Confused about bookkeeping regarding debts/CC transactions

[archcommus]

In bookkeeping in MS Money, I've been thinking of CC purchases as "expenses", and then CC bill payments as "transfers" from my checking account to the CC account. Of course I can't categorize the payments as expenses since that would be doubly accounting for each purchase.

However, this same methodology does not apply to a loan. If I create a loan account, it starts at a negative amount, and is slowly brought closer to 0 with each payment. Unlike the CC, though, where I consider each purchase (additional debt) as an expense, I do not consider the whole loan (one lump sum of debt) an expense initially. Rather, I'd consider it a "debt accrual", and then the PAYMENTS are the expenses. But this contrasts the CC case, where the debt accruals are expenses, and the payments are merely transfers.

So which is the correct way of thinking about it? Are both correct for their respective cases? I am having trouble reconciling these two concepts in Money. If I categorize CC charges as expenses and CC payments as transfers, this works fine. However, in recording car payments, I cannot consider the payments transfers because then there is no place to categorize any expense (transfers cannot be assigned categories). When you create the loan in Money, it automatically sets up a bill for you with type "SPECIAL" that cannot be changed to expense. This is dumb - it should be an expense! The only way to do it seems to be to maintain two "bills" - one of type special that just decreases the principal, and another of type expense that represents the actual payment.

Also, my idea of considering CC purchases "expenses" falls apart as spending increases. For example, if I bought a $5000 item on my CC and paid it off over many months, I wouldn't want to consider that a one-time $5000 expense. I'd rather consider it a $5000 debt accrual, and the payments expenses and not transfers like before.

So say I switch to this idea of considering CC purchases debt accruals and payments expenses - then how do I categorize individual purchases on the CC? If they are not categorized as expenses I lose the ability to categorize them at all.

Just some late night thinking...

 

[KLin]

Wouldn't the CC purchases be expenses against the CC?

 

[kranky]

I use Quicken, so my terminology may be slightly different.

Whatever you buy on a CC is an expense or an asset (rarely will it be an asset), and each CC transaction should be assigned to either an expense category or an asset category. Buying a $5000 item is no different.

When you pay the CC, it's a transfer from checking. That's all.

A loan should be no different. Your payments are simply transfers to the loan account. Payments are not expenses. What you spent the loan money on is the expense.

 

[AlienCraft]

The confusion is created by the intermingling of the Cash and Accrual methodologys and the basic lack of finacial acumen by most people.

A Credit Card is an accrual method instrument. Where time is a consideration in debts and income.
Most people use Cash method. Where it is a 'pay- as- you- go/ pay me now' system.

If you use a CC as a short term loan and pay each bill off, then simply register each expense as they occur and treat it as cash.

If you don't, then I don't know what to tell you cause it gets hairy, and I don't like hair.

 

[Fern]

Originally posted by: archcommus
In bookkeeping in MS Money, I've been thinking of CC purchases as "expenses", and then CC bill payments as "transfers" from my checking account to the CC account. Of course I can't categorize the payments as expenses since that would be doubly accounting for each purchase.
Correct

However, this same methodology does not apply to a loan. If I create a loan account, it starts at a negative amount, and is slowly brought closer to 0 with each payment. Unlike the CC, though, where I consider each purchase (additional debt) as an expense, I do not consider the whole loan (one lump sum of debt) an expense initially.
What kind of loan? Assuming it a loan to purchase something, yes consider it an "expense" (more likely it's an asset acquisition though


Rather, I'd consider it a "debt accrual", and then the PAYMENTS are the expenses. Nope But this contrasts the CC case, where the debt accruals are expenses, and the payments are merely transfers.

So which is the correct way of thinking about it? Are both correct for their respective cases? I am having trouble reconciling these two concepts in Money. If I categorize CC charges as expenses and CC payments as transfers, this works fine. However, in recording car payments, I cannot consider the payments transfers because then there is no place to categorize any expense (transfers cannot be assigned categories). When you create the loan in Money, it automatically sets up a bill for you with type "SPECIAL" that cannot be changed to expense. This is dumb - it should be an expense! The only way to do it seems to be to maintain two "bills" - one of type special that just decreases the principal, and another of type expense that represents the actual payment.

