Personal finance accounting question

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earplug
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Personal finance accounting question

Postby earplug » Tue May 04, 2010 9:33 pm

Hi everyone,

First a warning - this question might make little sense unless you use GnuCash or know double-entry accounting.

I have a question about selling personal belongings and how you record this in your personal finance software. Suppose you upgrade your computer by buying a new hard disk for $120 and sell your old one on eBay for $70 (let's ignore postage and transaction fees in this example). How do you record this?

For years I've entered such transactions as follows:

- increase my Expenses:Computer:Hardware by a debit of $120 and decrease my Assets:Bank Account by a credit of $120
- increase my Income:Items Sold by a credit of $70 and increase my Assets:PayPal by a debit of $70

However, this records the two transactions as completely unrelated events, and I'm thinking it would make more sense to record it like this:

- increase my Expenses:Computer:Hardware by a debit of $120 and decrease my Assets:Bank Account by a credit of $120
- decrease my Expenses:Computer:Hardware by a credit of $70 and increase my Assets:PayPal by a debit of $70

In other words, instead of my reports showing a $70 revenue and a $120 expense, I simply have a net computer hardware expense of $50. This seems more reflective of the true nature of the transaction, and gives me information more relevant to the question of how much of my budget goes into my computer hobby.

But I'm an accounting newbie, so I'm just wondering if doing it this way is a no-no or if there's some aspect I'm missing. I'm also curious if there's anyone who deals with this sort of transaction by recording items like computer hard disks as assets.

Thanks! :)

boorpoy
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Re: Personal finance accounting question

Postby boorpoy » Tue May 04, 2010 9:51 pm

This is a no-no.

Just because you sold something that happens to be computer related, doesn't mean that your computer expenditures magically disappeared.

"What your computer hobby costs you" is a different story. You can figure it out using the numbers you have manually. Instead of "Items Sold" category, create an Items Sold:Computers sub category.

orangebird2020
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Re: Personal finance accounting question

Postby orangebird2020 » Fri May 07, 2010 12:37 am

Keep revenue and expenses separate.

earplug
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Re: Personal finance accounting question

Postby earplug » Fri May 07, 2010 5:51 pm

Thanks for the input, nice to know I've been doing it the right way for years. However, I have two followup questions:

- If I buy something from a store and return it the following day for a refund, I simply reverse the expense by crediting the expense account, the way I described above. Is it still a no-no in such cases? Am I supposed to have an Income:Refunds account?

- If I'd be going to the trouble of creating subaccounts like Income:Items Sold:Computer:Hardware, why shouldn't I just create accounts like Assets:Computer:Hardware account instead? The only reason I could see for not recording things like hard disks as assets was the tedium involved in having lots of little asset accounts.

SirLanceALot
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Re: Personal finance accounting question

Postby SirLanceALot » Fri May 07, 2010 5:54 pm

Why are you keeping track of your finances in a double entry system? Just curious, I understand for a business reason, but for personal finances it seems like too big of a hassle for any benefit it provides.

earplug
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Re: Personal finance accounting question

Postby earplug » Fri May 07, 2010 7:22 pm

SirLanceALot wrote:Why are you keeping track of your finances in a double entry system? Just curious, I understand for a business reason, but for personal finances it seems like too big of a hassle for any benefit it provides.

I initially used Quicken in 2002 but had bad experiences with draconian registration/activation requirements. Drove me to Free/Open Source alternatives, and I placed my money on GnuCash being the one that'd still be active and supported in ten years time :)

For personal finance it's practically the same as Quicken, main difference being every "category" is an "account" instead, and double-entry flexibility is there if you need it. Neat thing is I can ask a question in double-entry language and people can know what I'm talking about even if they've never heard of GnuCash.

boorpoy
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Re: Personal finance accounting question

Postby boorpoy » Sat May 08, 2010 7:36 am

I have a "Reimbursement", "Refund", and "Cash Back" (Cash back is technically a discount) category for income, yes.

orangebird2020
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Re: Personal finance accounting question

Postby orangebird2020 » Wed May 12, 2010 10:22 pm

Returning a purchase just goes in and out of the expense account. With the opposing side being cash or credit, depending on how you paid. It is different than your first scenario since you are selling an item and earning money, rather than returning a purchase as in the second scenario.

I think its great you keep track of your money in GnuCash, does the same job of any other personal accounting software for the ultimate deal!

Savarel
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Re: Personal finance accounting question

Postby Savarel » Fri May 14, 2010 4:00 pm

Returning an item would enable you to reverse the previous entry. Having a separate refunds "account" would just create expenses that dont really exist.

Otherwise, you could end up with an example like this. You buy Call of Duty, the video game.

Credit the asset, debit the expense.

However, the store clerk accidentally charged you for it twice. It will be refunded, so they say, once the transaction goes through VISA's network, etc... and will take two days. (I know this isnt how VISA it works, just an example)

So, you credit the asset, debit the expense again. When VISA returns the money, you just reverse the entry. So the record of the temporary loss of money exists, but it doesnt appear like you made any income from the return, because you did not.

Now same scenario, you buy Call of Duty. Credit the asset, debit the expense. Then you send in the mail-in rebate form and receive a $20 rebate check.

This you *would* put into an Income:Rebates asset account and credit the expense account.

allisonld
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Re: Personal finance accounting question

Postby allisonld » Thu May 20, 2010 7:41 pm

It doesn't matter; you can account for this however you wish. There are no accounting rules for household finance that you must follow. I am a former CPA (retired after 10 years to stay home with kids). And I account for personal finance in whatever way is most meaningful to my husband and me.

For example, I could call a cash back award from a website miscellaneous income. But I prefer to have the amount go as a credit against whatever purchase category I earned the award for. I don't spend too much time worrying about it. I got a big Bing cashback award recently which I knew was for a TV, so it went as a credit in the entertainment category, where the TV had been expensed 3 months ago. But for smaller checks, if I don't remember where I spent the money, I usually just put a credit in "bank charges."

Likewise, when I sell books, I could have a book sales income category. But, it's more meaningful to me (and I'm the only one looking at this stuff!) to have it credited against the current month's book/education expense line.

Do whatever helps you understand your spending/income most.

earplug
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Re: Personal finance accounting question

Postby earplug » Wed May 26, 2010 7:33 am

allisonld wrote:And I account for personal finance in whatever way is most meaningful to my husband and me.

This sits well with what I've read about relevance being one of the basic principles of accounting. On the one hand, recording the transactions as you did with your TV rebate seems as though it'd also make the reports more meaningful in my own personal finances. On the other hand, I'm interested in the rules aspect because I may at some point start my own business and do some bookkeeping which may involve external users, so I was a bit worried about developing bad habits. But I should probably credit (or is that debit? :lol:) myself with having a bit more flexibility.

Thanks everyone for your perspectives on this question. At first I thought it was maybe a bit offtopic here and no one would have any idea what I was blabbing about.


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