Loans

[JBW]

Thanks all, the fog is starting to lift. Customizing GnuCash reports 
will allow transfers between Asset & Liabilty accounts to show up in 
cash flow and income/expense reports (thanks Mr Johnson). One thing that 
is still nagging at me is that if I follow correct accounting procedures 
(as per Mr Sackville-West) to allow accurate monitoring of interest 
charges (good point Mr Broderick), it seems I should show the capital 
portion of loan repayments flowing from the Asset (Bank's money in box 
under bed, as per analogy by Mr Sackville-West) to the Liability (Loan 
Balance). This however does not represent the reality that both the 
capital and interest portions of each loan repayment come from my 
savings account. If I take the capital portion of the loan repayment 
from the Asset (Box under bed) and send it to the Liabilty (Loan 
balance), my Asset named Savings Account will not have the correct balance.


Kevin T. Broderick wrote:

>
> 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

>
>
###########################
Mr Sackville-West's response to my initial questions shown below;

JBW wrote:

> I'm trying to figure out how to handle my loans in GnuCash. I've read the
> tutorial but the method described does not really suit me.
> The main problem is that the tutorial says loan interest should be 
> registered as an
> Expense. This however is not the case with me. Interest charges and loan
> repayments are two separate transactions of differing values. My 
> Expense is
> the loan repayment, not the loan interest charge.




the problem here is that you are not following standard accounting 
practices for keeping track of your loans.  AFAIK gnc doesn't handle 
this automatically and you will be stuck manually creating your 
transactions.

>
> For example, on the 10th April I want to move $500 from my Asset named
> Bank Account to reduce my Liability named Mortgage Balance. But I
> ALSO want this amount to show up as an Expense named Mortgage
> Repayment. This little equation has three sides (Bank Account, 
> Mortgage Balance
> & Mortgage Repayment), thus I am having trouble dealing with it.




this is not double entry book-keeping. Follows is a simple description 
of how loans work. Read or not as you like.



Here's how a loan works. You borrow money from a bank, say $1,000. you 
put that money in a box under your bed. That box of money is the bank's 
money. You're just keeping it for them for a while. So...
 Every month you take out the box, pull out $100 of the BANKS money and 
pay it to the bank. Then you reach into your pocket and get out $1.43 of 
YOUR money(just making up numbers here) and pay it to the bank as interest.

Remember, the box money is the banks money and the pocket change is your 
money. So in accounting, the way you represent this is simple. There are 
three accounts. First is the Liability account -- the amount of the 
banks money that you have. The second is the asset account -- the box 
under the bed (this can be anything, cash in your checking account, the 
boat you bought with the money, the groceries you bought with the money 
and then ate. regardless, it is the banks money sitting in a box waiting 
for you to give it back). The third is the expense account for interest. 
this is the money that you pulled out of your pocket. This is the only 
money that is YOURS that is included in the transaction and thus the 
only one you can expense. When you make a payment, you are moving some 
of the banks money back to the bank and giving some of your money to the 
bank, this principal and interest and equals the total payment to the bank.

If you have a loan that is accruing interest and adding it to the 
principal balance, then you enter an interest transaction in the 
liability register. That is an interest expense for say $2.53 accruing 
more liability. Using our example that means that you take $2.53 out of 
your pocket and put it in the box under the bed. Its now the banks money 
for you to repay later.

Hope this helps,

Andrew


Then on the 20th April I want the Liabilty named Mortgage Balance to
increase by $450 (Loan interest levied), but there is not really a
balancing account that I can see. The balance of this Liability just 
increases
when the Loan Interest is levied against my mortgage account. There is no
Expense involved.

Does Equity somehow play a part in handling the transactions in the way
I want?
How do I deal with these transactions in the way I want?