Basic Accounting: Short Term vs. Long Term Expenses

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Basic Accounting: Short Term vs. Long Term Expenses

Greg Novak-2
I'm looking for suggestions about how to solve a basic accounting
issue--perhaps there's a standard solution, but my attempts so far have
failed to produce a silver bullet.

I simply need to know if I'm living beyond my means by keeping day-to-day
cash flow rigidly separate from infrequent, large bills and purchases.
Here I define "short term" as being entirely contained within one month
(the frequency with which I balance my checkbook).  These things happen
often enough that one month is fair average of the expense.  "Long term"
means that the transaction extends over several months.  It could be
semi-annual car insurance payments or the process of saving up for several
months with the goal of buying, say, a bike.

What I've done for some time now is balance my checking account to exactly
1000 at the end of every month, transferring the excess/shortfall to/from
my savings account.  That works pretty well, but fails in two cases:
1) Say I've saved up $1000 to buy a new bike--I can't spend the money
directly out of my savings account, so I have to transfer it to the
checking account and then spend it.  This makes the account look funny for
the month because I've spent so much more than the "nominal" amount.  2)
Credit card purchases.  It's easy to rack up debt and still (incorrectly)
feel good about myself because I don't realize that I've overspent until
the bill comes.

I fixed problem #1 by getting a savings account that allows me to write
checks.  Then I can spend saved money straight from the savings account.

Problem #2 is still giving me trouble.  I can see three solutions:
1) Cut up the credit card
2) Keep a separate tree of expense accounts for "day-to-day expenses" and
"long term expenses."  Then I could infalliably see if I've spent too much
on day-to-day expenses in a given month by checking the expense accounts
rather than the asset/liability accounts.  However, this is horrendously
inelegant.
3) Group asset/liability accounts into "Day-to-day cash flow" and "Long
term cash flow."  That is, the account tree would look like:

--Short Term
----Checking
----Cash
----Credit Card
--Long Term
----Savings

This would go against the seemingly near universal practice of grouping
accounts by asset/liability.  However, it would have the nice effect that
credit card purchases couldn't sneak in and wreck the books.  The down
side to this scheme is that it may clash with the physical bank accounts.
Ie, I couldn't use the _same_ credit card for both short and long term
purchases.

Thoughts and suggestions are welcome, up to and including "You should just
do X, that's what everyone does and it works fine."

Thanks a bunch,
Greg
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Re: Basic Accounting: Short Term vs. Long Term Expenses

David Harrison-2


On 9/27/05, Greg Novak <[hidden email]> wrote:
I'm looking for suggestions about how to solve a basic accounting
issue--perhaps there's a standard solution, but my attempts so far have
failed to produce a silver bullet.

I simply need to know if I'm living beyond my means by keeping day-to-day
cash flow rigidly separate from infrequent, large bills and purchases.
Here I define "short term" as being entirely contained within one month
(the frequency with which I balance my checkbook).  These things happen
often enough that one month is fair average of the expense.  "Long term"
means that the transaction extends over several months.  It could be
semi-annual car insurance payments or the process of saving up for several
months with the goal of buying, say, a bike.


The answer for the car insurance (and any other bill which you pay in advance) is to set up the initial transaction as a prepaid expense, and expense the monthly portion each month.  This would look like:

Initial payment of car insurance:
Assets: Chequing                                1,200 (Cr)
Assets: Prepaid expense     1,200 (Dr)

Entry each month to expense that months expense (assumed 1,200 is for 12 months):
Assets: Prepaid expense                        100 (Cr)
Expenses: Car insurance        100 (Dr)

What I've done for some time now is balance my checking account to exactly
1000 at the end of every month, transferring the excess/shortfall to/from
my savings account.  That works pretty well, but fails in two cases:
1) Say I've saved up $1000 to buy a new bike--I can't spend the money
directly out of my savings account, so I have to transfer it to the
checking account and then spend it.  This makes the account look funny for
the month because I've spent so much more than the "nominal" amount.  2)
Credit card purchases.  It's easy to rack up debt and still (incorrectly)
feel good about myself because I don't realize that I've overspent until
the bill comes.

I fixed problem #1 by getting a savings account that allows me to write
checks.  Then I can spend saved money straight from the savings account.

Sounds like this is ok, then?

