Balance Sheet Report + Processing Provisions

@Tut @AJD @p4unger @eko Ofcause the liabilities will be there until it is paid. Yes this can work for me.

@kobus_Jhg, you may have valid reasons for organizing your chart of accounts the way you have, but I do not understand it. You are apparently making provision for all kinds of things. But such accounts would normally be asset accounts, not liability accounts. You do not, for example, owe anyone outside the business for potential donations. And it sounds as though you might plan to move money in and out of those accounts with journal entries. What is the point of that?

A liability account would be used when you owe money. For example, VAT collected from your customers is posted to a tax liability account because you owe it to the tax authority on behalf of your customers. While in the liability account, it offsets the asset that resides temporarily in your bank account because you collected the tax from the customer. That money, although in your bank, does not belong to you.

Did someone advise you to set up your chart of accounts this way?

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@Tut No we have done it for years. These are accounts we do not pay every month. it gets paid at the end of the year or when it is required. It is to ensure that there is sufficient funds available to do certain things. We use it as a type of a saving and that is why it is called a provision.

Obviously those funds are still in the bank account, but one can at any time check how much of what funds are available.

We do not owe anybody for something like Donations. You are correct, but the funds will be used for Donations when necessary. Then we Debit the Liability Account and Credit the Donations Account to clear the account. Then we make a payment via the bank.

With regard to the VAT. This is paid every 2nd month over to the authorities. Every 2nd month we do the journal Credit the Provision Account, Debit the Vat Account and pay the authorities via the bank.

This is an accepted way of doing it. Refer to a Google question below.

I know what provisions are. This is not the place for debate about your workflow. But you are creating more work for yourself.

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@Tut With all due respect it is not me who debated the workflow. I explained your question.
With it is very easy and quick to do these journals. Some other programs take a lot of time.

@kobus_Jhg there is absolutely no need to do that “clear the account” (reversal) transaction.
When you make the payment “via the bank” just post it directly to the provision account.
If over the financial year the provision amounts and the payment amounts are a mismatch then do a single year end journal adjustment covering all provision accounts.

Some provisions such as accounting fees could be adjusted when the invoice is received.
Say the provision account receives 100 per mth, so a total of 1,200 for the year.
If the invoice is for 1,500, then post 1200 to the provision account and 300 to the accounting fees account. So no other adjustment entries are required.

@Brucanna Thank You for your valuable input. We are still laymen at this and are doing this accounting for us to understand. The way I understand it the Provision Account is now a CR, which means the funds is showing in the Provision account, although we know it is actually in the bank.

In SA we have to pay 15% VAT or (Sales Tax) to the authorities.
When we do this provision we journalise the full amount incl the VAT to the Provision Account.

When we “clear the account” we DR the Provision account and CR the Expense account with the full amount incl the VAT. Let us assume we need to donate R1,000 In June 2021 to an institution, we do the following: -
We check the Balance Sheet how much funds is available. We currently have R1,200 in the Provision Account in June 2021.
We pay the Donation of R 1,000 through the bank to the Donations Expense Account.
R 868.57 will now reflect in the P&L report.
The VAT for the R1,000 (R 131.43) will be taken to the VAT Provision Account.
The Balance Sheet has not yet changed, because we have not done the reversal yet.
When we reverse the R 1000 From the Provision account, it will decrease the Balance with the said R 1,000 and clear the R 1,000 DR on the P&L account which was posted initially when the Journal was made.

I am just asking and not querying your suggestion. Your suggestion: -
We check the Balance Sheet how much funds is available. We currently have R1,200 in the Provision Account in June 2021.
We Pay R 1,000 directly from the Provision account through the Bank account.
The P&L does not reflect an expense have been paid.
The Balance Sheet has been reduced with R 896.57 and the (R 130.43) is posted correctly to the VAT account.
Would it be correct if there is no change on the P&L report?


Correct, as the P&L has already reflected the expense via the provision entries, the P&L doesn’t need to directly reflect the payment.

However you have another issue which maybe the cause of your current “flawed” process.

