[GNC] How To Handle Prepayments

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[GNC] How To Handle Prepayments

tbalaban
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Re: [GNC] How To Handle Prepayments

Adrien Monteleone-2
I’m not sure I’m entirely following the timing exactly, but many insurances, and it looks like your’s falls in this category, are pre-paid.

Thus they are assets until they are ‘used’.

So when you make the initial payment:

Dr. Assets:Current Assets:Pre-Paid Assets:Insurance
Cr. Assets:Current Assets:Cash/Checking

You can handle that with a Vendor bill and Payment if you like.

As the insurance is ‘used’:

Dr. Expenses:Insurance
Cr. Assets:Current Assets:Pre-Paid Assets:Insurance

This can be handled with a manual or scheduled transaction as your situation dictates. (which could also be a vendor bill, if you didn’t use one for the initial payment)

Subsequent payments are likely still in advance, and so would go to increase the pre-paid asset first and then when used, they are expensed.

There is no need for involving A/P accounts or credit memos to adjust them. (unless you opt for the vendor bill route, but you still shouldn’t need credit memos)

I had a thread some months back on a similar topic and the issue is something to consider:

I receive a bill about a month in advance of the due date every six months for auto insurance. If I pay that bill early, or on time, I am gaining a ‘pre-paid’ asset to be used up over the next six months. My problem wasn’t using the bills feature to handle this, or the expensing (I just set up a scheduled transaction for that part) but that I couldn’t post the ‘advance’ bill without it posting to my assets right away. Yet, it isn’t an asset till I actually pay it. I was wanting to take advantage of the bills due reminder for this bill. I had to settle on waiting to post the bill until I actually make the payment and forgoing the reminder. That way, my assets weren’t inflated early. Otherwise, everything else works out fine.

Regards,
Adrien

> On Dec 15, 2018, at 3:06 PM, tbalaban <[hidden email]> wrote:
>
> My Company pays an initial payment to our insurer at the beginning of each
> policy year. As we incur insurance costs based on event participants, that
> initial payment is charged. After it is exhausted we get a monthly bill for
> the amount due. In no case do we ever get the initial payment back.
>
> I'd like to treat the initial payment as a credit to insurer's A/P account
> then each month create a bill for the amount payable.
>
> Is this the correct way to handle such a transaction?
>
> Assuming it is, how do I credit the amount due from whatever account I
> posted the initial payment to?
>
> In practice we pay the initial payment in February, the start of our paolicy
> year. Usually, in April or May, the initial payment is exhaused and we have
> to send more money to pay that month's bill. I'm not at all clear on how to
> post this situation.
>
> I'd appreciate knowing how to do this in GNUCash as well as any comments on
> the applicable general accounting rules. In Quickbooks I could debit or
> credit A/R or A/P diectly and selects the customer or vendor required. Since
> that capabiity does not appear to be available in GNUCash, how do I post it?
>
> Many thanks for your already generous help.
>
>
>
> --
> Sent from: http://gnucash.1415818.n4.nabble.com/GnuCash-User-f1415819.html
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Re: [GNC] How To Handle Prepayments

elvis-5
In reply to this post by tbalaban
Unless you really need to do accrual accounting, then don't. If you are
never getting it back, it is not much of an asset.

Put it though as Insurance Expense, Initial Payment, Payment 2 etc.

Accounting is there to help you, not make more work to make it "correct".


On 16/12/18 7:06 am, tbalaban wrote:

> My Company pays an initial payment to our insurer at the beginning of each
> policy year. As we incur insurance costs based on event participants, that
> initial payment is charged. After it is exhausted we get a monthly bill for
> the amount due. In no case do we ever get the initial payment back.
>
> I'd like to treat the initial payment as a credit to insurer's A/P account
> then each month create a bill for the amount payable.
>
> Is this the correct way to handle such a transaction?
>
> Assuming it is, how do I credit the amount due from whatever account I
> posted the initial payment to?
>
> In practice we pay the initial payment in February, the start of our paolicy
> year. Usually, in April or May, the initial payment is exhaused and we have
> to send more money to pay that month's bill. I'm not at all clear on how to
> post this situation.
>
> I'd appreciate knowing how to do this in GNUCash as well as any comments on
> the applicable general accounting rules. In Quickbooks I could debit or
> credit A/R or A/P diectly and selects the customer or vendor required. Since
> that capabiity does not appear to be available in GNUCash, how do I post it?
>
> Many thanks for your already generous help.
>
>
>
> --
> Sent from: http://gnucash.1415818.n4.nabble.com/GnuCash-User-f1415819.html
> _______________________________________________
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--
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Re: [GNC] How To Handle Prepayments

tbalaban
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Re: [GNC] How To Handle Prepayments

tbalaban
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Re: [GNC] How To Handle Prepayments

Stan Brown
In reply to this post by tbalaban

> From: Adrien Monteleone <[hidden email]>
> I receive a bill about a month in advance of the due date every six
months for auto insurance. If I pay that bill early, or on time, I am
gaining a ?pre-paid? asset to be used up over the next six months. My
problem wasn?t using the bills feature to handle this, or the expensing
(I just set up a scheduled transaction for that part) but that I
couldn?t post the ?advance? bill without it posting to my assets right
away. Yet, it isn?t an asset till I actually pay it. I was wanting to
take advantage of the bills due reminder for this bill. I had to settle
on waiting to post the bill until I actually make the payment and
forgoing the reminder. That way, my assets weren?t inflated early.
Otherwise, everything else works out fine.

