Recording transactions

Tue Jan 16 00:09:21 EST 2018

> On Jan 15, 2018, at 10:26 PM, sszd <sszdkruk at gmail.com> wrote:
> 
> I’d like to thank you for your time and response.  You’ve cleared up a few
> things I was confused about, and made me feel better about how I was setting
> things up.
> 
> Aside from how you’ve categorized some of the accounts, it looks like my 1st
> example was right on the money (no pun intended), or at least pretty close. 
> I’d like to go over each itemized line just to clarify a few things and make
> sure I understand.
> 
> 1. Dr. Assets:Business:Current Assets:Bank $16.32
> 
> As I mentioned in my original post, the “Etsy” account is actually a real
> physical account, or at least we’re treating it that way.  Monies from Etsy
> sales go into this account maintained by Etsy.  If refunds are issued, those
> monies are used to reimburse the customer.  Once a week, whatever balance is
> in the account is automatically transferred to my wife’s business checking
> account.  So we simply treat the Etsy account just like a bank account. 
> When transfers are made, we enter a transfer of monies from the Etsy account
> to a checking account.  The Etsy account can also be used to make online
> purchases to other Etsy vendors.  This is exactly how PayPal works (with the
> exception of automated transfers of deposits).  In fact, Etsy customers can
> also make their purchases through PayPal.  But of course, monies from that
> sale would go to a PayPal account and not Etsy.

Then in the sales transactions, be sure to debit the Etsy account instead.

When you transfer funds manually, or automatically, then you do that between the Etsy account and your bank account.

> 
> 2. Dr. Expenses:Business:Fees:Etsy Sale Fees $  .76 
> 
> It looks like I’ve set this up correctly.
> 
> 3. Dr. Expenses:Business:Cost of Goods Sold $ 5.00 
> 
> We do not track cost of goods sold or track an inventory.  My wife’s
> business (as mentioned) is very small.  She puts together banners for
> special occasions (weddings, birthdays, etc.).  It would be a nightmare (if
> not impossible) to try to determine the cost of supplies in putting one of
> these banners together.  In addition, she makes so little money it would be
> far too much effort to try to do this extra work.  Tax season is already
> hard enough as it is, and it takes me many weeks to complete every year. 
> Ultimately, I don’t know if this is the right thing to do or not.  But years
> ago I was advised that as long as we keep detailed records of her business
> expenses and sales, we should be fine.  It seems to work out okay when we
> file schedule C.

It’s your call, but if you aren’t tracking this, it looks like your taxable income is much higher than it really is. Certainly, follow the advice of a local CPA on this one.

> 
> 4.        Cr. Revenue:Sales:Product $10.00 
> 
> I like your idea of the Revenue account vice the Income account.  Both, of
> course, are income, but I guess this makes it a little more clear.  I’m
> assuming you’d still keep a separate top level Income account for paychecks
> from my job (totally unrelated from the business)?

Yep.

It helps with separation in the same book.

Technically, everything that comes in is not ‘income.’ Income is Revenue - Expenses. (which is why tracking Cost of Goods, which is an expense, is so important. It’s probably at least 30% of your total expenses unless you are mostly service oriented.)

Any confusion on the income concept is entirely the making of 100+ years of murky laws. For a business, income is revenue - expenses. For an individual - ask a CPA or a lawyer. (you’ll probably get 2 different answers as well)

> 
> 5.        Cr. Revenue:Shipping $ 6.65 
> 
> You are correct, my wife will collect shipping costs from her customers at
> time of sale, which will go into the Etsy account (and eventually her
> checking).  Etsy does not handle any product directly.  A couple of times a
> week she will make a trip to the post office to ship multiple packages to
> multiple customers and pay for all the postage at that time.  She does not
> collect excess postage from customers.  If a customer overpays, or it costs
> less to ship than expected, she always issues a refund back to the customer
> for excess postage.  She feels bad and does not like customers paying more
> for shipping than what it really costs (unlike many other vendors).
> 
> It’s interesting how you’ve categorized this.  I’ve always considered
> shipping a business expense.  In Quicken, I considered what we received from
> the customer for shipping as income, and then later, when it’s actually
> shipped, the cost as an expense.  So actually, I guess I considered it both
> income and an expense.  With that in mind, I thought that putting it under
> Expenses in GnuCash was the appropriate thing to do.  I noticed that when
> it’s done this way the balance is negative when the customer has payed for
> shipping and then zeros out when the cost is incurred upon actual shipping. 
> I’m assuming doing it your way (as Revenue) it would show as a positive
> value when the customer pays, and then gets zeroed out upon actual shipping.

