Transfers

1) I understand that you do not count cc payments as expenses so I do not show this in my budget as a transfer. Is that correct? 2) What about transfers to mortgage accounts, home equity loans, vehicle loans etc. Do I show those as transfers out to account for the money being sent to the bank since it is not accounted for anywhere else?

Answers

  • Tom Young
    Tom Young SuperUser ✭✭✭✭✭
    "1) I understand that you do not count cc payments as expenses so I do not show this in my budget as a transfer. Is that correct?"
    Well, if you are attempting to create a budget that focuses on "income" and "expenses" - as those terms are used by accountants - then that's correct.  A transfer doesn't alter your net worth while items accounted for as income increase your net worth and items accounted for as expenses decrease your net worth.  So the expenses associated with credit card purchases can show up in a budget (and your income and expense report) but the payment of the credit card debt would not.
    "2) What about transfers to mortgage accounts, home equity loans, vehicle loans etc."
    The concept is exactly the same.  The "transfer" element of these payments, but not the interest expense portion, don't "flow" through a standard Income and Expense report, so if your budget is "income and expense" oriented, these transfers would not show up in the budget.
    That said, if your budget, (and the associated budget report), is more "cash flow" oriented then you can and should budget for and show these transfers.  What you want to do in this case is avoid double counting, e.g., showing both expenses incurred on the credit card in the budget and then also showing the credit card payment.
    It's easier to make a budget that really is "income and expense" oriented.  The thing to keep in mind is that not all "outflows" (payments of cash or the incurring of credit card debt) are really "expenses" (costs that flow through your income and expense or budget reports).   So for example if you bought a car with your credit card, you'd generally not consider the cost an expense that would flow through an income and expense report, you'd consider it an "asset" that you'd put on your balance sheet.  In other words, a "transfer" as Quicken uses that term.  (Your credit card liability would go up, but your asset Account for the car would go up the same amount, so there's no "net worth" effect.)
  • sauerld
    sauerld Member ✭✭
    Aside from the credit card issue, I'm still a little confused on the payment of principal amounts on loans. Should I show that as a transfer out for the principal part of the loan payment to the loan company so I have an accurate account of what remains in my checking account? Is it acceptable to show transfers out in cash flow reports or budget reports excluding credit cards. Thanks much for your response.
  • Tom Young
    Tom Young SuperUser ✭✭✭✭✭
    "Aside from the credit card issue, I'm still a little confused on the payment of principal amounts on loans."
    The payment against the credit card and the payment of principal amounts on loans are both "transfers"; there's no distinction to be made between a transfer to a credit card or a payment against a loan.  Both entries take cash out of your checking Account, both entries reduce a liability on your balance sheet, neither entries affect your net worth.
    "Should I show that as a transfer out for the principal part of the loan payment to the loan company so I have an accurate account of what remains in my checking account?"
    The "accurate account" of the balance ("what remains") in your checking Account is entirely dependent on accurately tracking the inflows into the checking Account and the outflows from the checking Account.  Only in the very, very simplest of situations - you only have a checking account, all deposits come from "income", all payments are for "expenses" - can you accurately account for the balance in your checking account via a "budget" or an "income and expense" report.  Even if you only have a credit card in addition to the checking account, things tend to get more difficult.  If you incur real expenses of, say, $550 dollars on your credit card in April but you March bill - all for "expenses", paid in April - is $876, what's the "right" number to budget for or to show in an income and expense report?  Those are two different numbers, but they both happen in April. 
    "Is it acceptable to show transfers out in cash flow reports or budget reports excluding credit cards."
    Quicken gives you a lot of flexibility when it comes to budgeting and creating reports so you get to define "what's acceptable."  If you're just getting started in the process then you're going to have to experiment and bit and maybe change things as you go along.  You're the Chief Accounting Officer here and there's no one looking over your shoulder that's going to say to you "That's Wrong!" 
    I think it's easiest to budget for only income and expenses, but if you have fairly regular and predictable transfers as part of the budget process, and want to do show them, that's certainly acceptable.   But generally no Budget/Income and Expense Report is really going to explain changes in your cash position.  That's what cash flow reports are for.
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