Handling tithe and taxes

[spiffytech]

I'm unclear on how I should record tithe and taxes when I get paid.
Neither are paid yet, so I don't want to put them in Expenses. This
really applied to any sort of "setting money aside" scenario, but
tithe and taxes are the boat I'm in right now.

I've thought of a couple ways to handle this, but neither is
satisfactory. Can anyone suggest a better solution? Am I missing
something obvious (I'm new to both double-entry and rigorous personal
accounting)? Or am I just being to picky about what my journal looks
like?

First idea:

===
= /^Income:Paycheck/
(Liabilities:Income Taxes:Federal) 0.1
(Liabilities:Income Taxes:State) 0.1
(Liabilities:Tithe) 0.1
(Assets:Bank:Checking) 0.3

...

2010/08/01 Church
Expenses:Tithe $12345
Assets:Bank:Checking
(Liabilities:Tithe) $12345
(Assets:Bank:Checking) $12345
===

This gets the job done, but doesn't fit with double-entry accounting;
the virtual transactions don't balance. Also, it's pretty annoying to
'fix' the virtual transactions balance when I pay my tithe.

Another idea:

===
= /^Income:Paycheck/
[Assets:Taxes:Federal] -0.1
[Assets:Taxes:State] -0.1
[Assets:Tithe] -0.1
[Assets:Bank:Checking] 0.3

...

2010/08/01 Church
Expenses:Tithe $12345
Assets:Bank:Checking
[Assets:Tithe)] -$12345
[Assets:Bank:Checking] $12345
===

Now the transactions balance, but using Assets doesn't reflect the
fact that I owe the money, like Liabilities does. Also, I still have
to 'fix' the virtual transactions. I could solve this by not using
virtual transactions, but then it's not nearly so easy to switch
between "real-world balance of checking account" and "balance after
subtracting money I've set aside". The -R flag does this nicely if I
use virtual transactions.

[Peter Ross]

On Thu, Jul 29, 2010 at 2:48 AM, spiffytech <spiff...@gmail.com> wrote:
> I'm unclear on how I should record tithe and taxes when I get paid.
> Neither are paid yet, so I don't want to put them in Expenses. This
> really applied to any sort of "setting money aside" scenario, but
> tithe and taxes are the boat I'm in right now.
>
> I've thought of a couple ways to handle this, but neither is
> satisfactory. Can anyone suggest a better solution? Am I missing
> something obvious (I'm new to both double-entry and rigorous personal
> accounting)? Or am I just being to picky about what my journal looks
> like?
>

You are trying to do cash based accounting, I find it much easier to
do accrual based accounting.

From http://www.allbusiness.com/accounting-reporting/methods-standards-cash/1308-1.html

Cash-based accounting recognizes income when money is received.
Accrual-based accounting recognizes income when goods are shipped or
services are rendered. Under the cash method, an expense is recognized
when it's paid. Under the accrual method, an expense is recognized
when the business is obligated to pay it.

Thus for accrual you recognize the expense of tax and tithe the
instant you receive your paycheck, but as you've yet to actually pay
it you add it as a liability, giving you the following transaction
(assuming 10% tax and 5% tithe)

2010/01/31 Salary
Assets:Bank $1000
Income:Paycheck -$1000
Expenses:Tax $100
Liabilities:Tax -$100
Expenses:Tithe $50
Liabilities:Tithe -$50

Or as an automated transaction.

= /^Income:Paycheck/
Liabilities:Taxes 0.1
Expenses:Taxes -0.1
Liabilities:Tithe 0.05
Expenses:Tithe -0.05

2010/01/31 Salary
Assets:Bank $1000
Income:Paycheck

Thus at any instant you can now determine how much tax you've actually
paid in cash to date (expense minus liability), how much expense you
would have to pay today (liability) and how much you've meant to have
paid as of today (expense).

So hopefully you can see the accrual system allows you to look at your
position in any number of ways, while doing the cash based system is
actually much more difficult.

Hope that helps,
Pete

[Eric Abrahamsen]

On Wed, Jul 28 2010, Peter Ross wrote:

> On Thu, Jul 29, 2010 at 2:48 AM, spiffytech <spiff...@gmail.com> wrote:
>> I'm unclear on how I should record tithe and taxes when I get paid.
>> Neither are paid yet, so I don't want to put them in Expenses. This
>> really applied to any sort of "setting money aside" scenario, but
>> tithe and taxes are the boat I'm in right now.
>>
>> I've thought of a couple ways to handle this, but neither is
>> satisfactory. Can anyone suggest a better solution? Am I missing
>> something obvious (I'm new to both double-entry and rigorous personal
>> accounting)? Or am I just being to picky about what my journal looks
>> like?
>>
> You are trying to do cash based accounting, I find it much easier to
> do accrual based accounting.

This is something I've been wondering about for a while, thanks for
explaining these different approaches so thoroughly! Now if you could
just do the same for college loan accounting...

E

[Brian Cottingham]

Very nice! That's a much cleaner way to account than I was trying.

For anyone listening in on this, "ledger bal checking" will show your actual checking account balance. You can check how much money you have available to spend with "ledger -sc bal checking liabilities:tithe liabilities:taxes".

