Basic Accounting: Short Term vs. Long Term Expenses
Greg Novak
novak at ucolick.org
Tue Sep 27 16:47:02 EDT 2005
I'm looking for suggestions about how to solve a basic accounting
issue--perhaps there's a standard solution, but my attempts so far have
failed to produce a silver bullet.
I simply need to know if I'm living beyond my means by keeping day-to-day
cash flow rigidly separate from infrequent, large bills and purchases.
Here I define "short term" as being entirely contained within one month
(the frequency with which I balance my checkbook). These things happen
often enough that one month is fair average of the expense. "Long term"
means that the transaction extends over several months. It could be
semi-annual car insurance payments or the process of saving up for several
months with the goal of buying, say, a bike.
What I've done for some time now is balance my checking account to exactly
1000 at the end of every month, transferring the excess/shortfall to/from
my savings account. That works pretty well, but fails in two cases:
1) Say I've saved up $1000 to buy a new bike--I can't spend the money
directly out of my savings account, so I have to transfer it to the
checking account and then spend it. This makes the account look funny for
the month because I've spent so much more than the "nominal" amount. 2)
Credit card purchases. It's easy to rack up debt and still (incorrectly)
feel good about myself because I don't realize that I've overspent until
the bill comes.
I fixed problem #1 by getting a savings account that allows me to write
checks. Then I can spend saved money straight from the savings account.
Problem #2 is still giving me trouble. I can see three solutions:
1) Cut up the credit card
2) Keep a separate tree of expense accounts for "day-to-day expenses" and
"long term expenses." Then I could infalliably see if I've spent too much
on day-to-day expenses in a given month by checking the expense accounts
rather than the asset/liability accounts. However, this is horrendously
inelegant.
3) Group asset/liability accounts into "Day-to-day cash flow" and "Long
term cash flow." That is, the account tree would look like:
--Short Term
----Checking
----Cash
----Credit Card
--Long Term
----Savings
This would go against the seemingly near universal practice of grouping
accounts by asset/liability. However, it would have the nice effect that
credit card purchases couldn't sneak in and wreck the books. The down
side to this scheme is that it may clash with the physical bank accounts.
Ie, I couldn't use the _same_ credit card for both short and long term
purchases.
Thoughts and suggestions are welcome, up to and including "You should just
do X, that's what everyone does and it works fine."
Thanks a bunch,
Greg
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