Why not use your bank's bill-pay service to schedule the bill payment?
At least in the US, such services are typically free, and in fact you
make money because you don't have to use a stamp, not an envelope, or a
paper check, all of which cost money to replace.

When I get the bill -- and in my case it's almost two months in advance
for six-month auto insurance -- I immediately schedule bill pay for the
due date and then record:

Debit:  Assets » Prepaid Expenses » Auto Insurance
Credit: Bank Accounts » Bank X
Description: (Company) payment on (due date)

Thus I don't have to remember to pay the bill, my total assets are not
inflated, and I know that money is earmarked so I don't accidentally
spend Bank X down to a balance that is still positive but not large
enough to cover the scheduled payment.

--
Regards,
Stan Brown
Tompkins County, New York, USA
http://BrownMath.com
http://OakRoadSystems.com
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Re: [GNC] How To Handle Prepayments

Adrien Monteleone-2
In reply to this post by tbalaban
In that case, yes, I would just expense them as well. And you can do that with a manual transaction or a vendor bill—your choice.

Regards,
Adrien

> On Dec 15, 2018, at 5:37 PM, Tom Balaban <[hidden email]> wrote:
>
> Many thanks Adrien.
>
> I think your explanation works except for a minor detail, after the initial payment is exhausted all payments are after the fact.
>
> Each month I submit a report of participant count for the prior month. They will then send me a bill for the amount due.
>
> I don't think there is anything prepaid regarding these subsequent payments so I'm pretty sure I can just expense them.
>
> Best,
> Tom
>
> ------ Original Message ------
> From: "Adrien Monteleone" <[hidden email]>
> To: "Gnucash Users" <[hidden email]>
> Sent: 12/15/2018 4:41:12 PM
> Subject: Re: [GNC] How To Handle Prepayments
>
>> I’m not sure I’m entirely following the timing exactly, but many insurances, and it looks like your’s falls in this category, are pre-paid.
>>
>> Thus they are assets until they are ‘used’.
>>
>> So when you make the initial payment:
>>
>> Dr. Assets:Current Assets:Pre-Paid Assets:Insurance
>> Cr. Assets:Current Assets:Cash/Checking
>>
>> You can handle that with a Vendor bill and Payment if you like.
>>
>> As the insurance is ‘used’:
>>
>> Dr. Expenses:Insurance
>> Cr. Assets:Current Assets:Pre-Paid Assets:Insurance
>>
>> This can be handled with a manual or scheduled transaction as your situation dictates. (which could also be a vendor bill, if you didn’t use one for the initial payment)
>>
>> Subsequent payments are likely still in advance, and so would go to increase the pre-paid asset first and then when used, they are expensed.
>>
>> There is no need for involving A/P accounts or credit memos to adjust them. (unless you opt for the vendor bill route, but you still shouldn’t need credit memos)
>>
>> I had a thread some months back on a similar topic and the issue is something to consider:
>>
>> I receive a bill about a month in advance of the due date every six months for auto insurance. If I pay that bill early, or on time, I am gaining a ‘pre-paid’ asset to be used up over the next six months. My problem wasn’t using the bills feature to handle this, or the expensing (I just set up a scheduled transaction for that part) but that I couldn’t post the ‘advance’ bill without it posting to my assets right away. Yet, it isn’t an asset till I actually pay it. I was wanting to take advantage of the bills due reminder for this bill. I had to settle on waiting to post the bill until I actually make the payment and forgoing the reminder. That way, my assets weren’t inflated early. Otherwise, everything else works out fine.
>>
>> Regards,
>> Adrien
>>
>>> On Dec 15, 2018, at 3:06 PM, tbalaban <[hidden email]> wrote:
>>>
>>> My Company pays an initial payment to our insurer at the beginning of each
>>> policy year. As we incur insurance costs based on event participants, that
>>> initial payment is charged. After it is exhausted we get a monthly bill for
>>> the amount due. In no case do we ever get the initial payment back.
>>>
>>> I'd like to treat the initial payment as a credit to insurer's A/P account
>>> then each month create a bill for the amount payable.
>>>
>>> Is this the correct way to handle such a transaction?
>>>
>>> Assuming it is, how do I credit the amount due from whatever account I
>>> posted the initial payment to?
>>>
>>> In practice we pay the initial payment in February, the start of our paolicy
>>> year. Usually, in April or May, the initial payment is exhaused and we have
>>> to send more money to pay that month's bill. I'm not at all clear on how to
>>> post this situation.
>>>
>>> I'd appreciate knowing how to do this in GNUCash as well as any comments on
>>> the applicable general accounting rules. In Quickbooks I could debit or
>>> credit A/R or A/P diectly and selects the customer or vendor required. Since
>>> that capabiity does not appear to be available in GNUCash, how do I post it?
>>>
>>> Many thanks for your already generous help.
>>>
>>>
>>>
>>> --
>>> Sent from: http://gnucash.1415818.n4.nabble.com/GnuCash-User-f1415819.html
>>> _______________________________________________
>>> gnucash-user mailing list
>>> [hidden email]
>>> To update your subscription preferences or to unsubscribe:
>>> https://lists.gnucash.org/mailman/listinfo/gnucash-user
>>> If you are using Nabble or Gmane, please see https://wiki.gnucash.org/wiki/Mailing_Lists for more information.
>>> -----
>>> Please remember to CC this list on all your replies.
>>> You can do this by using Reply-To-List or Reply-All.
>>>
>>
>>
>> _______________________________________________
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>> [hidden email]
>> To update your subscription preferences or to unsubscribe:
>> https://lists.gnucash.org/mailman/listinfo/gnucash-user
>> If you are using Nabble or Gmane, please see https://wiki.gnucash.org/wiki/Mailing_Lists for more information.
>> -----
>> Please remember to CC this list on all your replies.
>> You can do this by using Reply-To-List or Reply-All.
>
>


