[GNC] Why can't accounts called "Credit Card" be "A/Payable"?

[Adrien Monteleone]

The purpose of the Business Features is to handle accruals. Accounts 
Payable is the account traditionally used for this for Expenses incurred 
on credit.

It holds the liability for the expense, from the time it is incurred, to 
the time it is paid. This allows you to record activity on the vendor 
invoice (Bill in GnuCash) at the proper time, regardless of when you 
finally make payment. (or if you pre-pay)

The purpose of this method is to fulfill the 'matching principle' of 
accounting where you record activity in the period it happens, in the 
case of a vendor, when you incur the expense. This allows you to 'match' 
expenses to the same period you earn revenue, ostensibly those expenses 
being part of the cost of earning that revenue. The difference between 
revenue & expenses results in 'income', for that period.

The Accrual Basis method is *usually* limited to business use. But not 
all businesses use it.

Another method is the 'Cash Basis' method. With this, you record 
expenses or other activity - only when money changes hands. (actual use 
of cash is not required) Here, you record revenue when you get paid, 
regardless of when you earned it, and you record expenses when you pay 
them, regardless of when you incurred them. I'd hazard that the vast 
majority of individuals operate on the 'cash' method.

The benefit of this method for businesses is simplicity, but one 
downside is you can't determine how much you spent to earn a specific 
amount of revenue, so you can't reliably make managerial decisions. Some 
businesses can easily use this method if they routinely deal in 'cash' 
transactions, or transactions where nearly all activity also involves 
money exchange at 'point of sale'. (both ways, for expenses and revenue) 
Two candidates that come to mind are Bars/Restaurants & Grocery stores. 
Both usually pay for inventory on-receipt or at least within the same 
period, pay wages with little or no lag, and receive payment in full at 
the point of sale.

You can still operate a Cash Basis using the Business Features, but it 
does require a little finesse with the date of posting your invoices and 
payments.

I use the Business Features for personal use because they also offer me 
the ability to monitor due dates, amounts in arrears with aging, and I 
can run a report to match up payments to invoices. I can also run my own 
'Statement of Account' from my perspective to compare to my various 
service providers. I only do this for 'regular' services and expenses 
like monthly, quarterly, or annual bills. I do simple manual 
transactions for things like going to the grocery store or gas station.

I'll put some in-line responses below...


On 12/20/22 12:49 PM, Eric Chapman wrote:
> I'm still working on workflow for recording purchases made via credit 
> card. I am wondering:
> 
> Why can't accounts called "Credit Card" be marked as "A/Payable" so that 
> I can post straight from a New Bill into that liability account?

I'm pretty sure you could do so, but the above explanation may answer 
why you wouldn't want to or need to.

Of course, that account won't have features of type 'Credit Card' any 
longer and instead, operate as "A/Payable".

Also, a Credit Card is not really a liability holding account. It is 
more along the lines of a 'payment factor.' You are paying for 
something, using credit from someone else.

In the case of a vendor, you are paying off your liability to them, 
using a type of loan from a bank via the card network. That's just 
swapping a liability for another, though both of special types and with 
special purposes.

If there was a case where you did not by chance 'pay' a vendor 
immediately via Card, what now? Where do you hold the liability on your 
books to the vendor?

*note a 'Vendor' is understood here to mean someone or business that 
extends you credit for goods exchanged or services rendered, usually on 
specific terms, such as Net30. You generally don't pay these 
immediately. (though of course, you can)

> Seems to me that if I have the credit side of the New Bill transaction 
> be some account marked as "A/Payable", then I'm going to have move that 
> amount to the Credit Card sometime as an extra step.

Yes, the 'extra' step is called Payment. It appears you are entering and 
posting Bills you've already paid. (maybe even immediately)

You don't *need* to use the Business Features for these transactions, 
you can just do manual transactions between various expense accounts and 
the Credit Card account. But you might find the additional features 
useful, and if you are ever not consistent with how you pay the Vendor, 
that could be an issue as well.

> 
> *Current workflow: *When a bill gets posted, it would be recorded like 
> this (since, best I can tell GnuCash requires that the posting acct be 
> an "A/Payable": marked account, and that characteristic is impossible 
> for credit card type accounts):
> 
>     /*Debit*///Expense or asset
>     ///*Credit*/ A/Payable acct
This looks correct. It records a liability to a Vendor and why you 
incurred the liability.

> 
>     Sometime this journal entry would have to happen (when?):
> 
>     /*Debit*/ A/Payable acct for amounts on credit card
>     /*Credit*/ Credit Card acct

This happens when you pay the invoice from the vendor with the Credit 
Card. Apparently in your case, this is instant. So technically it is 
'cash basis' but you don't have to operate that way even though you pay 
instantly.

And if you do use the Business Features for Cash Basis, you still have 
to use Process Payment as a separate step. But in this case, you do not 
post until you pay, (you can enter early) and the date of posting and 
payment need to be the same.

There is a Pay on Posting option, but all this does is immediately bring 
up the Process Payment window to save you a few clicks when you post a Bill.
> 
>     When the payment reflected on the credit card statement is recorded,
>     it would be:
> 
>     /*Debit*/ Credit Card acct
>     /*Credit*/ Checking acct

That looks correct. You've paid the Vendor above, now you need to pay 
the Credit Card down. These happen at different times, so they are two 
events that need to be recorded separately.
> 
> Seems to me that this workflow would be better, but I do not think it'll 
> work with GnuCash:
> 
> *Shorter workflow: *When a bill gets posted.
> 
>     /*Debit*///Expense or asset
>     /*Credit*/ Credit Card acct
> 
>     When the payment reflected on the credit card statement is recorded,
>     it would be:
> 
>     /*Debit*/ Credit Card acct
>     /*Credit*/ Checking acct

Doable, but all of the above should shed light on maybe why you wouldn't 
want to.

Regards,
Adrien