Transfers Between Checking and Savings

[Michael Hendry]

On 18 Mar 2013, at 15:55, Ian Konen <iankonen at gmail.com> wrote:

> On Sun, Mar 17, 2013 at 2:29 PM, Michael Hendry <hendry.michael at gmail.com>wrote:
> 
>> 
>> On 15 Mar 2013, at 22:14, Ian Konen <iankonen at gmail.com> wrote:
>> 
>>> On Fri, Mar 15, 2013 at 12:35 PM, Michael Hendry
>>> <hendry.michael at gmail.com>wrote:
>> 
>> I hit on the idea of creating a "Pseudo Income" account, so that I could
>> simplify monthly budget calculations, but I was faced with the need for a
>> source account for the income. As the Opening Balances account is how the
>> Loan Trust asset initially came into being in my GnuCash accounts, I
>> reasoned that this would be the right source, but I now realise that this
>> doesn't make sense from an accountant's point of view - the Opening
>> Balances account is effectively being "charged" twice for the same sums of
>> money - once for the setting up of the Loan Trust (£12000), and then in
>> every subsequent month for the loan repayment (£50).
>> 
>> As I've been able to get away with this for several years without causing
>> any apparent problems with my accounts, and never have to show them to an
>> accountant, I'm not too unhappy with this arrangement, but it would be
>> desirable to clean the whole thing up.
>> 
>> I think I have a reasonable grasp of double-entry book-keeping principles,
>> and of the need for the value of Assets:CurrentAsset:Loan Trust to diminish
>> as the loan is repaid.
>> 
> 
> But its not diminishing the way you're recording it now, does it?

That works properly - the primary entry in the split transaction is between the Loan Trust and my bank - the monthly repayment of the loan to the trust arrives in the bank account from the insurance company that administers the trust, so the loan diminishes by the same amount as the bank balance increases by.

My (now it seems not-so) clever trick was to create the Pseudo Income account, and "feed it" from an account I wasn't reconciling or checking in any way - the Opening Balances.

>  It seems
> like your pseudo-income trick should be incorrectly leaving the loan with a
> high, constant balance because the money going into your other assets
> (perhaps checking account) is coming from opening balances. As you note
> above is you're double counting those payments by taking them from opening
> balances a second time after having already filled the asset account.
> You're effectively telling GnuCash every month, no wait, I was $50 richer
> when I started keeping my records.  Now please update my current finances
> accordingly.  If the only asset in your GnuCash file related to the trust
> is the interest free loan to the trust, then you're correct that you don't
> need to include an interest income, but I don't see how you can correctly
> show the balance dropping without making a transfer out of it.  That's not
> bug in how accounting works, it's a feature.

Yes - anyone studying my accounts would conclude that I'm receiving the same payment twice each month, once from the insurance company and once from the (erroneous) transaction between Opening Balances and Pseudo Income.

> 
> If you're also trying to track the entire net worth of the trust (perhaps
> to reconcile bank statements which include payments to you and payments
> from interest on investments) you should either treat the entire trust as
> your asset and it's earned income as your income, or probably better,
> create a new GnuCash file to represent the trust as independent from you,
> and in the new file the loan from is a liability, the payments to you,
> would be a transfers from some asset account like a money market to the
> loan account, and interest earned on the money market would be income.

You're absolutely right. I've overreached in trying to keep track of the value of trust as a whole within my own personal accounts, when the whole purpose of the trust is to get the capital out of my estate! 

> 
> 
>> 
>>> 
>>> I'm guessing you started moving money from opening balances into an
>> income
>>> account because you thought the income account should show a positive
>>> balance over time.
>> 
>> My pseudo income account is a device which allows me to regard money
>> transferred from an asset as income, as that is the way I'm managing my
>> monthly budgets.
>> 
> 
> I think this is the flawed assumption that is the root cause of confusion
> here. In a simpler example, if you were just living off the contents of
> cash under your mattress, you could budget 0 income and a monthly expense
> level calculated to keep you from running out of money, perhaps an
> estimated need of $50 / month.  You don't have to balance income and
> expense in a budget, or nobody would be able to budget for retirement, or
> going back to school, or saving up for the down payment on a house.  If you
> just want to look at the budget report and see if you're meeting your plan,
> budget $50/month more in expenses than income and pay more attention to the
> expense side of the report to see how well you're sticking to the plan.
> 
> If you really want to count payments towards towards principal on the loan
> you made to the trust as income, then the only way to get your numbers to
> add up correctly is to not even count the loan as one of your assets.  Just
> make a $50/month income stream that lasts for 20 years and call it an
> annuity (or something).  Your net worth will look smaller now, but at the
> end of 20 years it will catch up to the asset:loan + internal
> transfers accounting method.

Although the current arrangement is for a regular monthly withdrawals from the Loan Trust over twenty years, the terms of the trust allow for more rapid withdrawal if the need arises, so if I stop recording the loan under Assets, I'll lose track of its current balance.

So I'll have to abandon the Pseudo Income method, and run the budgets with a built-in monthly overspend.

Many thanks for your patient corrections to my muddled thinking.

But how can we help the Mark Phillips (the Original Poster) - who wanted to present his parents' withdrawals from savings as income?

Michael

> 
> 
> -- 
> Ian Konen
> iankonen at gmail.com
> www.linkedin.com/in/iankonen
> 978-821-6498
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