Invoice & Bill Posting Date Issues Across Multiple Periods
Adrien Monteleone
adrien.monteleone at gmail.com
Mon Dec 18 13:00:33 EST 2017
> On Dec 17, 2017, at 11:07 PM, Dale Alspach <alspachde at gmail.com> wrote:
>
> Adrien,
>
> It seems to me that what you want is not an accounting solution but a
> software enhancement. I believe that you need to say exactly what you
> want in a bugzilla RFE. For the issue you describe below what seems to
> be required is a special version of scheduled transactions which will
> post a bill. Your purpose seems to be to delay the increase in assets
> and liabilities until a time period near to the date that the bill will
> be paid.
>
I outlined it in the very first post of the thread. There are two separate issues here really. The pre-paid issue is one that requires special treatment. I’d have to think it through more and look at the code to see how it might work.
As a first stab at it, perhaps a checkbox in the posting dialog, or the bill/invoice creation dialog that this is for a "pre-payment." The result would be for GnuCash to treat this similar to an ‘open but not posted’ bill/invoice, thus it won’t enter any accounts yet, but it will still trigger the Bills Due Reminder and still show up in vendor/customer reports. OR change how the Bills Due Reminder works and have it operate on any ‘active’ open bill, not just posted ones. (you can mark a bill ‘inactive’, this might be useful in this case) I suspect the first option would be less disruptive, however not as clean.
Note, I don’t want to ‘delay' the increase in assets and liabilities at all. There is no increase in assets in this case and there is never a liability that enters the picture. This is a shift in assets - from Cash to Pre-Paid Expense.
What is happening right now is that there IS an increase in assets and liabilities. (until the bill is paid) This is an error.
This is more like a transfer that involves a line-item bill from a vendor for services not yet rendered. (a deferred expense)
> I believe that you wrote something incorrect here:
>> Additionally, as noted in another reply, ‘bills’ for pre-paid expenses
>> should never hit AP at all. They aren’t ever liabilities. They are (as
>> yet unpaid) deferred expenses, not accrued expenses.
>
> It is not the pre-paid expenses that are being entered into AP it is the
> obligation to pay for them that is in AP and that is a liability. From
> an accounting perspective this is exactly what is required. The not yet
> existing asset pre-paid expense is being offset by a corresponding
> liability so that the net on the balance sheet is 0. Once the bill is
> paid the liability is 0 and the pre-paid expense becomes real.
I understand the pre-paid expenses aren’t being entered into AP, but they are balanced by it until paid. They should not. They are NOT a liability. If I don’t pay them, I don’t owe them. The insurer has no legal claim against me. They have yet to provide me anything of value.
Acquiring a pre-paid asset is the result of an asset shift. AP or other Liabilities never enter the equation. That’s probably why every example of this transaction I can find never show anything but the actual pre-payment. Anything else is simply not contemplated. It’s possible, nothing at all is entered in paper books until the payment is made. But then with paper, your managing your payment calendars in a system separate from your books anyway. The issue is that GnuCash offers payment date managing with the Bills Due Reminder feature but it only works on posted bills. This is a bill that technically, you can’t post till it’s paid. (It’s not really a bill)
So the solution would be either treat it as a special case for posting, or change how the payment reminder works.
>
> One other note is that this question of when to recognize an obligation
> to pay is a subtle one and really requires an accounting expert familiar
> with the type of business. A cash flow problem could be hidden by
> manipulating recognition dates.
I agree, but again, there is no obligation here at all. This is a pre-payment. This is not a bill for services rendered. It is a bill for services TO BE rendered. AP liabilities are known as ‘accrued expenses.’ They are recognized in the period incurred and paid later. This is the opposite. This is paid now, and recognized when incurred. But the Business Features don’t contemplate this at all, even though it is very common. (most ALL insurance is pre-paid, rent is another example though that is usually more important for businesses to track)
>
> Dale
>
> On 12/17/2017 01:46 PM, Adrien Monteleone wrote:
>> Dale,
>>
>> Thank you, but in my case the first event to happen (for me) is the bill arriving.
