Expense account for mortgage principal

[Andrew Sackville-West]

Jim wrote:
> Hi,
> 
> I have a scheduled transaction for my mortgage payment that looks 
> something like this:
> 
> Interest     Expenses:Interest Mortgage     25.00
> Tax          Expenses:Taxes:City Property   25.00
> Principal    Liabilities:Loan Mortgage Loan 50.00
> Payment      Assets:Bank Account                  100.00
> 
> This seemed to work fine until I ran an income/expense report.  The 
> problem I'm seeing is that the Principal doesn't show up as an expense.

this is exactly right. the 50 paid to liabilities:loan mortgage is not 
an expense. it paying of a liability. This means that the asset you 
have, your house valued at say 100,000 is offset by a liability, your 
mortgage for say 80,000. you just reduced that liability to 79,950 
making your net worth (how much $ we could get for your soul on the 
black market ;-) go up by 50 from 20,000 to 20,050 (100,000 - 79,950).

> I'd like to use this report as an indication as to what my cashflow 
> 'really' is. 

this is called a cash flow report and shows how much money came in, how 
much went out and where it all went. a cash flow report will show you 
whether you are "coming out ahead" or not. If you have negative 
cashflow, then more money is going out than coming in and you are headed 
down that slippery slope to where the rest of us americans like to live...

  That is, I'd like to see how much I'm really coming out
> ahead (or behind) every month.  I'm thinking that the solution is to 
> create another Expense Account for principal Payments.
> 
> 1. Is this acceptable accounting?

no, but they're your books and if that's what you want to do, go for it. 
IANAA. For most peoples practical purposes, its perfectly fine to record 
it as an expense simply because most people don't run a personal balance 
sheet or the like. Its simply not necessary and your accountant can 
figure out things like basis for your house when you sell it etc. To do 
it right, you must set up the above mentioned asset and liability 
accounts. one for your house showing the value of your house (the 
initial purchase price adjusted from time to time for market effects and 
improvements made). one for your mortgage showing the principal balance 
owed. then your loan payment is split between interest expense and 
principal payment. the net value of your house is the difference between 
your asset for the house and your liability for the mortgage. hopefully 
that's a positive number ;-)

> 2. If so, How/Where should I place the other entry to balance the 
> principal payment?
> 
> I have the same issue for my 401k witholding.

this is the same thing in reverse. again its not an expense. its money 
moving from one account to another. your 401K account is an asset. when 
money is withheld from your paycheck, it is paid into your 401 K account 
and is YOUR money even if you can't get at it right now. so you should 
set up an asset account called 401K or whatever. When you enter your 
paycheck, you can put in a split that transfers money to that 401 K 
account. As the value of the 401 K goes up, so does your net worth and 
so we become more likely to bludgeon you and haul you off to that black 
market. Also, from time to time you shouldmake entries in your 401 K to 
account for investment returns in that account. and for god's sake don't 
put all those 401K $'s into Enron!! diversify man!


Andrew