If you have lots of liabilities you want to include, just say "ledger -sc checking liabilities". You can exclude specific liabilities like student loans with "ledger -sc checking liabilities -loan".

To pay your tithe/taxes, just transfer from your checking account to Liabilities:

===
2010/07/29 Church
    Liabilities:Tithe    $10
    Assets:Bank:Checking
===

Now you've recorded two pieces of information: when you incurred the expense (date of Liabilites -> Expenses) and when you actually paid it (date of Checking -> Liabilities). Hooray for double-entry and accrual-basis accounting!

[Peter Ross]

On Thu, Jul 29, 2010 at 3:59 PM, Eric Abrahamsen
<er...@ericabrahamsen.net> wrote:
> This is something I've been wondering about for a while, thanks for
> explaining these different approaches so thoroughly!

I'm just glad it made sense to you.

> Now if you could
> just do the same for college loan accounting...
>

For my home loan, I have the following (no college loans in oz, we
have HECS instead. A loan where the government adds an extra 1.5% to
your tax when your income exceeds a certain amount)

The first transaction transfers the money you borrowed into the asset
you bought with money (a college loan I assume it's just into you bank
account or an expense education).

2010/01/01 Make Loan
Assets:House $10000
Liabilitiy:Mortgage

Then monthly your loan amount increases by the amount of interest your
bank charges you.

2010/01/01 Interest
Expense:Mortgage Interest $10
Liabilities:Mortage

But as you make a repayment you lower the amount that you owe on the loan.

2010/01/01 Repayment
Assets:Bank -$100
Liabilities:Mortgage

You could also use commodites instead (1 HOME) for the first
transaction and then use prices to see your actual financial worth
change over time.

2010/01/01 Make Loan
Assets:House 1 HOME
Liabilitiy:Mortgage -$10000

I can't directly remember the price syntax but it's something like the
following to revalue your home

P 2011/01/01 HOME $11000

Hope that helps,
Pete

[Eric Abrahamsen]

Thanks veru much for taking the time to address this! Ledger has been my
introduction to accounting (and personal fiscal responsibility :)) and
I'm finding I have a lot more to learn about accounting than about
command line options. This about the mortgage is easier to understand
than the accrual method, mostly because I've let go of the idea that I
have to calculate interest myself. I record what the bank tells me, and
that's that.

I really like the idea of tracking major belongings as commodities,
particularly how you can track changes in value.

Thanks again,
Eric

[Martin Michlmayr]

* Peter Ross <pe...@emailross.com> [2010-07-29 10:17]:

> You are trying to do cash based accounting, I find it much easier to
> do accrual based accounting.

Do you feel that accrual based accounting is appropriate for personal
finance? I was thinking about cash vs accrual accounting a few weeks
ago and realized that proper accrual based accounting is probably a
lot of overhead, although I haven't made a firm decision yet whether
it's worth the effort for me or not.

For example, I usually pay my rent on the 28th but it's really for the
following month. So instead of having one transacation on the 28th
paying rent, I'd need

2010-07-28 * Pay rent
Assets:something -123 GBP
Assets:Prepaid Expenses

2010-08-01 * Rent for August
Assets:Prepaid Expenses
Expenses:Rent

Although I guess I could simply it by using an effective date:

2010-07-28 * Rent for August
Assets:something -123 GBP
Expenses:Rent ; [=2010-08-01]

On the other hand, I see some benefits from accrual based accounting
even for personal finance. For example, in the UK you have to pay
fees to the city for your flat monthly. But when I moved in, it took
me a few months to register so my initial bill was quite high and
covered several months - but I paid it in one month (leading to an
artificial spike in my expenses). So here it would make sense to
split this amount over multiple months, maybe with effective dates:

2010-0x-0x Council Tax for last X months
Assets:Bank -1234 GBP
Expenses:Council Tax 123 GBP ; [=2010-01-01]
Expenses:Council Tax 123 GBP ; [=2010-02-01]
Expenses:Council Tax 123 GBP ; [=2010-03-01]

My other concern about using accrual based accounting for personal
finance is that tax for individuals is based on cash based accounting,
although I'm not sure this actually makes a difference in practice for
most people.

Anyway, it seems to me that I'm using a mix between cash and accrual
accounting right now, which I don't find ideal either.

What are your thoughts of the possible overheads associated with
accrual based accounting for personal finance?

--
Martin Michlmayr
http://www.cyrius.com/

[Peter Ross]

I also use a mixture of accrual and cash accounting. I use accural
when I want to track amounts of money I owe and are owed (eg money
owed to the government, or loans to a friend).

For me I find it works fine. Full accrual would imply too much
overhead, I don't want to register on the first of the month that I
have an asset which is my pay check on then on the second to the
fourth transfer that asset to my bank account.

Pete

[Martin Michlmayr]

* Peter Ross <pe...@emailross.com> [2010-07-30 20:45]:

> I also use a mixture of accrual and cash accounting. I use accural
> when I want to track amounts of money I owe and are owed (eg money
> owed to the government, or loans to a friend).

Same here.

Thanks for confirming that what I'm doing seems to make some sense. :)