>>
>> Here is the sequence:
>>
>> 1) Renewal bill is generated
>> 2) Renewal bill is mailed
>> 3) Renewal bill arrives in the mailbox
>> 4) Renewal bill is entered in GnuCash with date of #1 as ‘opening date'
>> 5) Renewal bill is ‘posted’ in GnuCash with current date as ‘posting date'
>> 6) Renewal bill is paid
>> 7) Renewal policy goes into effect
>>
>> There is usually a one-week gap between 1 & 3. 3,4 & 5 usually happen on the same day. There is usually a 4-5 week gap between 3 & 7. The period boundary usually happens between 5 & 6, but sometimes between 6 & 7.
>>
>> The pre-paid expense should not appear until 6 is complete, but is currently happening at 5. The date of 6 is unknown until it happens, so I can’t ‘fudge’ and choose it as the posting date beforehand.
>>
>> Additionally, as noted in another reply, ‘bills’ for pre-paid expenses should never hit AP at all. They aren’t ever liabilities. They are (as yet unpaid) deferred expenses, not accrued expenses. So I’ve opted to bypass the Business Features entirely for this special case and forego the bill reminder as well as any ability to see this activity in a vendor report.
>>
>>
>> Regards,
>> Adrien
>>
>>> On Dec 16, 2017, at 4:36 PM, Dale Alspach <alspachde at gmail.com> wrote:
>>>
>>> Adrien,
>>>
>>> I do not use the business features but it seems from what you have
>>> written that something like the following may do what you want.
>>>
>>> Create a new liability account named Unbilled Payables (or whatever you
>>> like).
>>> Replace
>>>> Dr. Assets:Current_Assets:Pre-Paid_Expenses:Auto_Insurance
>>>> Cr. Liabilities:Accounts_Payable
>>> by
>>> Dr. Assets:Current_Assets:Pre-Paid_Expenses:Auto_Insurance
>>> Cr. Liabilities:Unbilled Payables
>>>
>>> There is no change in the Balance Sheet net. The entry in Unbilled
>>> Payables should be tagged so that an audit trail could be constructed.
>>>
>>> When the bill arrives, post the bill so that you effect a transfer
>>> between the liabilities
>>> Dr. Liabilities:Unbilled Payables
>>> Cr. Liabilities:Accounts_Payable
>>>
>>> Again there is no change in the Balance Sheet net. At this point the
>>> normal flow of the business features should generate your reminder and,
>>> upon payment, zero the liability for the pre-paid insurance. The asset
>>> becomes real.
>>>
>>> Dale
>>>
>>> On 12/15/2017 02:57 PM, Adrien Monteleone wrote:
>>>> Yes, I can explain. And the example of insurance is just that. A pre-paid expense IS an asset. (in accrual accounting)
>>>>
>>>> I pay in advance for auto insurance. The policy renews every 6 months. (for me, this is in December and June)
>>>>
>>>> Paying in advance is a pre-paid expense. This is an asset. I have not yet received ‘service’ from the insurance company.
>>>>
>>>> Here’s what the entry should be twice a year:
>>>>
>>>> Dr. Assets:Current_Assets:Pre-Paid_Expenses:Auto_Insurance
>>>> Cr. Assets:Current_Assets:Cash
>>>>
>>>> As I receive ‘service’ each month, or ‘use’ the asset, I credit the pre-paid expense account and debit the actual expense account for one-sixth of the asset (as this is a 6-month policy):
>>>>
>>>> Dr. Expenses:Auto:Auto_Insurance
>>>> Cr. Assets:Current_Assets:Pre-Paid_Expenses:Auto_Insurance
>>>>
>>>> The original question was trying to resolve the issue of posting the bill from the insurer for each renewal and how that affects recognition of the acquisition of the pre-paid expense asset.
>>>>
>>>> My current entry from the bill is:
>>>>
>>>> Dr. Assets:Current_Assets:Pre-Paid_Expenses:Auto_Insurance
>>>> Cr. Liabilities:Accounts_Payable
>>>>
>>>> and then when I pay it:
>>>>
>>>> Dr. Liabilities:Accounts_Payable
>>>> Cr. Assets:Current_Assets:Cash
>>>>
>>>> Technically, legally, I don’t have this asset until I actually pre-pay. The generation of a paper bill from the insurer is not an activity that either is the earning of income on their part, the incurring of an expense on mine, or even the assumption of a liability on the part of either of us. If I decline to pay the bill, the policy never goes into effect, I never receive anything of value and the insurer earns nothing, owes me nothing, and has no claim against me. (I don’t owe them anything)
>>>>
>>>> Posting the bill on any date other than the actual payment date creates the problem of properly recognizing the asset. This is even more problematic if the bill for renewal is received and posted into GnuCash in the period prior to the renewal and payment date. (frequently the case - the bill usually arrives in mid November/May)
>>>>
>>>> Note, I can’t find any guidance online on posting a ‘bill' for pre-paid insurance. ALL examples I find state to make the above entry—effective on the date of payment. I suspect this is because it is a shift in assets that cannot occur until it actually does. This is not a cash vs. accrual problem. The very use of the pre-paid expense account is a practice of accrual accounting and NOT cash basis accounting. (on a cash basis, the entire premium would be expensed when paid)
>>>>
>>>> Accrual vs. Cash doesn’t mean "document-dates vs. payment-dates." It means "activity-dates vs. payment-dates.”
