Invoice & Bill Posting Date Issues Across Multiple Periods

[Adrien Monteleone]

Thanks Dave,

I was already operating this way per the insurance issue. 

The only difference that I can’t figure out is how to handle pre-billing. (you’ve well described being billed AFTER making that 6 month pre-payment)

I’ve already got the pre-paying and expensing part straight. My issue isn’t the idea of a pre-paid asset, my issue is that it is increasing when I post the bill, not when I pay it. I understand the difference between recording events vs. actual money exchanges but this is a question of ‘when is the event?’

1. When the insurer generates the bill?
2. The date I arbitrarily ‘post’ the bill in GnuCash.(usually the day I enter it, or the ‘effective date’ of service.)
3. The due date of the bill and thus effective date of the beginning of the policy?
4. The date I actually pay the bill and decrease my cash asset?

The problem is that 1&2 are happening in November and May of each year, while 3&4 are usually happening in December & June respectively. Thus, balance sheets for November and May are overstated in the pre-paid asset category.

On the invoicing side of the question, I didn’t think of an ‘unbilled-work’ account. Thanks. I’ll use that.

As for normal post-billed expenses crossing multiple periods I guess the only option is correcting entries, but that sure seems like a limitation of paper that computers should be able to handle more easily. The data is already being entered. It just isn’t being used by the software. I’ll file an enhancement request.

Regards,
Adrien

> On Dec 10, 2017, at 1:49 AM, DaveC49 <davidcousens at bigpond.com> wrote:
> 
> 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
> --
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