I am an accounting beginner- can someone help me understand the difference I am seeing between the “Receipts and Payments Summary” report and the “Profit and Loss Statement” report?
Quick background: I pay an independent contractor. When I get the bill, I create a Purchase Invoice, and put all the charges towards an expense account “Contractor expense.” When I actually give the contractor money, I create a Payment and put the money towards “Accounts Payable > My Contractor > Invoice X”
Looking at either the Summary page of Manager or the “Profit and Loss Statement” report I see all the money I paid this contractor appearing next to “Less: Expenses > Contractor expense.” But when I look at “Receipts and Payments Summary,” I see that money next to “Accounts Payable.”
Have I entered something incorrectly here? Or is this all correct and intended?
Also, side question, is it correct to say “Profit and Loss Statement” is an Income Statement and “Receipts and Payments Summary” is a Statement of Cash Flows?
Thanks again Manager team, I really love this application! (And thanks to any accounting nerds who take the time to help a cat out.)
Not as some accountants define a statement of cash flows, but it serves much the same purpose.
Now for the lengthier explanation of your opening question. All this assumes you are using accrual basis accounting:
The purchase invoice debits the Contractor expense account and credits Accounts payable > Contractor > Invoice No. The payment debits Accounts payable and credits the bank or cash account you select (the source of funds). That has the effect of zeroing out the liability for the purchase invoice you have been carrying in Accounts payable, transferring the credit to the bank/cash account instead. So Accounts payable was a like a holding location because you purchased on credit (not to be confused with credits to an account). That step would have been skipped if you just paid the contractor directly as a “cash” purchase.
Because we are using accrual basis accounting, the expense appeared on your Profit and Loss Statement as soon as you created the purchase invoice; you accrued the expense, even though you hadn’t yet paid it. So the expense showed up in an expense account, Contractor expense.
The Receipts and Payments Summary, however, does not list income and expenses. It lists money flows into and out of accounts. When you paid your contractor, you were actually paying off your liability in Accounts payable, even though you gave the money to the contractor. So that’s where the payment shows up. The expense, remember, was accrued and recorded by the purchase invoice.
So you did everything correctly and all is as it should be.