On 5/5/2020 10:30 PM, flywire wrote:
Thank you. The guide explains a credit card account is a short-term
loan. The Loans section probably needs a reference back to Credit Card
Putting It All Together section which clearly explains Interest and
Payments.
Aaron describes it pretty well, a loan interest transaction generates
an expense interest-paid transaction at the same time. The Loan
payment (split as desired) from the bank account is an independent
transaction. The Income/Expenses reports and the Assets/Liabilities
registers work as expected so everyone's happy.
With the part interest payment described by Aaron, the $1 is from
Liability:Principal.
THAT is why I used "line of credit" as an example instead of "credit
card" though there are similarities.
Even if you are on a "cash basis", the interest expense is incurred when
they bill it/add to principle. It is precisely because that is the way
these loans work, that they EXPECT the interest to be "paid" by assuming
more liability (added to principle). There is no real need for you to
consider the debt partitioned into interest and principle (the balance
of the interest expense account for this loan will give you that). Then
when you make a payment, just affects bank account paid from and and the
loan (principle). That is not a transaction affecting income/expense.
When would I partition? Probably only if a "conditional" loan with
either interest or even a portion of principle forgiven when certain
conditions were met. And I might "redo" a line of credit when/if the
active (credit) part ends and becomes more like a mortgage << if not
paid off prior or replaced by a new line of credit >> The reason for
partitioning a "conditional" loan is that you expect to be meeting the
conditions affecting forgiveness. Thus I went to university with NDF
loans (LONG before gnucash existed, all computer software in infancy).
The conditions of those loans were "no interest while continuing
education" and "no interest and 10% principle forgiven every year
teaching". If you had a loan like that today (and were meeting
conditions) you might want to partition so you didn't have to record
expense when "billed". Instead, when you had submitted proof of
conditions met each year and been approved, would get notified what
forgiven << and you would enter a so called "journal transaction" to do
the adjustment >>
Michael D Novack
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