<article id="xacc-apar">
<artheader>
<title>Accounts Payable/Accounts Receivable</title>
</artheader>

<para>A/R (Accounts Receivable) and A/P (Accounts Payable) are used by
businesses to record sales for which they are not immediately paid, or
to record bills that they have received, but might not pay until
later.  These types of accounts are used primarily when you've got a
lot of bills and receipts flowing in and out, and don't want to lose
track of them just because you don't pay/get paid right away.  
</para>
<para> For most home users, A/R and A/P will add so much complexity
that they are not worth the effort.  
</para>
    
<sect1 id="xacc-ardef">
<title> Accounts Receivable</title> 

<para>Let's assume that instead of requiring customers to pay
<emphasis>instantly,</emphasis> in cash, you issue them an invoice,
and give them 30 days to pay the bills. (After 30 days, we start
charging interest and sending out harassing letters :-)).  When we
make a sale, the two accounts affected are <emphasis>Sales</emphasis>
(an income account) and <emphasis>Accounts Receivable.</emphasis>
Accounts Receivable is an asset, but it's not "liquid," as you can't
readily sell it, and it's certainly not cash.  When the customer pays
the bill, you transfer the amount from A/R to Cash.  This is done in
two steps because you have decided to do your accounting on an accrual
basis and not on a cash basis.  This is because most of your
transactions are not solely based on cash changing hands, but rather
based on <emphasis>establishing obligations.</emphasis> </para>

<para>In more sophisticated operations, there may be a much more
complex sequence of documents generated and tracked:

    <itemizedlist>

<listitem><para>A customer sends in a <emphasis>Purchase
Order</emphasis>, which authorizes a purchase.  </para>
</listitem>

<listitem>
<para>A <emphasis>Work Order</emphasis> to schedule production of
      whatever the customer is buying.
      </para>
</listitem>

<listitem> <para>A <emphasis>Shipping Notice</emphasis> is issued, to
ship to goods to the customer.  </para> </listitem>

<listitem>
<para>Once shipped, an <emphasis>Invoice</emphasis> is issued,
representing the <emphasis>request to pay</emphasis>.
    </para>
</listitem>
</itemizedlist>

    </para>

<para>Sales are reported as soon as they occur.  Unfortunately, you
may wind up selling some product to no-good shady operators that you
didn't know were shady, and thus may get stuck with some "bad debts."
In order to determine which parts of Accounts Receivable appear to be
most at risk, it is typical to arrange A/R based on the "ages" of the
debts, commonly segmenting it into several aging periods, of payments
outstanding 0-30 days, those that outstanding 31-60 days, 61-90 days,
and then those that are <emphasis>way overdue.</emphasis> At some
point, it may become clear that a customer is never going to pay what
they owe, and we have to write it off as a <emphasis>Bad
Debt.</emphasis> At that point, it is typical to record an entry thus:

<table>
<title>Bad Debt Expense Example</title>
<tgroup cols="3">
<thead>
<row>
<entry>Account</entry>
<entry>DR</entry>
<entry>CR</entry>
</row>
</thead>
<tbody>
<row>
<entry>Bad Debt Expense</entry>
<entry>$10,000</entry>
<entry>        </entry>
</row>
<row>
<entry>        </entry>
</row>
<row>
<entry>Accounts Receivable</entry>
<entry>        </entry>
<entry>$10,000</entry>
</row>
</tbody>
</tgroup>
</table>

    </para>

<para>You could have reduced <emphasis>Sales Income</emphasis>
instead, but companies tend to prefer to specifically track the amount
that they're losing to bad customers.  </para>

<para><emphasis>Warning: <emphasis>Advanced Accounting
Concept.</emphasis> Bad Debt is an example of a "contra-account." That
doesn't refer to <emphasis>amounts paid to Nicaraguan
rebels,</emphasis> but rather the notion that the account is an income
account that is expected to hold a balance opposite to what is
normally expected, to be counteract the balance in another income
account.  <link linkend="xacc-depreciation">Accumulated
Depreciation,</link> used to diminish the value of an asset over time,
is another example of a contra-account.</emphasis> </para>

</sect1>
<sect1 id="xacc-ar">
<title> Accounts Payable</title>

<para>To see how Accounts Payable work, reverse the scenario for
Accounts Receivable: switch customer with supplier.

<itemizedlist>
<listitem>
<para>If you buy materials "on account," accrual accounting
      requires that you record the expense
      immediately.  Rather than reducing cash, put the
      "credit" into the <emphasis>Accounts Payable</emphasis> account.

      </para>
</listitem>

<listitem><para>Three weeks later, the invoice comes in. You issue a
payment, <emphasis>debiting A/P and crediting Cash.</emphasis> </para>
</listitem>

</itemizedlist>

    </para>
</sect1>
<sect1 id="xacc-prepaidexpenses">
<title> Prepaid Expenses</title>

<para>The same sorts of techniques are also used for pre-paid
expenses.  If you have to pay out down six months of rent in advance,
that is treated as an "accrued asset."

<itemizedlist>

<listitem> <para> At the time of payment, you
<emphasis>debit</emphasis> <emphasis>Prepaid Rent</emphasis> for the
amount paid, which is a <emphasis>credit</emphasis> to
<emphasis>Cash.</emphasis> This puts an unfortunate dent in the Cash
account, but it <emphasis>does</emphasis> show on the books as an
asset, and there are no more payments to make for the next six months.
</para>

</listitem>
<listitem>
<para>Each month, the balance in <emphasis>Prepaid Rent</emphasis> goes
      down by <emphasis>debiting</emphasis> 
      <emphasis>Rent Expense</emphasis> and <emphasis>crediting</emphasis>
      <emphasis>Prepaid Rent</emphasis>.
    </para>
</listitem>
</itemizedlist>

    </para>

<para>Similarly, companies collect payroll taxes on behalf of
employees, and track them in a special account.

<itemizedlist>

<listitem>
<para><emphasis>That</emphasis> money is not the company's, so there
is a <emphasis>debit</emphasis> to the <emphasis>Cash</emphasis>
account on one side, and a <emphasis>Credit</emphasis> to an Accrued
Liability, namely, <emphasis>Payroll Taxes Payable</emphasis>, on the
other side.  </para>
</listitem>

<listitem> <para>When the company sends its quarterly payroll tax
check to the Government, <emphasis>Payroll Taxes Payable</emphasis>
drops, as does the balance in the <emphasis> Checking Account
</emphasis>.  </para></listitem>

</itemizedlist>


</para>
</sect1>
</article>

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