Categorize a transfer as expense

kathy234311

I transfer money from a credit union checking account to a car loan account (both set up in Quicken), in order to pay the loan. The first step of the transfer works correctly; it shows as a payment out of the checking. But it also shows as a payment in the loan account. And that leaves the $$ uncategorized, when I need to categorize them as a car payment.

If I categorize them back in checking as a car payment instead of a transfer, then the payment doesn't show up in the loan account, and my loan balance t isn't tracked.

It would be OK if the transfer showed as a payment out of checking (it does) and as a deposit in the loan account (it doesn't). I could then manually add and categorize a payment out of the loan account and categorize it. But it gets treated as a payment in both accounts.

The only solution I can see is to delete the loan account and categorize the transfer out of checking as a car payment. Anyone have another idea?

Chris_QPW

You might not believe this, but your transfer to the loan account (at least the part that isn't the interest) isn't an "expense".  It is a transfer of equity.  As is just as if you transferred $1000 from your checking account to your savings account you would have the same net worth.  Your paying off of the loan removes say $500 from what you owe and $500 from your checking account.  They balance each other out.

For the purpose of budgets and reports/graphs there are ways to include the transfers so that you can record "cash flow" kinds of operations.

Tom Young

Well, if you have a loan, I'm sure there's interest being charged on that loan, so the "missing piece" of the puzzle seems to be the interest expense.  When you have an interest-bearing amortizing loan the correct accounting for each payment is:

Debit (decrease) Auto Loan Account                $XXX

Debit (increase) Auto Loan Interest Category $YYY

Credit (decrease) Credit Union Checking Account   $ZZZ

Of course $XXX +$ZZZ = $ZZZ

So the proper characterization of a payment is that some of it is a reduction of a loan (a liability) on your balance sheet and part of it is interest expense.

If you don't care if you net worth is correctly stated then you could eliminate the loan off your balance sheet and expense the entire payment as a "Car Expense" Category.

NotACPA

You might want to take a look at a "Cash Flow" report, rather than the "Income & Expense" report.

In the Cash Flow, it WILL show as an expense ... because it is "cash out".

But, @Chris_QPW is entirely correct that the principal portion of the loan isn't an expense, it's a transfer of the cash asset from one pocket (checking) to another (Loan liability).

An expense reduces your net worth.  A transfer doesn't.

The Expense was when you bought the car.

kathy234311

You people are awesome! Of course you're right; it's not an expense. So my challenge is how to get to show that $$ out simply for purposes of my budget. I have money budgeted each month to go toward the car loan, and I don't want my husband to think we underspent our budget by that amount so he can spend it somewhere else. ;-)

Suggestions on how to show it for budget purposes would be welcome! Failing that, I may just delete the loan and treat it as an expense. I can always check the balance at the credit union site.

Thank you for the quick responses!

Tom Young

"The Expense was when you bought the car."

Only if you didn't put the car on your balance sheet as an asset but instead let it flow through your Spending report in an expense Category.

Generally all "expenditures" are "costs." Some end up in the P&L, some end up on the Balance Sheet.

Tom Young

For budgeting and reporting purposes you can elect to show a "transfer" as a form of "income" or "expense."  A transfer treated as an expense will show up in a budget report as "To [Account Name] down in the Expenses section and will be included in the period's total expenses.

In the Planning > Budgeting area click on "Manage Budget Categories" and one of the categories of "expense" is "Transfers Out."  (You could also use "Detailed Loan Payments.")

In the Reports area customize the report to show the Loan Account as a form of Category.  You probably will need to play around with Transfers options under the "Advanced" tab.

Chris_QPW

kathy234311 said:

You people are awesome! Of course you're right; it's not an expense. So my challenge is how to get to show that $$ out simply for purposes of my budget. I have money budgeted each month to go toward the car loan, and I don't want my husband to think we underspent our budget by that amount so he can spend it somewhere else. ;-)

Suggestions on how to show it for budget purposes would be welcome! Failing that, I may just delete the loan and treat it as an expense. I can always check the balance at the credit union site.

Thank you for the quick responses!

In the budget "categories" look at the "Transfer Out" section.

Chris_QPW

Note above post was delayed by a day waiting for the moderators to approve it.

NotACPA

" I have money budgeted each month to go toward the car loan, and I don't want my husband to think we underspent our budget by that amount so he can spend it somewhere else. ;-)"

That's what the Cash Flow report is for.

kathy234311

Tom, your suggestions were great and very detailed. I changed that particular transfer to an expense using your instructions, but it still doesn't show up on budget report. Maybe because I set up that account as a credit account, instead of a loan? Probably not worth me working at too much harder, because it's a set amount every month, so it's easy for us to mentally add to our budget expenditures.

I'm very experienced at using Quicken for online updates, automatic reconcile, bills, etc.--but I have zilch experience at more "accounting" type issues. As if you couldn't tell. :-)

Chris, I know about the delay. I submitted my question too quickly and tried to edit a couple of typos. I got a bizarre formatting error, and after searching I found that unless one has a certain amount of "points," everything goes to moderation before the poster can even edit (which produces the completely confusing formatting error message). A problem for people like me, who need to post only occasionally.