Yes. The shipping charge is something she’s charging the customer. It’s no different than any other charge for any other service she might provide. How much she actually spends on providing that service is a separate question. The fact that she makes sure to adjust their ‘account’ and issue a refund is quite noble. (you’re right, most companies won’t bother, but does she ask for extra if the postage turns out to be more?)

Since you’re recording it as an expense, the recording of the charge as revenue doesn’t increase income.

Note, I purposely called the revenue account ‘Shipping’ and the expense account ‘Postage.’

It helps with keeping it straight which is which and why you do both.

One is a service charge, the other is the actual expense of providing that service.

> 
> 6.        Cr. Liability:Business:Sales Tax Payable $ 0.43
> 
> Actually, I was torn about this particular item.  I thought about putting it
> in as a liability, but then every example I found online showed it as a
> business expense.  Your explanation makes a lot of sense, and I agree with
> what you’re saying.  Oh, and by the way, we only pay the sales tax to the
> state once a year instead of quarterly.  The business generates about 99% of
> its sales from out of state.  There are so little in-state sales that if we
> payed quarterly, we’d rarely owe anything due to the formulas and rounding
> used to calculate what’s owed.

I’ve never seen it explained as anything other than a liability. Interesting you found the opposite.

It’s a liability because it is money you posses that isn’t yours. It belongs to the government. So you have to offset that asset in your books with a liability.

Now, sales tax the business pays on things it buys for its own use, THAT is an expense, but not the sales tax you collect on what you sell to others.

No matter when you pay the liability, just be mindful of local laws. Most jurisdictions I’m familiar with require you to calculate what you owe based on a sales report - not simply remit what you collected. (that way, if you under collected, you still have to pay as if you collected it properly) However, if you OVER collect, you can’t keep the difference, you have to remit it all. Tracking this as a liability will help see if you are over/under collecting when you calculate the actual liability at year-end.

> 
> 7.        Cr. Assets:Current Assets:Business:Inventory $ 5.00 
> 
> See #3 above.
> 
> 8. Dr. Expenses:Business:Postage 
>         Cr. Assets:Current Assets:Bank-Business 
> 
> Okay, I see what you’re doing now with postage.  You’re considering it both
> an income and an expense.  So that means you have two separate Postage (i.e.
> Shipping) accounts.  I didn’t know if it was typical to do that kind of
> thing in GnuCash or double entry bookkeeping.  I thought it was better to
> have a single account that monies go into and out of.

Not ‘Income’ and ‘Expense’ but ‘Revenue’ and ‘Expense’, it’s the difference between them that is either Income or Loss.

Yes, in most cases you want one account. But this is really two different things.

On the one hand, you’re charging for a service.

On the other, you have an expense that is related to providing that service.

This is similar to recording the sale of a product as Revenue:Sales and the cost of acquiring that product as Expenses:Cost of Goods Sold.

*note, your inventory purchases are technically not expenses, they are acquisition of assets. The expense is realized when you sell the product - this is an example of the ‘matching principle’ where you match expenses to the period in which you earned the revenue. It’s up to you to decide how you want to track things though and how much trouble it is based on your volume.

> 
> I have another question unrelated to any of the above that I’m hoping you
> can help with.  Is there any way to generate a report that shows refunds? 
> I’ve been messing around with the various report types and cannot find any
> way to do this.  I need to be able to see refunds for sales as well as
> postage refunds separately.

Assuming the refund is issued from the Etsy account…

When you issue the refund I’d use this transaction:

Dr. Revenue:Sales:Returns & Allowances
	Cr. Assets:Business:Current Assets:Etsy

Returns & Allowances in this case is a contra-revenue account. It will have a debit balance instead of a credit balance like the rest of your sales accounts.

On the Income Statement, it would appear like so:

Revenue
	Sales:Product			$10.00
	Shipping			$ 6.65
	Returns & Allowances	       -$ 1.00
					======
Total Revenue				$15.65

You could tag the Returns & Allowances split in the transaction with an explanation like ‘shipping’ or ‘damaged goods’ or something, then run a filtered transaction report to see why and how much you are refunding, or you could create separate sub-accounts of Returns & Allowances for your major refund reasons if you wanted to see them on an Income Statement.

> 
> Thanks again for all your help.
> 
> 
> 
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