loan explanation

[Yawar Amin]

Hi Tom,

On 2009-09-12 18:39, T. Howell-Cintron wrote:
> Yawar & Others,
>
> Thank you for your advice.  I'm still a little lost, likely because I'm
> not up on accounting terminology, GC, and.. well.. I'm not the brightest
> crayon in the box.  I know what's meant by the date/description you
> mention but hazy on the rest.  Hopefully you can clarify.
>   

Sorry for the delay. I've been trying to come up with something good.
Didn't really succeed, but I'll try anyway:

> Yawar Amin wrote:  
>   
>> For the initial loan:
>>
>> Date: whenever you got the loan initially
>> Description: who/where you got the loan from
>> Debit Assets:Checking $1,000
>> Credit Liabilities:Loan $1,000
>>     
>
> Debit assets?  So my Assets:Checking should have a transaction that
> deposits said $1000 - from what source?  (The Liabilities:Loan?)
>   

Yes, exactly, from Liabilities:Loan.

> Likewise with the Liabilities:Loan it should read an increase of $1000 -
> from what source?
>   

You keep track of the `source' in the Description field of each
transaction in GnuCash. More relevant here is the accounts that the
money is moving between. There's a credit (increase in your liability)
of $1,000 to Liabilities:Loan and a debit (increase in your asset) of
$1,000 to Assets:Checking. These two sides of the same transaction
ensure that the double-entry accounting entry is valid.

>> For each payment:
>>
>> Date: date of payment
>> Description: who/where you got the loan from
>> Debit Liabilities:Loan $how much you repaid at that point
>> Credit Assets:Checking $same amount
>>     
>
> Liabilities:Loan should have a decrease of the amount I paid, and show
> the transfer from my Assets:Checking account, right?
>   

Exactly. The assets and liabilities decrease by the same amount. Again,
this is a valid double-entry bookkeeping transaction.

>> Date: date of purchase
>> Description: name of the computer shop
>> Debit Expenses:Computer $100
>> Credit Assets:Checking $100
>>     
>
> Then enter a transaction in my Expenses:Computer account that reflects
> an expense of $X coming from my Assets:Checking account? .. or should
> that be from my Liabilities:Loan account?
>   

The money should be coming from your Assets:Checking account, because in
this simplified example, you're putting the borrowed cash in your
checking account, then spending it from there. In other situations, like
if you had a line of credit from your bank, you might have been spending
the money directly from the LoC by writing out a check. In that case the
money would move straight from Liabilities:Loan to Expenses:Computer.

>> Date: date borrowed more
>> Description: who/where you got the loan from
>> Debit Assets:Checking $how much you borrowed
>> Credit Liabilities:Loan $same amount
>>     
>
> So Assets:Checking should show a deposit of $X and Liabilities:Loan
> should show an increase of the same amount?
>   

Exactly.

>> I think for liability accounts, `increase' means credit, and `decrease'
>> means debit. In this case, you're on the right track.
>>     
>
> Increase = additional loan, decrease = loan repayment, right?
>   

Exactly. For the Liabilities:Loan account.

> I think I'm understanding the end result, I'm just hazy on how to get
> there.  It makes sense that as the amount of the loan increases I'd have
> more money available in my Assets:Checking account, but what do I
> attribute the Liabilities:Loan increase to?  The money doesn't just come
> from nowhere (although I wish it did. :)
>   

That takes care of itself. You just have to debit (increase)
Assets:Checking and credit (increase) Liabilities:Loan in the same
transaction.

In the case, of assets, yes, the money doesn't come out of nowhere
initially, you have to show assets as coming in from your equity
accounts as opening balances. But for liabilities you don't need to
worry about that. At least, not that I know of.

>> Final tip: enter all the transactions in the General Ledger (Tools >
>> General Ledger), so you don't need to worry about which account you're
>> entering transactions into. Of course, you can enter any transaction in
>> any account window and it'll automatically get put into the right
>> windows, but I won't get into that here.
>>     
>
> I'm going to try tinkering with the General Ledger, which seems more
> like what you'd encounter in a paper-and-pencil operation anyway.  It's
> just so foreign to me that I'm sure it will take me a bit to get used to.
>   

The General Ledger is, I think, completely designed around the concepts
of double-entry bookkeeping. People who've been introduced to the
concepts of making entries in a general journal will find it very
familiar. Others might find it takes a bit of getting used to. I can
vaguely remember a time, before college accounting 101, when I had never
done any accounting in my life. Trying to use GnuCash, admittedly back
in 2002--3, I found it quite perplexing and counter-intuitive. But after
some basic accounting, what a difference! It's the most natural fit in
the world for someone who thinks in terms of debits and credits.

> All in all I'm very happy with GnuCash and look forward to using it to
> manage my personal finances from here on out.  I've used MS Money and
> Quicken but neither gave me the control I wanted, had clumsy interfaces,
> and were above all an EXPENSIVE option for what little they provide.
>   

I wholeheartedly agree with you there. I hope you get a lot of use and
value out of GnuCash.

Cheers,

Yawar

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