Car loan payments and budgets

[Maf. King]

On Thu 26 April 12 16:38:33 skerit wrote:
> I just bought a new car. If I do everything by the gnucash-book I have to
> create an account for the loan in the "liabilities" section.
> 
> But I don't see how I can make that work with my budget.
> 
> Because, no matter how you look at it, in the end those loan payments are an
> expense. And if I just transfer the money from my account to the loan
> account it will never show up in my budget report
> 
> Or am I missing something here?
> 

Hi Skerit,

You may be missing the fact that _buying_ a car isn't an expense.  Yes, I know 
it seems counter-intuitive, but keep reading!

You swap (for example) £10,000 of cash for £10,000 worth of car-shaped-asset.  
the expense only happens as the car depreciates and it's worth goes down.

You could, theoretically, sell that car again tomorrow and get (nearly) all of 
your 10k back.  the only expense you incur is the difference between what you 
bought it for and what you sell it for. 

Suppose, in this case, you have borrowed  £8,000, put £2,000 cash deposit 
down, and got £10,000 car as a "Capital Asset" on your books.

To further complicate the equation (as others have pointed out), you'll be 
paying some interest on the loan - that is also an expense.  The actual 
repayment of the loan isn't, though.

The intitial transactions could look something like:

1. Get Loan:
Asset:Bank       8000
Liability:CarLoan      8000
(this one may be optional - you won't have this txn if the finance went 
directly to the car vendors. If the loan was paid to you, then combine the two 
splits in the txn below into a  single 10k from bank), 


2. Buy Car:
Asset:Car	10,000
Asset:Bank              2,000
Liability:loan            8,000


3. Loan repayment each month:
Liability:loan 300
Expense:LoanInterest 50
Asset:Bank                             350

And you also get depreciation/loss on the car over time:
Expense:Deprecaition   £6,000
Asset:Car                                     £6,000

So if you sell the car for 4k in a few year's time, everything balances!  If 
not, then there is a further expense (which could be negative) eventually.

The reason I bring up depreciation is to do with tax.  you _may_ be able to 
set off the depreciation each year, maybe as a fixed percentage drop (eg 25% 
of the pool each year) or "straight line over 5 years" ie. £2000 each year.   
that depends on your circumstances and tax jurisdiction, (but probably 
unlikely - take pro. tax advice if you are unsure about this!)

Your budget needs to show that the money you repay to the loan company isn't 
an expense, but is reducing your overall liabilities.

Of course, this may be more info than you need/want to record - in which case, 
don't set the loan up as a liability or the car as an asset, and just record 
each loan repayment as an expense (eg. expenses:LoanRepayments)  It won't be 
strictly financially correct, but probably adequate if you are a private 
individual.

HTH,
Maf.