gnucash/doc/sgml/C/xacc-apar.sgml

<ARTICLE ID="XACC-APAR">
<ARTHEADER>
<TITLE>Accounts Payable/Accounts Receivable</TITLE>
</ARTHEADER>
<SECT1 ID="XACC-AP-AR">
<TITLE> Accounts Payable and Accounts Receivable</TITLE>
<PARA>    </PARA>
<PARA>A/R (Accounts Receivable) and A/P (Accounts Payable) are
    advanced concepts that are used by businesses to record sales
    for which they are not paid right away, or to record bills that
    they have received, but might not pay until a little while
    later.

    </PARA>
<PARA>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 almost all home users, A/R and A/P are too complicated
    and confusing to be worth the effort.

    </PARA>
</SECT1>
<SECT1 ID="XACC-ARDEF">
<TITLE> Accounts Receivable</TITLE>
<PARA>    </PARA>
<PARA>First, let us examine A/R. After all, we really shouldn't
    really <EMPHASIS>need</EMPHASIS> to relate to A/P because we always pay
    <EMPHASIS>our</EMPHASIS> bills on time, don't we ? :-)

    </PARA>
<PARA>As a first approximation, let us assume we don't require
    customers to pay <EMPHASIS>instantly,</EMPHASIS> in cash, but rather issue
    them an invoice, and give them 30 days to pay the bills. (After
    30 days, we can start charging interest and sending out
    harassing letters :-)).

    </PARA>
<PARA>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.

    </PARA>
<PARA>Then when they come by to pay their bill, dropping off a
    large sack of twenty-dollar bills (or, more likely, a
    check/cheque), we transfer the amount from A/R to Cash.

    </PARA>
<PARA>The reason we do this in two steps is that we have decided
    we need to do our accounting on an accrual basis and not on a
    cash basis, because most of our 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>, thus
      authorizing a purchase.

      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>We set up a <EMPHASIS>Work Order</EMPHASIS> to schedule production of
      whatever the customer is buying

      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>We issue a <EMPHASIS>Shipping Notice</EMPHASIS>, to ship to goods to
      the customer

      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>Once shipped, we issue an <EMPHASIS>Invoice</EMPHASIS>, representing
      the <EMPHASIS>request to pay</EMPHASIS>
    </PARA>
</LISTITEM>
</ITEMIZEDLIST>

    </PARA>
<PARA>The fact of there being four documents leads to there being
    considerable wads of paper, and having these and other such
    processes explains why large organizations tend to have hefty
    bureaucracies.

    </PARA>
<PARA>We report sales in our sales figures as soon as we make
    them. Unfortunately, we may wind up selling some product to
    no-good shady operators that we didn't know were shady, and
    thus may get stuck with some "bad debts."

    </PARA>
<PARA>In order to determine which parts of Accounts Receivable
    appear to be most at risk, it is typical to arrange AR 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>

    </PARA>
<PARA>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>

    </PARA>
<PARA>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>We 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>The scenario for Accounts Receivable, reversed, reflects how
    Accounts Payables work; just switch customer with supplier, and
    watch the roles reverse.

    <ITEMIZEDLIST>
<LISTITEM>
<PARA>If we buy materials "on account," accrual accounting
      requires that we record that we incur the expense
      immediately, and rather than reducing cash, we put the
      "credit" into the <EMPHASIS>Accounts Payable</EMPHASIS> account.

      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>Three weeks later, the invoice comes in, and we issue a
      payment, and so <EMPHASIS>Debit AP, Credit Cash.</EMPHASIS>
      
      
    </PARA>
</LISTITEM>
</ITEMIZEDLIST>

    </PARA>
</SECT1>
<SECT1 ID="XACC-PREPAIDEXPENSES">
<TITLE> Prepaid Expenses</TITLE>
<PARA>    </PARA>
<PARA>Analogous techniques are also used for expenses that are
    pre-paid.

    </PARA>
<PARA>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 that is a <EMPHASIS>Credit</EMPHASIS> to
        <EMPHASIS>Cash.</EMPHASIS> 

        </PARA>
<PARA>While this puts an unfortunate dent in the Cash account,
        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> would be
      down via <EMPHASIS>Debit</EMPHASIS> <EMPHASIS>Rent Expense</EMPHASIS>, <EMPHASIS>Credit</EMPHASIS>
      <EMPHASIS>Prepaid Rent</EMPHASIS>.
    </PARA>
</LISTITEM>
</ITEMIZEDLIST>

    </PARA>
<PARA>Similarly, companies collect payroll taxes on behalf of
    employees, and keep them in a special bank 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 quarterly check to the Government so that they
      can make <EMPHASIS>their</EMPHASIS> payroll, <EMPHASIS>Payroll Taxes Payable</EMPHASIS>
      drops as does the balance in the <EMPHASIS>Checking Account</EMPHASIS>.
      
      
    </PARA>
</LISTITEM>
</ITEMIZEDLIST>


</PARA>
</SECT1>
</ARTICLE>