Problem #2 is still giving me trouble.  I can see three solutions:
1) Cut up the credit card
2) Keep a separate tree of expense accounts for "day-to-day expenses" and
"long term expenses."  Then I could infalliably see if I've spent too much
on day-to-day expenses in a given month by checking the expense accounts
rather than the asset/liability accounts.  However, this is horrendously
inelegant.
3) Group asset/liability accounts into "Day-to-day cash flow" and "Long
term cash flow."  That is, the account tree would look like:

--Short Term
----Checking
----Cash
----Credit Card
--Long Term
----Savings

This would go against the seemingly near universal practice of grouping
accounts by asset/liability.  However, it would have the nice effect that
credit card purchases couldn't sneak in and wreck the books.  The down
side to this scheme is that it may clash with the physical bank accounts.
Ie, I couldn't use the _same_ credit card for both short and long term
purchases.

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)

Then when you pay the credit card, you enter:

Assets:Bank account                 100 (Cr)
Liabilities:Credit card       100 (Dr)

Thoughts and suggestions are welcome, up to and including "You should just
do X, that's what everyone does and it works fine."

Thanks a bunch,
Greg

Hope this helps

--
David Harrison, BAccS, CGA
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Re: Basic Accounting: Short Term vs. Long Term Expenses

Greg Novak-2
> 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.

One solution is just to stop using the card, or use it only for large
expenses that I need to spread out over several months.  The problem here
is that sometimes I use the credit card because I'm not comfortable using
my debit card with the merchant for one reason or another.  So in general
there's a mix of short term and long term expenses on the card.

All of the information about the transactions are there, in Gnucash, but
it's not "propogating" to the right place.

Thanks,
Greg
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Re: Basic Accounting: Short Term vs. Long Term Expenses

David Harrison-2
On 9/27/05, Greg Novak <[hidden email]> 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.


Have you tried looking at the Cash Flow report?  It sounds like that's what you're after. 

--
David Harrison, BAccS, CGA
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Re: Basic Accounting: Short Term vs. Long Term Expenses

Dale Alspach
In reply to this post by Greg Novak-2
You probably want to research this further if you want to be "correct"
(GAAP) but a common way to do this is to have some accounts labeled
current which is roughly equivalent to your short term. This is more
appropriate for an accrual basis.

For personal accounting purposes you may find that the inelegant solution
actually works pretty well. I find that transactions to certain
accounts tend to be almost all short term or almost all long term.
You may also want to consider whether all of
your long term expenses are actually expenses rather than assets. I think I
would consider a $1000 bike an asset. Some people use a combination of life
and cost to classify purchases, e.g., if it will last more than a year and
costs more than $250, it is an asset.

The problem (for me) with using expense accounts (without duplicating the
account tree) to separate short and long term
expenses comes with something like a vacation. During a vacation you eat,
buy gasoline, etc. These normally are short term expenses but if you saved
for six months for your vacation and you eat at more expensive restaurants,
etc., during your vacation, throwing these into the short term expenses
distorts everything.

Dale Alspach
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Re: Basic Accounting: Short Term vs. Long Term Expenses

Andrew Sackville-West
In reply to this post by Greg Novak-2
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
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Re: Basic Accounting: Short Term vs. Long Term Expenses

Beth Leonard
In reply to this post by Greg Novak-2
On Tue, Sep 27, 2005 at 03:13:28PM -0700, Greg Novak wrote:
> 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."

The problem is fundamentally that you want to know what your
credit card transactions for the month are before you receive
your bill.  In some way you have to enter these expenses at
the same time as you're balancing your checkbook in order to
come up with that single number.

You can either 1) Keep all your receipts and enter them as
expenses in advance, and include that in your liabilities
as a number to subtract from your bank account balance. Or
2) Download all the transactions so far that month from your
credit card company and pay in advance.  Different companies
have different download capabilities.  My credit card company
allows me to make payments as often as once every 24 hours
without problems.

So, assuming that your credit card bill normally shows up to
be paid on the 15th of the month, and your bank statement
comes on the 1st, then when you're balancing your bank statement
you just check on-line with the credit card company and see
that you have made purchases so far of $150.  You can pay that
as-is using on-line bill pay, the money comes out of your
bank account, and you can balance your bank account to the
$1000 as usual, but includes the credit card purchases.

Depending on how your card is billed, you may also have to
pay the credit card company at the regular time as well (for
the other $155 you charged in the other part of the month), it
depends on how many days they have in their grace period.

Another option you have is to ask your credit card company to
change what day of the month the bill is usually due so that
the CC bill matches with when you want to balance your checkbook.
The potential issue there is that because of the way credit
cards work, if you go with the amount due on your bill, that's
usually the expenses from the previous month, and you seem to
want to include the current month's expenses as well when
deciding if you are ahead or behind for the month -- thus you
have to look up that amount on-line as you balance your
checkbook.

> One solution is just to stop using the card, or use it only for large
> expenses that I need to spread out over several months.

