The purpose of the Business Features is to handle accruals. Accounts
Payable is the account traditionally used for this for Expenses incurred
on credit.
It holds the liability for the expense, from the time it is incurred, to
the time it is paid. This allows you to record activity on the vendor
invoice (Bill in GnuCash) at the proper time, regardless of when you
finally make payment. (or if you pre-pay)
The purpose of this method is to fulfill the 'matching principle' of
accounting where you record activity in the period it happens, in the
case of a vendor, when you incur the expense. This allows you to 'match'
expenses to the same period you earn revenue, ostensibly those expenses
being part of the cost of earning that revenue. The difference between
revenue & expenses results in 'income', for that period.
The Accrual Basis method is *usually* limited to business use. But not
all businesses use it.
Another method is the 'Cash Basis' method. With this, you record
expenses or other activity - only when money changes hands. (actual use
of cash is not required) Here, you record revenue when you get paid,
regardless of when you earned it, and you record expenses when you pay
them, regardless of when you incurred them. I'd hazard that the vast
majority of individuals operate on the 'cash' method.
The benefit of this method for businesses is simplicity, but one
downside is you can't determine how much you spent to earn a specific
amount of revenue, so you can't reliably make managerial decisions. Some
businesses can easily use this method if they routinely deal in 'cash'
transactions, or transactions where nearly all activity also involves
money exchange at 'point of sale'. (both ways, for expenses and revenue)
Two candidates that come to mind are Bars/Restaurants & Grocery stores.
Both usually pay for inventory on-receipt or at least within the same
period, pay wages with little or no lag, and receive payment in full at
the point of sale.
You can still operate a Cash Basis using the Business Features, but it
does require a little finesse with the date of posting your invoices and
payments.
I use the Business Features for personal use because they also offer me
the ability to monitor due dates, amounts in arrears with aging, and I
can run a report to match up payments to invoices. I can also run my own
'Statement of Account' from my perspective to compare to my various
service providers. I only do this for 'regular' services and expenses
like monthly, quarterly, or annual bills. I do simple manual
transactions for things like going to the grocery store or gas station.
I'll put some in-line responses below...
On 12/20/22 12:49 PM, Eric Chapman wrote:
I'm still working on workflow for recording purchases made via credit
card. I am wondering:
Why can't accounts called "Credit Card" be marked as "A/Payable" so that
I can post straight from a New Bill into that liability account?
I'm pretty sure you could do so, but the above explanation may answer
why you wouldn't want to or need to.
Of course, that account won't have features of type 'Credit Card' any
longer and instead, operate as "A/Payable".
Also, a Credit Card is not really a liability holding account. It is
more along the lines of a 'payment factor.' You are paying for
something, using credit from someone else.
In the case of a vendor, you are paying off your liability to them,
using a type of loan from a bank via the card network. That's just
swapping a liability for another, though both of special types and with
special purposes.
If there was a case where you did not by chance 'pay' a vendor
immediately via Card, what now? Where do you hold the liability on your
books to the vendor?
*note a 'Vendor' is understood here to mean someone or business that
extends you credit for goods exchanged or services rendered, usually on
specific terms, such as Net30. You generally don't pay these
immediately. (though of course, you can)
Seems to me that if I have the credit side of the New Bill transaction
be some account marked as "A/Payable", then I'm going to have move that
amount to the Credit Card sometime as an extra step.
Yes, the 'extra' step is called Payment. It appears you are entering and
posting Bills you've already paid. (maybe even immediately)
You don't *need* to use the Business Features for these transactions,
you can just do manual transactions between various expense accounts and
the Credit Card account. But you might find the additional features
useful, and if you are ever not consistent with how you pay the Vendor,
that could be an issue as well.
*Current workflow: *When a bill gets posted, it would be recorded like
this (since, best I can tell GnuCash requires that the posting acct be
an "A/Payable": marked account, and that characteristic is impossible
for credit card type accounts):
/*Debit*///Expense or asset
///*Credit*/ A/Payable acct
This looks correct. It records a liability to a Vendor and why you
incurred the liability.
Sometime this journal entry would have to happen (when?):
/*Debit*/ A/Payable acct for amounts on credit card
/*Credit*/ Credit Card acct
This happens when you pay the invoice from the vendor with the Credit
Card. Apparently in your case, this is instant. So technically it is
'cash basis' but you don't have to operate that way even though you pay
instantly.
And if you do use the Business Features for Cash Basis, you still have
to use Process Payment as a separate step. But in this case, you do not
post until you pay, (you can enter early) and the date of posting and
payment need to be the same.
There is a Pay on Posting option, but all this does is immediately bring
up the Process Payment window to save you a few clicks when you post a Bill.
When the payment reflected on the credit card statement is recorded,
it would be:
/*Debit*/ Credit Card acct
/*Credit*/ Checking acct
That looks correct. You've paid the Vendor above, now you need to pay
the Credit Card down. These happen at different times, so they are two
events that need to be recorded separately.
Seems to me that this workflow would be better, but I do not think it'll
work with GnuCash:
*Shorter workflow: *When a bill gets posted.
/*Debit*///Expense or asset
/*Credit*/ Credit Card acct
When the payment reflected on the credit card statement is recorded,
it would be:
/*Debit*/ Credit Card acct
/*Credit*/ Checking acct
Doable, but all of the above should shed light on maybe why you wouldn't
want to.
Regards,
Adrien
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