This is incorrect. Your journal should only reflect the expected expense “excluding” VAT. VAT should never be included as part of the P&L expense account amount as your entry is only an internal transaction unrelated to any supplier’s tax invoice. So taking the previous accounting fees example the transactions would be

Monthly Provision
Dr Accounting Fees > 100
Cr Accounting Fees Provision > 100

Annual Provision therefore is 1,200

The actual suppliers tax invoice is for 1,500 plus 15% VAT = 1,725

That invoice is then processed as.
Dr BS > Accounting Fees Provision > 1,200 (plus tax code VAT 15%)
Dr P&L > Accounting Fees > 300 (plus tax code VAT 15%)
Dr BS > VAT Provision > 275 (via the above tax codes)
Cr BS > Accounts Payable > 1,725

The exclusion of the VAT from the provision shouldn’t change this management tool as the VAT payable (225) is going to be a contra against any VAT receivable so the net effect is zero.

How so. The contra to a P&L accrued expense is a BS liability provision. If you are going to be debiting an Asset provision account, what account are you crediting to accrue the expense - P&L income ???

@Brucanna Thank You for your assistance. I will be using your suggestion. It is much less work.
I have one question though: -

What if the invoice is less and one has to clear the account at year end?

I was not referring to crediting any P&L account. I was referring to partitioning available funds to designate a portion of them as having been set aside for whatever you are making provision for. So if you are debiting an asset provision account, you would credit some other asset account, most likely a bank account. In Manager, this would most likely be done in an artificial bank account. That is why it all seemed pointless and unnecessary work to me.

That is all @kobus_Jhg is really doing: setting aside money to be sure it is available for future uses. There are no actual liabilities of the business involved, so using liability accounts does not seem appropriate to me. This is not like, say, an annual insurance premium bill that might be posted to a liability account and accrued monthly to an expense account.

@Tut @Brucanna Tut, you are right in some cases it is funds set aside, but is that not a liability?
It is definitely going to be invoiced and spent just like Insurance or accounting fees. Only the amount to be spent is still unknown.

No. A liability is an amount you are now obligated to pay to an outside entity in the future. Examples are accounts payable (your supplier has invoiced you and you owe money to the supplier) or bank loans (the bank has loaned you money and you must repay it). Insurance premiums or accounting fees are expenses you plan for, but you do not owe the money unless you renew the policy or contract with the accountant to perform services. You can make provisions for these planned expenses, but they are not yet liabilities. Setting aside money (an asset) for a planned expense is one thing. Owing that money (a liability) is something else.

That is why I originally asked you if someone had advised you to set up your chart of accounts the way you did.

@Tut @Brucanna Tut, How would you propose we do it? CR asset provision account and DR the expense account?

Personally, I would not do this at all. I would use a provisional account only to set aside funds for major purchases such as large fixed assets.

@Tut @Brucanna Tut, One sometimes get a major expense : -

  1. Advertising (This can be a major expense which can cost hundreds of thousands of rand depending on what one wants to do.)
  2. Promotions (This cost item can cost a lot of money as well)
  3. Legal Fees (One can be sued for millions of rand for example if a building burns down whilst you have serviced the equipment)
  4. Property repairs & Maintenance (As you are aware this can be a large expense as well.)

This is only some of the large expenses to be catered for.
If one does not do this it might happen that once one do need the expense there would not be sufficient funds.

What you decide about those situations are management actions and are really not related to how to use Manager.

@Tut @Brucanna Tut, I will leave it as is. It will be in Provisional accounts under Liabilities.

@Tut and @Brucanna gave you good advice. One of the first by @Tut was that Provisional accounts if used should be under Assets. In essence, what you do is not that different from Envelope budgeting but with a ledger. There they have links to explain [Dave Ramsey's Envelope System Explained |](https://Ramsey’s Envelope System) and it is clear that these “Envelopes” are assets and can best be setup as virtual Cash Accounts. You would thus establish one account (envelope) for each expense account you want to provision such Advertising, Promotions, etc . You should use inter-account transfers to reserve funds from bank to these envelopes. Once you make a real transaction with your bank account for example to settle Legal Fees then in P&L the Legal Fees expense account will show this but you will also then need to do an inter-account transfer from the Legal Fees envelope to the bank account so that you always see the correct “balance” of that envelope. As was explained using such systems is putting a lot of extra work that is usually not done now that many of us use accrual system of accounting. I understand that this is a way of budgeting and indeed Manager is pretty poor in that aspect as one can only use it in reports → Profit and Loss Statement (Actual vs Budget). Discussions on this have been had and Manager as accounting software records more of what has happened and does a excellent job at that rather than being used for financial forecasts and budgeting.

@eko @Tut @Brucanna Ecko, Thank You I will Follow the links and study them.

A good way to learn about how virtual envelopes work is going over the tutorial of Neobudget and see how you could implement similar in Manager (as Manager, in essence, has all the tools needed as well).