Basic Accounting: Short Term vs. Long Term Expenses

[Andrew Sackville-West]

my .02


Greg Novak wrote:
>> Do you have a liability account set up for your credit card? When you 
>> incur
>> and expense on the credit card you enter it as:
>>
>> Liabilities:Credit Card 100 (Cr)
>> Expenses: Whatever 100 (Dr)
> 
> 
> Thanks for the response.
> 
> Yes, of course I have an account set up for the credit card.  The 
> problem here is that I want there to be, at some point, a _single_ 
> number that I can look at and say "I'm $150 ahead for the month."  Doing 
> the usual thing (as you described it) leaves me in a situation where I 
> can _think_ that I'm $150 ahead for the month b/c I've got the extra 
> money in my checking account, but I'm actually down $150 b/c there's 
> $300 on the credit card.

lets take an example. annual car insurance $1200 (ouch, shop around 
buddy! ;)

so that's $100 per month.

so your initial transaction, when the insurance is paid looks like this

<David Harrison wrote>
Assets: Chequing                                1,200 (Cr)
Assets: Prepaid expense     1,200 (Dr)

so now you have an asset, prepaid expenses of 1200 and no expense 
recorded at all.

then each month

<David Harrison wrote>
Assets: Prepaid expense                        100 (Cr)
Expenses: Car insurance        100 (Dr)

so now you've recorded an insurance expense for the month at 100. when 
you run a profit and loss report, this expense will show up as 100 for 
insurance.

if you base "how you're doing" on the p&l amount, you'll see how you're 
doing form month to month. you didn't actually pay out that 100, but 
recorded it as expense, thereby decreasing the amount of "profit" for 
the month. At the end of the month, your "profit" is how much money up 
you are and you could put that amount into savings or spend it or whatever.

If you set up similar transactions for all you long term expenses, then 
you'll get a real picture of how you are doing each month.

It doesn't matter where these expenses are recorded. For example, you 
could pay an annual expense with your credit card and use the same method:

Liability: Credit Card		1200 (Cr)
Asset: Prepaid expenses	1200 (Dr)

then make your payment from the checking to credit card at the end of 
the month:

Asset: Checking 		1200 (Cr)
Liability: Credit Card 1200(Dr)

both these transaction will NOT show up on the p&l. You still only show 
actual expense transaction on the p&l. This is tricky though because 
your checking account will be down 1200 though you only expensed 100 
that month. But what it will do is show you month to month whether you 
are making headway or not.

hope this helps in some way

Andrew