Cash Method and write off's

[DaveC49]

Hi Martijn,

Gnucash is capable of supporting both cash and accrual accounting. The
business features (accounts receivable and accounts payable) are explicitly
accrual accounting based however as they record the income at the time the
invoice is created  normally on the date the service is rendered to the
client. 

The difference is primarily one of the date of the recording of the
transaction. In accrual accounting the timing of reporting the transaction
in your accounts is set primarily by when the transaction is entered into
i.e. when the agreement to perform the transaction is reached whereas cash
accounting is based on when the cash actually changes hands which, as in
your case can frequently, be some time later.

To do cash accounting in Gnucash you would have to not use the business
features and only record the transaction in your accounts when the payment
is received from the medical insurers. This would require a separate system
for recording your invoices to customers. It would be possible to maintain
two sets of books one on a cash basis and the other on an accrual basis but
this would require a lot of extra work.

Whether you can use cash accounting  will normally be determined by the
business and tax legislation in your jurisdiction(country). Some
jurisdictions have a threshold in turnover, below which you can apply to use
cash accounting and some require use of accrual accounting. 

Writing off the balance of the invoice seems like a reasonable approach
after receiving the medical insurance payment if the balance is
uncollectable. Again your local business and tax legislation can impact on
how this should be done and when and it would be a good idea to consult an
accountant locally who is experienced in your industry about how to best
handle this in your jurisdiction.

Have you looked at other reports other than the P&L e.g. Cash Flow to give
you a better idea of money flow particularly from a business management
point of view rather than just the tax perspective.

Your account of the treatment of a business loan is correct with regard to
the tax treatment in most juridictions. The principal component of the loan
repayment is still taxable as income. The principal component is recorded as
a reduction in the liability the loan represents to the business. As this
matches the reduction in assets that the principal component represents, it
does not affect your equity in the business. Income and expense accounts are
in practice temporary equity accounts used to record the change in equity
during an accounting period and as this component of the loan repayment
transaction does not result in a change in equity it does not appear in the
expense account.  

Another way of looking at it is that when you first take out the loan, your
bank account balance is increased and the liability account for the loan is
correspondingly increased, so there was no resulting change in equity
associated with taking out the loan amount for the principal. This means
there should no change in equity in repaying the principal. The interest
component however is not balanced by any change in equity when the loan is
taken out which is why it appears as an expense (a reduction in equity in
the current acoounting period). I hope the above makes it clearer rather
than further confusing the issue.


David Cousens





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David Cousens
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