Loans

[Kevin T. Broderick]

On 30 May 2005, at 3:38 AM, JBW wrote:

> This sounds good, however it seems using this correct accounting  
> practice that the only component of a loan repayment that can show  
> up as an expense is the interest. The capital component of each  
> repayment bypasses the expense account. In reality my monthly  
> expenses (that come out of my pocket) include a COMPLETE loan  
> repayment. Having only the interest component registered as an  
> expense does not allow me to accurately monitor my cash flow.
>
> I am just a home user of GnuCash, so it becoming apparent that the  
> only way I can make sure my entire loan repayment shows up as an  
> expense is to forget trying to monitor the loan in detail and just  
> have an expense "loan repayment" that comes out of my pocket. This  
> is caveman accounting but I can't see any other way to keep  
> accurate records of my monthly cash flow. I would like to have kept  
> track of the loan balance in my accounts but I can't see how I can  
> achieve this and follow the accounting rules.
>
> All I ever know is;
> 1) The loan balance.
> 2) The date interest is added to the loan balance and the amount  
> added.
> 3) The date and total amount of my monthly repayment (interest/ 
> capital split not known), which comes out of my pocket.
>
> How can I monitor this loan correctly and also show the entire  
> repayment as an expense?  Alternatively if you cannot show capital  
> repayment as an expense, how do I manage my cash flow accurately  
> when capital repayments are not counted as expense?

Have you looked at the cashflow report?  You can track your income  
and expenses accurately (per the relevant generally-accepted  
accounting practices) and still track cashflow.  The cashflow report  
basically "draws a circle" that encompasses a set of accounts and  
displays transactions that cross the line of that circle.  You would  
have to either open multiples copies of the report to view different  
months or reload it with different options, though.

Personally, I find it useful to follow GAAP and to be able to track  
cashflow separately from profit/loss (or income vs. expense, if you  
prefer).  Among other reasons, I can look to see if the apparent  
buildup of money in my checking account represents a pattern of  
positive cashflow or just a temporary increase in cash-on-hand; if  
it's the former, then I know that I should probably increase the  
amount of money I'm putting towards debts (credit cards in  
particular, but student loans as well), while the latter might   
suggest that I either make a one-time increased payment or that I  
hold the cash in anticipation of upcoming cash-preferred expenses.

If you'd still prefer to consider the entire loan payment an expense,  
then yes, you're right, you need to just create an expense account  
called "loan" and put your entire payment there.  It's not following  
GAAP and it may make your taxes a tad more complicated (if the  
interest is in any way deductible, it's quite helpful to track it  
separately from the principal pay-down and know exactly how much  
interest one has paid during the year), but it can be done.

Kevin Broderick / kbroderick at smcvt.edu