                      $x,xxx.xx

The problem here is, what account do you use to balance the entry?  It
wouldn't be an asset, since you haven't added any assets. Nor would it
be a liability, because that would create a negative liability.  It
doesn't appear to be an expense. And it certainly can't be a negative
revenue.  So that leaves equity.  Also, since what you've done is
borrow from past earnings (that's how the money got into the RSP in
the first place), equity seems to make sense to me.  This is how I
arrived at the first three entries in my original response.

Now, to repay the loan is simply the reverse of the above.  First you
would have to record the transfer of money from the bank account to
the RSP:

Asset:RSP                  $x,xxx.xx
   Asset:Bank                                $x,xxx.xx

Then, you record the reduction in the amount you have to pay back:

Liability:Owing to RSP:        $x,xxx.xx
   Equity:Retained earnings                  $x,xxx.xx

Thus, if you make the required payments every year, you would end up
back where you started.  But what happens if you don't make the
required payment?  If you don't make the payment, then you need to
take the portion that you should have repaid into income for that
year.  (Note that Canada Revenue Agency will tell you how much the
required repayment is on your Notice of Assessment.)  The entry to
record this as income would be:

Liability:Owing to RSP:          $x,xxx.xx
   Income:Revenue                                  $x,xxx.xx

Since you have taken this into income, it doesn't have to be repaid.

As for the reporting, the value of the house should offset both the
loan and your mortgage, so your assets should be reported correctly.

I hope this helps.
                   

-- 
David Harrison, BAccS, CGA