“Stat Crazy” wrote in to ask a few questions about recording personal finances in Quicken. His first question is about recording expenses.
If you purchase something during the month one June 15 with a VISA card, then submit an online payment on June 28, and the card says it is paid off on June 30 but it does not pull the cash from your bank account until July 3, then which month do you apply the expense? In my balance statement I am lazy and just say I have no balance AND the money is still in the bank account since I strictly take data from my online statements and reported transaction dates.
I track my finances using a hybrid accrual method. That means that I take most expenses and income on the day they occur, not the day I receive or withdraw the associated cash. You’re free to use whatever method makes the most sense to you, but this is how I do it.
On June 15 you experienced an expense in the form of a purchase using your credit card. If your purchase was, for example, a birthday gift, you would record the category as Gifts Given (an expense category in Quicken). On June 28 and June 30, you wouldn’t record anything in order to reflect your true savings account balance for the end of the month.
Even though your credit card’s website shows that your payment was applied on June 30, I would prefer keeping the cash recorded in your savings account until your bank debits your account. Therefore, on July 3, record a transfer in Quicken from your savings account to your credit card account. In your savings account, you would record the description as something like “Credit Card Payment” with the category as [VISA Credit Card] — the name of your credit card account in Quicken. A category in brackets denotes a transfer of money, not an expense.
Using this hybrid accrual technique, your income statement will reflect your Gifts Given expense in June while your balance sheet will reflect your proper June account balances (with accuracy in the savings account taking precedence over the credit card account). Your expense should come when you make a purchase, not necessarily when your bank account is affected.
The cash flow report is used less often. If you paid your credit card from your active checking account, and if your checking account is properly configured as a cash flow account for that report, then it would reflect an outflow in July when you transferred money to your credit card. This might be different if you paid the card from a savings account, as savings are generally not cash flow accounts.
If you use Microsoft Money or any other financial tracking program, the concept is the same but some of the details in terms of category names may be slightly different.
This is the method I use because it makes the most sense to me. The beauty about personal finance is that you don’t have the SEC knocking on your door asking for accurate reports nor must you follow Generally Accepted Accounting Principles.