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Re: [GNC] How To Handle Prepayments

Adrien Monteleone-2
In reply to this post by Stan Brown
Stan,

Assuming one uses a bank at all...


But even then, if you record the pre-paid expense when you get the bill 2 months early, your assets are off. (though not inflated, sorry, that was the wrong term)

You’re showing you have more pre-paid expenses and less money in the bank than you actually do. On the date of the payment that transaction will be correct, but not until then. Of course, for personal finances, one might not care that a balance sheet in the interim will be incorrect.

Regards,
Adrien

> On Dec 16, 2018, at 7:31 AM, Stan Brown <[hidden email]> wrote:
>
>
>> From: Adrien Monteleone <[hidden email]>
>> I receive a bill about a month in advance of the due date every six
> months for auto insurance. If I pay that bill early, or on time, I am
> gaining a ?pre-paid? asset to be used up over the next six months. My
> problem wasn?t using the bills feature to handle this, or the expensing
> (I just set up a scheduled transaction for that part) but that I
> couldn?t post the ?advance? bill without it posting to my assets right
> away. Yet, it isn?t an asset till I actually pay it. I was wanting to
> take advantage of the bills due reminder for this bill. I had to settle
> on waiting to post the bill until I actually make the payment and
> forgoing the reminder. That way, my assets weren?t inflated early.
> Otherwise, everything else works out fine.
>
> Why not use your bank's bill-pay service to schedule the bill payment?
> At least in the US, such services are typically free, and in fact you
> make money because you don't have to use a stamp, not an envelope, or a
> paper check, all of which cost money to replace.
>
> When I get the bill -- and in my case it's almost two months in advance
> for six-month auto insurance -- I immediately schedule bill pay for the
> due date and then record:
>
> Debit:  Assets » Prepaid Expenses » Auto Insurance
> Credit: Bank Accounts » Bank X
> Description: (Company) payment on (due date)
>
> Thus I don't have to remember to pay the bill, my total assets are not
> inflated, and I know that money is earmarked so I don't accidentally
> spend Bank X down to a balance that is still positive but not large
> enough to cover the scheduled payment.
>
> --
> Regards,
> Stan Brown
> Tompkins County, New York, USA
> http://BrownMath.com
> http://OakRoadSystems.com
>


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Re: [GNC] How To Handle Prepayments

Mike or Penny Novack-4
In reply to this post by tbalaban
On 12/15/2018 4:06 PM, tbalaban wrote:

> My Company pays an initial payment to our insurer at the beginning of each
> policy year. As we incur insurance costs based on event participants, that
> initial payment is charged. After it is exhausted we get a monthly bill for
> the amount due. In no case do we ever get the initial payment back.
>
> I'd like to treat the initial payment as a credit to insurer's A/P account
> then each month create a bill for the amount payable.
>
> Is this the correct way to handle such a transaction?
>
What do you mean by "correct"? WHY would you want to do this?

Look, I really should not be giving accounting/tax advice, but normally
you make that sort of decision on what tax law allows. It is normally
advantageous to "expense" a business expenditure (not treat as an asset)
if you are allowed to.

I suggest you consult your accountant whether you have to treat as a
"wasting" asset something with a "life" of less than one year.

Michael D Novack
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