Also, my idea of considering CC purchases "expenses" falls apart as spending increases. For example, if I bought a $5000 item on my CC and paid it off over many months, I wouldn't want to consider that a one-time $5000 expense. Yes you DO want to consider it a "one-time expense" I'd rather consider it a $5000 debt accrual, and the payments expenses and not transfers like before.

So say I switch to this idea of considering CC purchases debt accruals and payments expenses - then how do I categorize individual purchases on the CC? If they are not categorized as expenses I lose the ability to categorize them at all.

Just some late night thinking...

See bolded comments above

Fern

 

[archcommus]

Originally posted by: kranky
I use Quicken, so my terminology may be slightly different.

Whatever you buy on a CC is an expense or an asset (rarely will it be an asset), and each CC transaction should be assigned to either an expense category or an asset category. Buying a $5000 item is no different.

When you pay the CC, it's a transfer from checking. That's all.

A loan should be no different. Your payments are simply transfers to the loan account. Payments are not expenses. What you spent the loan money on is the expense.

Thank you, you put that very clearly. That's the way I was already thinking about it with my CC, as purchases as expenses and payments as transfers, but at first that didn't seem to make sense for a big loan, as well. It didn't seem right to think of it as a one time gigantic expense, and then just transfers thereafter. However, that is the correct way to manage it. Even though this is a bit odd at first I want to do things financially accurately, so this is how I will set it up.

One problem, though, is that when I'm looking at a monthly income/expense report, I want to see my payments as a sort of pseudo-expense, just for that month. Money DOES include a feature for this - it gives you the option to include transfers to asset and liability accounts on such a report. However it doesn't seem to work. I have this option selected, but still don't see transfers on the report. Oh well.

 

[archcommus]

Originally posted by: Fern
See bolded comments above

Fern

Thanks Fern, I'm glad I asked on here since I learned this new way to think about it. The loan is a car purchase, so that would be an asset acquisition, correct? You speak as if that's the opposite of an expense though. What's the difference? Should the car loan not be considered an expense?

 

[Fern]

Originally posted by: archcommus

Originally posted by: Fern
See bolded comments above

Fern

Thanks Fern, I'm glad I asked on here since I learned this new way to think about it. The loan is a car purchase, so that would be an asset acquisition, correct? You speak as if that's the opposite of an expense though. What's the difference? Should the car loan not be considered an expense?

Think of an asset purchase as more like an investment, rather than an expense.

The asset wil have a long useful life, unlike an expense which you use up almost immediately.

This is getting beyond the capability (I think?) of program (checkbook type) like you mention, but an expense goes immediately into some "expense" cateogory on a Profit & Loss Statement.

The purchase of an automobile, OTOH, goes straight to the Balance Sheet (instead of P&L) and is listed as an asset.

Over time, as the car declines in value due to use etc, you will "expense" it by reducing it's value on the Balance Sheet. This reduction in value of the auto will be taken as a deduction on the P&L. This is called "depreciation expense" on the P&L.

Hope that's reasonably clear?

Fern

 

[archcommus]

Thanks, Fern. Yes that is very clear. In that sense, the initial loan is just a debt accrual, and then I gain an asset, and the true "expense" is when I record the depreciation. The payments are still just transfers.

One thing about that, though, is that I cannot consider the car an asset or part of my net worth while the bank still technically owns it. So if I'm keeping track of all contributors to my net worth in Money, I don't think the car should be included. Doesn't affect the loan/payment scenario, though.

 

[Fern]

Originally posted by: archcommus
Thanks, Fern. Yes that is very clear. In that sense, the initial loan is just a debt accrual, and then I gain an asset, and the true "expense" is when I record the depreciation. The payments are still just transfers.

One thing about that, though, is that I cannot consider the car an asset or part of my net worth while the bank still technically owns it. So if I'm keeping track of all contributors to my net worth in Money, I don't think the car should be included. Doesn't affect the loan/payment scenario, though.

Net Worth is:

A list of all your assets at their current FMV.

Less the list of all your debts

= Net Worth.

So, yeah it's part of your net worth.

The greater portion of most peoples' net worth is from their house. Most still have mortgages on them. Not dissimilar to an auto.

Fern

 

[archcommus]

Makes sense. Thanks for the clarifications! Learned a lot from toying around with this.