>>>>
>>>> In fact, I see very little guidance with reference to the receipt of bills or issuing of invoices. What I see is how to make entries for when the relevant activity trigger takes place. (an expense is incurred or revenue is earned)
>>>>
>>>> In the case of a pre-paid expense, (a deferred expense) the activity takes place in later periods than the payment date. So the expense has to be accrued as it is incurred. In the case of an accrued expense (the opposite) the expense is recognized when incurred, and is booked as a liability until paid.
>>>>
>>>> It seems the business features only contemplated accrued expenses. (and conversely on the invoice side, did not consider un-billed work)
>>>>
>>>> So posting this bill shouldn’t even be a liability, it’s not an accrued expense, it’s a deferred expense. It should never hit AP but I can’t see anyway around that the way the system presently works.
>>>>
>>>> A complication is that the Bills Due Reminder feature only works on posted bills because that is when you enter the due date.(it can’t calculate anything without it, unless you have fixed terms, but even with that, unless you post, the reminder will not be triggered)
>>>>
>>>> It would be nice to enter the bill when received in GnuCash and have it show up on the Bills Due Reminder, but that seems impossible in this case. I can certainly enter the bill when received, but I can’t post it till I pay it or else my assets will shift too soon.
>>>>
>>>> I suppose I could bypass the business features all together, but then I don’t get the benefit of a bill reminder, or an easy to follow history with that vendor. (manual transactions won’t show up on the vendor report)
>>>>
>>>> I’ve decided on this approach for now:
>>>>
>>>> Set a reminder in my OS calendar to enter and post the bill as a manual transaction when I actually pay it.
>>>>
>>>> This means I can’t see this transaction on a vendor report and I can’t see my ‘due dates’ all in one place - GnuCash.
>>>>
>>>> However, my AP won’t have an erroneous entry and my assets won’t be inflated in November and May of each year.
>>>>
>>>> Regards,
>>>> Adrien
>>>>
>>>>> On Dec 15, 2017, at 9:51 AM, Derek Atkins <warlord at mit.edu> wrote:
>>>>>
>>>>> Adrien,
>>>>>
>>>>> Adrien Monteleone <adrien.monteleone at gmail.com> writes:
>>>>>
>>>>>> Sorry, allow me to rephrase, when do I acquire the pre-paid expense ASSET?
>>>>>
>>>>> Can you please explain what you mean by a "pre-paid expense asset"? Is
>>>>> it an Expense? Or is it an Asset?
>>>>>
>>>>> Could you give a concrete example of something that is a "pre-paid
>>>>> expense asset"?
>>>>>
>>>>> Sorry for being dense, but I still don't grok what you're trying to do
>>>>> or how this is mapping into a real-world transaction.
>>>>>
>>>>>> Please remember to CC this list on all your replies.
>>>>>> You can do this by using Reply-To-List or Reply-All.
>>>>
>>>> Sorry, I thought I did. I usually do this by backing-out the personal e-mail and replace it with the list email when I start each reply. I really wish Apple Mail would handle ‘reply to list’ properly to save me the trouble. I stuck with Thunderbird for many years on that point alone but finally made the switch for integration advantages. My apologies.
>>>>
>>>>>
>>>>> -derek
>>>>>
>>>>> --
>>>>> Derek Atkins, SB '93 MIT EE, SM '95 MIT Media Laboratory
>>>>> Member, MIT Student Information Processing Board (SIPB)
>>>>> URL: http://web.mit.edu/warlord/ PP-ASEL-IA N1NWH
>>>>> warlord at MIT.EDU PGP key available
>>>>
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