Best Practices : Transfer Estimates
A transfer estimate is intended to represent a planned transfer of funds from one account to another in a way that does not impact the ending balances. For example, if a $100 purchase is charged to a credit card and caught as an expense in a previous budgeting period, a planned $100 payment on that credit card may or may not be considered an expense. The difference is how the initial balance of the budgeting period is determined and whether transfer transactions are counted as transfers, expenses, or ignored.
In all cases, transfer estimates exist merely to point out an intention of the transfer. The actual transfer could be completely ignored and the same end result would be achieved.
A transfer of funds from a checking bank account into a savings bank account is planned during a given budgeting period. If the transfer estimate is incorrectly considered an expense, the ending balance is incorrect.
Init. Balance : $500 ($150 in checking, $350 in savings)
income : $100 (type:income)
expense : $75 (type:expense)
transfer : $100 (type:expense)
End. Balance : $425 ($75 in checking, $450 in savings) -- wrong!!!
The transfer estimate must be marked as a transfer to indicate that no actual impact to the ending balance has been made.
Init. Balance : $500 ($150 in checking, $350 in savings)
income : $100 (type:income)
expense : $75 (type:expense)
transfer : $100 (type:transfer) -- no impact to ending balance since both accounts are counted
End. Balance : $525 ($75 in checking, $450 in savings)
Given two budgeting periods, A and B, a purchase was made in period A and charged to a credit card. This purchase was accounted for as an expense for budgeting period A.
The initial balance for budgeting period B should take into account the fact that the expense was already tracked in the previous period. That is, the initial balance is the sum of all asset account balances less the sum of all liability account balances.
Init. Balance : $150 ($250 in bank, $100 owed on credit card)
income : $100 (type:income)
expense : $75 (type:expense)
payment : $100 (type:transfer) -- no impact to ending balance since both accounts are counted
End. Balance : $75 ($75 in bank, $0 owed on credit card)
If other purchases are charged to the credit card during period B then the ending balance will be the sum of all asset account balances less the sum of all liability account balances.
Init. Balance : $150 ($250 in bank, $100 owed on credit card)
transactions...
income : $100 (type:income)
expense : $75 (type:expense, debit card)
payment : $100 (type:transfer) -- no impact to ending balance since both accounts are counted
expense : $25 (type:expense, credit card)
End. Balance : $50 ($75 in bank, $25 owed on credit card)
A transfer of funds from a checking bank account into a savings bank account is planned during a given budgeting period. If the destination account is not part of the initial/ending balance, the transfer estimate must be considered an expense otherwise the ending balance will not account for the decrease of funds.
Init. Balance : $150 (checking)
income : $100 (type:income)
expense : $75 (type:expense)
transfer : $100 (type:transfer) -- does not affect balance
End. Balance : $175 -- wrong!!! checking account should have $75
The transfer must be considered an "expense" so that the loss of funds to the account account is accounted for.
Init. Balance : $150 (checking)
income : $100 (type:income)
expense : $75 (type:expense)
transfer : $100 (type:expense)
End. Balance : $75 -- correct
Given two budgeting periods, A and B, a purchase was made in period A and charged to a credit card. This purchase was not accounted for at all as part of budgeting period A.
The initial balance for budgeting period B only includes the sum of asset account balances. Payments to the credit card must be considered an expense for the ending balance to be correct.
Init. Balance : $250 ($250 in bank, $100 owed on credit card)
income : $100 (type:income)
expense : $75 (type:expense)
payment : $100 (type:expense)
End. Balance : $75 ($75 in bank, $0 owed on credit card)
If other purchases are charged to the credit card during period B, those transactions must not be counted since the balance of the credit card is not accounted for in the initial/ending balance.
Init. Balance : $250 ($250 in bank, $100 owed on credit card)
income : $200 (type:income)
expense : $75 (type:expense, debit card)
payment : $100 (type:expense)
expense : $25 (type:expense, credit card)
End. Balance : $50 ($75 in bank, $25 owed on credit card) -- wrong because it shouldn't include the owed amount
Init. Balance : $250 ($250 in bank, $100 owed on credit card)
income : $200 (type:income)
expense : $75 (type:expense, debit card)
payment : $100 (type:expense)
charge : $25 -- this cannot be counted towards the balance! cannot be tracked!
End. Balance : $275 ($275 in bank, $25 owed on credit card) -- correct
In other words, the expense from period A has been deferred to period B and is tracked as an expense via payment to the credit card.
It is recommended that option #1 be used as it allows for all expenses to be tracked accurately, regardless of the payment source (cash, debit card, credit card).
Regardless of which scheme is chosen, the same scheme must be used consistently with each budget. Consider the following two scenarios. In the first, there is no rollover balance on the credit card, while in the second scenario, the credit card balance is carried over to the next budgeting period.
Init. Balance : $200 ($200 in bank, $0 owed on credit card)
Est. incomes : $300
Est. expenses : $100
Est. balance : $400 ($200+$300-$100=$400)
income : $300 (type:income)
expense : $100 (type:expense, credit card)
payment : $100 -- not counted/assigned/tracked
End. balance : $400 ($400 in bank, $0 owed on credit card)
Next initial : $400 ($400 in bank, $0 owed on credit card)
Since there is no balance on the credit card before or after, either scheme works perfectly fine and can be used interchangeably.
For example, the scenario could have been:
Init. Balance : $200 ($200 in bank, $0 owed on credit card)
Est. incomes : $300
Est. expenses : $100
Est. balance : $400 ($200+$300-$100=$400)
income : $300 (type:income)
charge : $100 -- not counted/assigned/tracked
payment : $100 (type:expense)
End. balance : $400 ($400 in bank, $0 owed on credit card)
Next initial : $400 ($400 in bank, $0 owed on credit card)
Init. Balance : $200 ($200 in bank, $0 owed on credit card)
Est. incomes : $300
Est. expenses : $100
Est. balance : $400 ($200+$300-$100=$400)
income : $300 (type:income)
expense : $100 (type:expense, credit card)
End. balance : $400 ($500 in bank, $100 owed on credit card)
Next initial : $400 ($500 in bank, $100 owed on credit card)
If the other initial balance scheme was used after scenario 2, the next initial balance would be $500 (because the credit card is not counted). This implies that the expense was not yet counted and the payoff of the credit card should be counted as an expense. This is fine when making the math work out correctly, however a comparison of both budgets shows that the same expense got tracked twice.
To summarize:
| Scheme | Initial Balance | Credit Charges | Payments/Transfers |
|---|---|---|---|
| Include transfer accounts | assets less liabilities | expenses | transfers, or ignored |
| Exclude transfer accounts | assets | ignored | expenses |