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207 lines
6.9 KiB
HTML
207 lines
6.9 KiB
HTML
<!DOCTYPE html PUBLIC "-//W3C//DTD HTML 4.01//EN">
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<html>
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<head>
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<meta name="generator" content="HTML Tidy, see www.w3.org">
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<link rel="stylesheet" title="normal" type="text/css" href=
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"gnucash.css">
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<title>Accounts Payable/Accounts Receivable</title>
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</head>
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<body>
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<h1>Accounts Payable and Accounts Receivable</h1>
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<p>A/R (Accounts Receivable) and A/P (Accounts Payable) are
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advanced concepts that are used by businesses to record sales
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for which they are not paid right away, or to record bills that
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they have received, but might not pay until a little while
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later.</p>
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<p>These types of accounts are used primarily when you've got a
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lot of bills and receipts flowing in and out, and don't want to
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lose track of them just because you don't pay/get paid right
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away.</p>
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<p>For almost all home users, A/R and A/P are too complicated
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and confusing to be worth the effort.</p>
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<h1>Accounts Receivable</h1>
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<p>First, let us examine A/R. After all, we really shouldn't
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really <em>need</em> to relate to A/P because we always pay
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<em>our</em> bills on time, don't we ? :-)</p>
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<p>As a first approximation, let us assume we don't require
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customers to pay <em>instantly,</em> in cash, but rather issue
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them an invoice, and give them 30 days to pay the bills. (After
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30 days, we can start charging interest and sending out
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harassing letters :-)).</p>
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<p>When we make a sale, the two accounts affected are <b>
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Sales</b> (an income account) and <b>Accounts Receivable.</b>
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Accounts Receivable is an asset, but it's not "liquid," as you
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can't readily sell it, and it's certainly not cash.</p>
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<p>Then when they come by to pay their bill, dropping off a
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large sack of twenty-dollar bills (or, more likely, a
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check/cheque), we transfer the amount from A/R to Cash.</p>
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<p>The reason we do this in two steps is that we have decided
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we need to do our accounting on an accrual basis and not on a
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cash basis, because most of our transactions are not solely
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based on cash changing hands, but rather based on <em>
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establishing obligations.</em></p>
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<p>In more sophisticated operations, there may be a much more
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complex sequence of documents generated and tracked:</p>
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<ul>
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<li>A customer sends in a <b>Purchase Order</b>, thus
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authorizing a purchase.</li>
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<li>We set up a <b>Work Order</b> to schedule production of
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whatever the customer is buying</li>
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<li>We issue a <b>Shipping Notice</b>, to ship to goods to
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the customer</li>
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<li>Once shipped, we issue an <b>Invoice</b>, representing
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the <em>request to pay</em></li>
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</ul>
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<p>The fact of there being four documents leads to there being
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considerable wads of paper, and having these and other such
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processes explains why large organizations tend to have hefty
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bureaucracies.</p>
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<p>We report sales in our sales figures as soon as we make
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them. Unfortunately, we may wind up selling some product to
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no-good shady operators that we didn't know were shady, and
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thus may get stuck with some "bad debts."</p>
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<p>In order to determine which parts of Accounts Receivable
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appear to be most at risk, it is typical to arrange AR based on
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the "ages" of the debts, commonly segmenting it into several
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aging periods, of payments outstanding 0-30 days, those that
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outstanding 31-60 days, 61-90 days, and then those that are
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<em>way overdue.</em></p>
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<p>At some point, it may become clear that a customer is never
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going to pay what they owe, and we have to write it off as a
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<b>Bad Debt.</b></p>
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<p>At that point, it is typical to record an entry thus:</p>
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<table summary="BADDEBT">
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<tr>
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<th>Account</th>
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<th>DR</th>
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<th>CR</th>
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</tr>
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<tr>
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<td>Bad Debt Expense</td>
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<td>$10,000</td>
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<td>
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</td>
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</tr>
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<tr>
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<td>
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</td>
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</tr>
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<tr>
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<td>Accounts Receivable</td>
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<td>
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</td>
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<td>$10,000</td>
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</tr>
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</table>
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<p>We could have reduced <b>Sales Income</b> instead, but
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companies tend to prefer to specifically track the amount that
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they're losing to bad customers.</p>
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<p><em>Warning: <b>Advanced Accounting Concept.</b> Bad Debt is
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an example of a "contra-account." That doesn't refer to <b>
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amounts paid to Nicaraguan rebels,</b> but rather the notion
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that the account is an income account that is expected to hold
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a balance opposite to what is normally expected, to be
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counteract the balance in another income account. <a href=
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"xacc-apprdepr.html#depr">Accumulated Depreciation,</a> used to
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diminish the value of an asset over time, is another example of
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a contra-account.</em></p>
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<h1>Accounts Payable</h1>
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<p>The scenario for Accounts Receivable, reversed, reflects how
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Accounts Payables work; just switch customer with supplier, and
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watch the roles reverse.</p>
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<ul>
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<li>If we buy materials "on account," accrual accounting
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requires that we record that we incur the expense
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immediately, and rather than reducing cash, we put the
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"credit" into the <b>Accounts Payable</b> account.</li>
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<li>Three weeks later, the invoice comes in, and we issue a
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payment, and so <em>Debit AP, Credit Cash.</em><br>
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<br>
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</li>
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</ul>
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<h1>Prepaid Expenses</h1>
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<p>Analogous techniques are also used for expenses that are
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pre-paid.</p>
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<p>If you have to pay out down six months of rent in advance,
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that is treated as an "accrued asset."</p>
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<ul>
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<li>
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At the time of payment, you <em>Debit</em> <b>Prepaid
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Rent</b> for the amount paid that is a <em>Credit</em> to
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<b>Cash.</b>
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<p>While this puts an unfortunate dent in the Cash account,
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it <em>does</em> show on the books as an asset, and there
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are no more payments to make for the next six months.</p>
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</li>
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<li>Each month, the balance in <b>Prepaid Rent</b> would be
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down via <em>Debit</em> <b>Rent Expense</b>, <em>Credit</em>
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<b>Prepaid Rent</b>.</li>
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</ul>
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<p>Similarly, companies collect payroll taxes on behalf of
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employees, and keep them in a special bank account.</p>
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<ul>
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<li><em>That</em> money is not the company's, so there is a
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<em>Debit</em> to the <b>Cash</b> account on one side, and a
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<em>Credit</em> to an Accrued Liability, namely, <b>Payroll
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Taxes Payable</b>, on the other side.</li>
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<li>When the quarterly check to the Government so that they
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can make <em>their</em> payroll, <b>Payroll Taxes Payable</b>
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drops as does the balance in the <b>Checking Account</b>.<br>
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<br>
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</li>
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</ul>
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<hr>
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<p>Return to <a href="xacc-main.html">Main Documentation
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Page.</a></p>
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</body>
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</html>
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