Representing a personal loan with double entry

Question

I have received a family loan (no interest or penalties, just a friendly loan) from my parents which is deposited into my savings account for my bank. I'm having issues understanding how I should document this loan in gnucash. I understand that I can put the amount in there as a liability and it will be deducted off my net worth (which is accurate since it's a loan), however am I also supposed to make another account to represent the fact that the loan exists in my savings account?

In other words, should I make a separate account under my Savings Account with the loan amount so that my savings account in gnucash represents the actual amount in my bank's savings account? I feel like it's strange to have two accounts representing one loan which is why I'm seeking assistance to make sure I'm understanding this correctly.

To provide further clarification, I would like to be able to document the following situation in Gnucash:

I have the loan sitting in my savings account. A major event happens and I have to use $1,000 of that loan to cover it (which is the reason it's there). Now I need to still be able to track that the initial loan was $3,500, $1,000 of it has been used, and the amount left of the original loan is now $2,500.

With two accounts I would do the following: Create a liability account to exemplify the initial loan account and create a sub-savings account that exemplify's the loan in my savings account. After those accounts are created make a transaction for the loan amount that goes from the liability account into the sub-savings account. Now I can move money around from my sub-savings account and be able to track how much of the original loan I have used by subtracting the value of the liability account from the current amount in the sub-savings account (I.E Savings account has $3,500 in it; move $1,000 out of it to cover an expense; savings account now has $2,500 and the above scenario is met).

The question is, is this the correct way to do it from the double-entry viewpoint?

Answer 1

I would just create a single liability account to represent the loan, starting with a $0 balance. Then, create a transaction in which the amount of the loan moves from the liability account into your savings account. As you pay the loan off, you'll create new transactions that move money from whichever account you're using to pay it off into your liability account.

Answer 2

The standard double-entry approach would just be to create a Liability account for the loan, and then make a transfer from that account to your Asset (Savings) account when the loan proceeds are distributed to you.

After that point, the loan doesn't "belong" to your Savings account in any way. Each account and transaction is tracked separately. So, you might for instance pay that loan back with a transfer from your Checking account, even though the initial disbursement arrived into your Savings account. In order to see how much of a loan you have remaining, you need to look at the loan's Liability account to see what transactions occurred in it and what its remaining balance is.

It sounds like what you're really trying to accomplish is the idea of "earmarking" or "putting into an envelope" certain assets for certain purposes. This kind of budgeting isn't really something that Gnucash excels at. It does have some budget features, but there's more about being able to see how actual expenses are to expected expenses for a reporting period, not about being able to ask "How much 'discretionary' assets do I have left before I start hitting my 'emergency fund'". The closest you get is splitting up your asset accounts into subaccounts as you suggest, in which case you can "allocate" funds for your specific purposes and make transfers between them as needed. That can work well enough depending on your exact goals, though it can sometimes make it a little trickier to reconcile with your actual bank statements. But there's not really an accounting reason to associate the "emergency fund" portion of your assets with the remaining balance of your loan; though there's nothing stopping you from doing so if that's what you're trying to do.

Accounting answers questions like "How much have I spent on X in the past?" and "How much do I own right now?". If you want to ask "How much am I allowed to spend on X right now?" or "Am I likely to run out of money soon?", you may want a budgeting tool rather than an accounting tool.