Re: Cash reporting of Advances on AR

Hi,

Excellent questions. I actually had to do a little research on them.

On Thu, Dec 26, 2013 at 2:34 PM, John Locke <..hidden..> wrote:

Hi,

I'm writing this to the users list, because I'm not sure what the
correct behavior should be, looking for an accountant to weigh in on that.

In the past year, we've started collecting payment up front as an
overpayment/prepayment, into a liability account. We keep it there until
the final invoice is sent for the project, and then we apply that
pre-payment to the last invoice.

As best I can tell, the Accrual-based reporting all looks correct, but
I'm thinking if I need to do a cash-based income statement, that
prepayment should show up somewhere (and I'm thinking it would be
taxable -- we're collecting the cash now and doing the invoice later --
but we need to pay tax on the cash basis).

First, good questions. A few basic points first meta-accounting-wise. Virtually all of the effort to formalize accounting practices in accounting organizations address accrual accounting. Virtually all of the effort to standardize cash-basis accounting comes from tax authorities. So the larger questions are effectively tax accounting questions, far more than financial accounting ones. If you aren't filing your taxes on a cash basis, then what you need on your cash-basis income statement is less rigorously specified than it is with accrual-basis.

I try very hard not to get into tax accounting questions here because they are so localized. That's something to get local help on and make adjustments as needed. However, from my research, in the US, whether or not it shows up depends on how far out it is paid. You don't have to put it on your income taxes if it is an obligation deliverable in more a year out (as I understand what I read), and so instead it would be posted in a future year. But again, the main reason for mentioning this is that local tax help would be important in sorting this sort of thing out. So for example, if you pay cash up front for a five year lease, you'd deduct the expense over five years via amortization even on a cash basis.

It also isn't clear to me how an overpayment (as in a genuine overpayment, I bill you $120 and you pay me $150) works without expectation of further services. Does it matter if one expects to pay it back? I.e. if you get paid $30 over on December 28th and refund it on January 4th, I doubt that means you have $30 income in the first year and $30 expenses in the second year. This is a tax law question however.

I'm testing LSMB 1.4 to see how this works, and what I'm finding is that
the overpayment received does not show up anywhere on the income
statement, until it's received against an invoice. As I write through
this, I'm having a hard time seeing any other way to do it -- we need to
apply the overpayment to an invoice to know what account to put the
income into -- and when we do apply that overpayment, it will show up as
cash revenue for the date the payment is applied (I'm assuming, have not
verified this).

Yeah. I am not sure whether it is the date the overpayment was received or the date it was applied (I am assuming the former, if the latter we need to fix that).

Is it routine in cash reporting to not report deposits as income?

Sometimes.

If so,
this should be fine for us. The biggest issue here is knowing when the
overpayment was applied -- you cannot see any indication of the
overpayment getting applied on the invoice itself, only on the general
ledger for the overpayment account.

Right. I think there are two immediate steps for now. The first is a note somewhere on the screen which says that for cash basis reports, deposits are not included. The second is an overpayment report.

Until we have payments as top-level financial documents, I doubt we can do much more than that.

Cheers,
John Locke
http://www.freelock.com

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Best Wishes,

Chris Travers

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