Invoice & Bill Posting Date Issues Across Multiple Periods

[DaveC49]

Hi Adrien,
Add ressing this point: 
"Pre-paid expenses are a special case, but I should think it possible to
address it with the business features somehow. I’ve thought of using special
clearing accounts but I can’t seem to figure where they might go. Posting a
bill for a pre-paid expense (but not yet actually paying it) produces a
liability balanced by what exactly? You don’t yet have a new asset because
you haven’t paid the bill yet. You don’t have an additional liability. You
haven’t realized any income or expense and your equity position hasn’t
changed. What should balance Liabilities:AP for an as yet un-paid pre-paid
expense? "

I think this goes to the differences between accrual accounting and cash
accounting as a separate issue from sales/ purchases made on credit which is
the real purpose of the A/R and A/P accounts. They are not specific to
accrual accounting but may apply for both.

If for example you purchase insurance in advance to cover a specific period
with a specified start date and end date for the cover but you are to be 
invoiced at a later date by the insurer, then you actually purchase the
insurance at the time you enter into the agreement to buy the insurance.
Under accrual accounting you would record the purchase at that date.

At this point I would debit an Asset:Prepaid Insurance for the agreed amount
and credit a Liability:PrepaidInsurance for the agreed amount to record that
purchase in your accounts. 

When you enter the period which the insurance provides cover, you would then
expense the insurance. Depending on the nature of the business you might do
this monthly, for example. Each monthly transaction would be a credit of the
appropriate fraction of the agreed amount to the Asset:PrepaidInsurance
account and a debit to an Expense:Insurance account for each month of the
period of the cover. This satisfies the matching principle by matching the
timing of the expense to the timing of the income earned as a result of
incurring that expense. 

When you receive the invoice for the insurer then an appropriate action
would then be to raise a Bill crediting Liability:A/P for the agreed amount
with a corresponding debit to Liability:PrepaidInsurance for the same amount
as the balancing split of the transaction.

The final transaction would be when you pay the bill with a credit to An
Asset:Bank account and debit to the Liability:A/P account.

I haven't tested how Gnucash's business feature, particularly the reporting
handles the above, specifically as yet but will try it out.

For a Cash Accounting treatment, you would still raise Bill when the insurer
sends you their invoice debit the Liability:A/P and crediting
Expense:Insurance posting it at the date of the invoice. You would then
record the payment as above when the payment is actually made to them. Where
this runs into problems in calculating profit and loss is when the period of
insurance does not match the accounting period (and particularly if premiums
were increasing significantly annually). 

One appropriate treatment for this would be to then capitalise the value of
any unexpired insurance at the end of the accounting period and then expense
it in the next accounting period. A pair of transactions, one transaction
debiting an Asset:UnexpiredInsurance account and crediting the
Expense:Insurance account in the current period with a corresponding
reversing transaction recorded during the next accounting period, would
achieve this. This would have to be allowable under the applicable
legislation which authorises the use of Cash Accounting of course.

"When entering a bill or invoice, each line item allows you to put a date. 

When posting that bill or invoice, only the posting date is used - not the
individual line-item dates. "

You would in principle adopt a similar approach in accrual accounting for
recoding income earned but not yet invoiced.

When you perform the work debit an Assets:UnbilledWork account for the
amount of the work and credit a sutable  Income: account. This records the
income in the accounts at the time the work is carried out.

When you bill the customer and raise the invoice and post it, you debit
Assets:A/R and credit Assets:Unbilled Work with the line dates matching the
dates of debits to this account as the work was performed covered by this
invoice. 

Then when payment is received from the customer your Asset:Bank account is
debited and the Liability:A/R account is credited for the amount of the
payment.

I think the above treatment meets the income recognition principle and the
matching principle in the GAAP and is necessary to do so, not just as a
carry over from paper ledgers, but an essential part of meeting those
principles. 

One of the difficulties is that what is meant by GAAP may be defined
differently in different jurisdictions. Not all countries, notably the US
and with Brexit possibly the UK, have adopted the IFRS standards specific
version or equivalent of the GAAP and some who have may have specific
modifications relevant to other legislation in their countries, but they are
pretty close. Any differences do however become important. It would be
difficult to make Gnucash able to comply with all jurisdictions so any
specific cases really need to be accomodated by how you use Gnucash.

David



-----
David Cousens
--
Sent from: http://gnucash.1415818.n4.nabble.com/GnuCash-User-f1415819.html