PS. For general wealth-accumulation purposes, never use a credit
card to spread out large expenses.  The extra fees you pay in
interest are crazy.  If you are at all capable of it, pay your
credit card off completely every month and if you want something
large use your savings as you have described above or take out
a larger school loan / home loan etc.  Keeping debt on a credit
card is about the worst possible place in the world to keep it.

--Beth
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+                             Beth Leonard                          +
+       O say, does that star-spangled banner yet wave              +
+       O'er the land of the free and the home of the brave?        +
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
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Re: Basic Accounting: Short Term vs. Long Term Expenses

Cayenne
In reply to this post by Greg Novak-2
On 9/27/05, Greg Novak <[hidden email]> wrote:

> 3) Group asset/liability accounts into "Day-to-day cash flow" and "Long
> term cash flow."  That is, the account tree would look like:
>
> --Short Term
> ----Checking
> ----Cash
> ----Credit Card
> --Long Term
> ----Savings
>
> This would go against the seemingly near universal practice of grouping
> accounts by asset/liability.  However, it would have the nice effect that
> credit card purchases couldn't sneak in and wreck the books.  The down
> side to this scheme is that it may clash with the physical bank accounts.
> Ie, I couldn't use the _same_ credit card for both short and long term
> purchases.

Here's what I do, that doesn't have this problem:

Assets
-- Checking
---- Short term
---- Long term
-- Savings
---- Short term
---- Long term

This way, everything in my checking account is under the checking
account and everything in the savings account is under the savings
account.  When I want a report of my short term funds I select the
short term subaccounts and when I want a report of everything I select
all of them.

Also, one can make transfers between savings and checking, within the
same type of subaccount, without anything getting thrown off.

- Cayenne

(P.S. I apologize to Greg for the duplicate due to sending this first
to him before I remembered what button I needed to press in Gmail to
have it go to the list.)

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Re: Basic Accounting: Short Term vs. Long Term Expenses

Greg Novak-2
In reply to this post by Beth Leonard
Beth Leonard writes:
 > On Tue, Sep 27, 2005 at 03:13:28PM -0700, Greg Novak wrote:
 > > 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."
 >
 > The problem is fundamentally that you want to know what your
 > credit card transactions for the month are before you receive
 > your bill.  

Not true... I meticulously enter the transactions as I make them.  All
the information is in the program, it's just a matter of getting it to
spit the right thing out.  

The fundamnetal issue is finding a generic method of separating
"day-to-day" expenses from large, infrequent, perhaps unexpected
expenses.  I had thought that there would be some "general" method of
dealing with this sort of thing that was obvious to people who knew
something about accounting (unlike me).  Sort of like the mentioned
technique for prepaid expenses like auto insurance, where you transfer
the money out of checking and then make monthly transfers into
expenses.

When I started looking into this, however, I didn't feel so bad about
having trouble with it.  It seems that many of the sudden plunges of
stock prices (Krispy Kreme was one example) that you see are the
result of companies showing large paper profits while their cash
reserves are going down.  Eventually it becomes clear that the
"profits" are only on paper--the company has booked routine operating
expenses as either capital investments or as "one-time" large outlays,
thereby being overly optimistic about profits.  This is pretty much
exactly the same problem that I'm struggling with; if large
corporations sometimes mess it up, I guess it's not so bad that I have
trouble too.

Thanks for the input,
Greg


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Re: Basic Accounting: Short Term vs. Long Term Expenses

Andrew Sackville-West


Greg Novak wrote:

>
> When I started looking into this, however, I didn't feel so bad about
> having trouble with it.  It seems that many of the sudden plunges of
> stock prices (Krispy Kreme was one example) that you see are the
> result of companies showing large paper profits while their cash
> reserves are going down.  Eventually it becomes clear that the
> "profits" are only on paper--the company has booked routine operating
> expenses as either capital investments or as "one-time" large outlays,
> thereby being overly optimistic about profits.  This is pretty much
> exactly the same problem that I'm struggling with; if large
> corporations sometimes mess it up, I guess it's not so bad that I have
> trouble too.
>

FWIW, when I used to run the books for a corporation, no matter how I
massaged the reports, I ALWAYS had to attach a long list of notes and
adjustments about various transactions and what they really meant.
Things like: "this expense is an annual expense at $1200, of which only
$100 should be credited to this month so our operating profits for this
month were actually $1100 higher, however due to paying this expense, we
had negative cashflow for the month, thus despite having a profitable
month, we have no free cash." This was repeated ad nauseum for all sorts
of items and at the end of it all was a nice summary of the real state
of the cash of the business.  There is no real substitute for looking at
P&L, cashflow and balance sheet and then applying brains.

A

> Thanks for the input,
> Greg
>
>
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>
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