Thank you all for the prompt help!

Chris_QPW

@kathy234311

There are inconsistencies between the budget view and the reports.

The transfers "categories" can be seen in the budget view, but the reports don't support them.  The account type doesn't matter.

On the delay and such.  They are using a couple of different approaches to combat spam.  One is that you are limited on what you can do depending on points.  But every once in a while they randomly (from what I can tell) choose to "send" a comment through the moderators for review.

Tom Young

Edit your budget report to include the transfer as a form of expense. (When people use the word "report" I only think of reports that come up when you click "Reports" and then select a report from the drop-down menu, so that's what I'm talking about here.)

Click the gear wheel in the top of the Current Budget report and then click the Categories tab.  Scroll way down the list, past all the Categories until you start encountering the Accounts.  Your bank Accounts come first, then the credit card Accounts.  Tick the loan Account.  That should result in transfer to that Account showing up a line item in the Expenses area of the report.

Under the Advanced tab set Transfers to Exclude internal or Exclude self-transfers.  Either one should work. 

kathy234311

Tom, you're amazing! I had understood that we were talking about Reports and had already added the transfer to Categories in the Budget report after your earlier suggestion. But your additional suggestion about Exclude under the Advanced tab did the trick. Exclude Internal was already selected and didn't work, but Exclude self-transfers did.

My budget report now shows a budgeted amount for car payment with 0 actual expenditure, but it's balanced by a budgeted amount of 0 for my transfer and the correct amount of actual expenditure. The two balance once another out so my budget vs. actual totals are correct for whatever period I select--and that's what I was after.

Thank you so much for your patience in answering this and for giving such clear instructions!

oldngrmpy1

Kathy don't forget that you may be able to use a specific "Tag" for the transfer, then maybe you can pull a report to your liking using "Tags"!

Chris_QPW

Tom Young said:

Under the Advanced tab set Transfers to Exclude internal or Exclude self-transfers.  Either one should work. 

Oh!

I forgot to change this setting!

I did look to make sure I had included the transfer in the "category" list, but forgot about including transfers in the advanced tab.

Joseph Hanna

If you are interested in seeing your true net worth, here is my solution.

Three Accounts:

1. CHECKING (Asset Account) - for budgeting, all income and expenses flow through this account;
2. CAR LOAN (Liability Account) - Starts with original loan amount, principal payments to the car loan are recorded here; and
3. CAR (Asset Account) - Starts with original value of the car, periodic depreciation of the car's value is recorded here.

Four Categories:

1. CAR PAYMENT (for budgeting purposes);
2. CAR LOAN INTEREST (optional if you want to track the interest paid);
3. CAR DEPRECIATION (for net worth purposes, not used in the budget); and
4. CAR LOAN PRINCIPAL PAYMENT.

Your budget will include either CAR PAYMENT or CAR PAYMENT & CAR LOAN INTEREST.

For example:

The original purchase price of the car is $20,000, deposit is $5,000, leaving the original loan balance of $15,000. Monthly payments including interest are $400, with the first payment being $300 of interest and $100 principal.  Interest rate is not relevant.

Account: CAR beginning balance $20,000.

Account: CAR LOAN beginning balance $15,000.

Each payment is recorded in:

1. The CHECKING account and assign it category CAR PAYMENT $400 if not tracking interest payments.  If you are tracking the interest payments then split the transaction into two categories, CAR PAYMENT ($100) and CAR LOAN INTEREST ($300).
2. The CAR LOAN account in the amount of the principal portion of the payment ($100) and assign it category CAR LOAN PRINCIPAL PAYMENT.

In order to track the car's value for your net worth you would periodically look up the car's value online and record a transaction reducing the value and assign it category CAR LOAN PRINCIPAL PAYMENT.

The transactions can be set-up to be recorded monthly and you just need to adjust the numbers each month.

kathy234311

Thank you so much, Joseph. Excellent detail!

Tom Young

@Joseph Hanna

One of the advantages of Quicken is that you get to decide how you want to see your financial transactions reported, even if an outsider might look at what you're doing and say "that's not right!" 

Personally, the scheme you've proposed seems over-busy to me and I think that with simple tweaks to reports you can achieve both objectively "correct accounting" and meaningful Spending/Budget reports. 

I don't see a huge advantage to reducing your loan liability by an offset to an "expense", with what would typically be a negative balance, called "Car Loan Principal Payment."  Simply including the principal payment (transfer) from checking to the Car Loan Account as a form of "expense" (for budgeting purposes) would give that cash outflow the "right sign" in the Expenses portion of the report.

Of course your scheme would have that Car Loan Principal Payment Category eventually zero out at some point, but a better, (in my opinion), presentation of the decline in the car's value would be to present the decline in the vehicle's value to a meaningful Category like "Depreciation of Car."