In an earlier article I demonstrated how to get started with Money Manager Ex, a versatile budgeting and checkbook managing software from Codelathe. I showed how to handle transactions involving “cash back”, that are a little less than obvious. This article will demonstrate a similar technique for handling credit card transactions. While I am using MMEX as an example, any good accounting software should adapt to the technique. An actual event will be used for the tutorial.

Not long ago my 30 year old electric stove died. After some shopping, I decided to purchase a new stove from Lowe’s. Conveniently, I have credit account at Lowe’s with no outstanding balance. Realize that any department store credit account you have is actually a bank account. It differs from your normal checking/savings account in that it will have negative balance until you pay it off. The first thing I did was to set up a bank account with the name ‘Lowe’s Credit’. The first transaction in the account was a withdrawal of the purchase price of the stove (about $475). The payee was myself and the category was Homeneeds:Furnishings. Yes, this will effect (as it should) my cash flow for the month. In extending credit, Lowe’s gave me a loan.

Two new categories needed to be set up. The first I called ‘Credit Cards’. It is a “dummy” category that works very much like the CashBack category that I described in my previous article. It will always have a zero balance. The other category I called ‘Finance Charges’. It will not be used immediately but if the purchase is paid off over a few months time , Lowe’s will charge me some interest.

When the Lowe’s statement arrives in the mail it will be treated as  a bank statement. Let’s say I decide to pay $100 toward the purchase. Two transactions are entered. The first transaction will be a withdrawal of $100 from my checking account. The payee will be Lowe’s, the category will Credit Cards. The second is a deposit of $100 to the Lowe’s Credit account. The payee will be myself and the category will be Credit Cards. In subsequent months, any charges that are imposed by Lowe’s will be entered as withdrawals to the Lowe’s Credit account.  It’s a simple concept but not the least bit obvious.

Very likely, your existing credit accounts will not have zero balances. In that case make your best guess on the category or categories on how you spent the money. If necessary you can use a non specific category like ‘Miscellaneous’ or ‘General’. As time goes on your financial model will adapt to your actual spending. The more detail you input, the more useful MMEX’s reports will be.

Technorati Tags: Money Manager Ex, budgeting, credit cards