I’ve come across an exceptional situation (for us at least), where I need to off-set or leverage an outgoing invoice with an incoming invoice. I can’t figure out how to do this correctly.
We received an invoice for a subscription, but then did some work for that company at the same price as the subscription rate. We sent our invoice, expecting both to settle payment by ordinary bank transfer. However, the other party suggested to barter it and settle the accounts without transfer of money.
How/where can I connect these two invoices and get a zero-sum trade, closing our outstanding invoice?
How will that accomplish anything? Can you please explain? If you enter zero-valued receipts and payments against the sales and purchase invoices, Accounts receivable and Accounts payable will not be reduced.
The case described by @lmns involved two already issued invoices: a sales invoice and a purchase invoice which were both outstanding.
Now a Journal entry is not a proper legal document to be exchanged as acknowledgement that these dues are now exterminated. As a start, the Journal Entry is not addressed to anyone.
However, when you create a 0 valued receipt, you create a positive line to reduce the receivable and another negative line to reduce the payable. If you choose a payment you just flip the sign.
These lines will affect the receivable and payable and reduce both.
You can also get fancy and custom title the document to “Offsetting” or whatever.
I know it works because I use this method.
If you really think about it, a zero valued receipt says “I received nothing but these two invoices are now gone” and the payment says “I paid nothing but still those two invoices are gone” and the great part is, you can give this document to the other party and it’s a proper legal document.
Sure, that would definitely remove any confusion as to the meaning of the signs (+/-) but I still prefer the lazy way, not because it’s better but because I am lazy.
@Joe91, @Ealfardan, I initiated an update of the Guide on offsetting sales and purchase invoices to include all three methods mentioned in this thread. Thinking about it, I realized all have advantages and disadvantages. And treatment can depend on relative amounts due on sales and purchase invoices if they are not identical. The updated Guide should be available on the web site by tomorrow.
Sorry to have been incomplete in my description. Many thanks for all your quick replies, suggestions and feedback.
We received an invoice, incl. shifted VAT.
We then sent our invoice, also with shifted VAT.
We expected both to just make a payment, but that didn’t happen.
Both had an outstanding amount, passing due date.
Then came the suggestion to barter it and settle without actual payment.
So, we need to enter something that will balance it out, without credit note, without making it a €0 invoice.
But it must be clear that the counter entry is related to this first entry.
For us, it’s something we never do, and that triggered my question.
Second, why do you say this? You started this thread by asking how to offset the invoices, presumably indicating you did not know how. Now you want to dictate the answer? You cannot just magic the invoices away. They are real financial transactions, and you need real transactions to settle them, especially since VAT is involved. Most tax authorities do not allow either leg of barter transactions to go untaxed. And the fact is, the situation you described is not bartering. You are merely looking for a method to offset invoices already issued for services provided (or to be provided).
1: Shifted VAT is when the other party settles the VAT in their own country. So it comes down to 0% VAT in your books, but with a tax rule between EU countries. Our VAT could be 20%, while in the other country it’s 18%. Shifted VAT makes it 0% on the invoice (instead of our 20%) and the other party is taxed at their own 18%.
2: Haha, no, we’re not magically deleting it at all. On the contrary. The original invoice must remain in the system, but we guessed we need to put a counter item in the system that will balance it out so the result is a zero-sum transacion. So, not a credit (because the service/product was delivered and invoiced), and not at €0 (because the value must remain visible, both for the price as well as the VAT that has been entered in the Intra-Community statement).
A credit note does not imply the product or service was not delivered. It can be used when products are returned, but also when only a price adjustment occurs.
Agreed. The main point is that the value is not being changed. The value remains and the tax calculated on that value also remains. A credit implies that the invoice and thus its value is reversed. Furthermore, it lowers the turnover, although the service/product has been delivered at that particular value and so should remain visible in the books. Our logic was that it should somehow be possible to have a counter entry somewhere that keeps the value in the books, but shows that the payment was not cash received, but is offset against another invoice.
Where did you get the idea that a credit Note automatically implies a sales has been reversed? Because that’s only one of many uses for a credit note.
What a credit note implies that you have credited the account of another party, the details of the credit is in the lines. Generally speaking, does your bank send you a “receipt” or a “credit notice” when you deposit funds? Banks issue credit notices to inform you that your account has been credited, no sale involved.
Second point, a Zero valued receipt doesn’t cancel anything.
You should at least give these methods a try before shrugging them off.
Sorry. Not shrugging them off. I’m not a native English speaker, so I am searching for words and correct expressions. I am trying to explain, not starting a discussion or picking a battle. I am trying to understand how to go about this.
If we credit, this is tied to the value that was on the original invoice. Which seems to make that one service/product sold at €0. And with that, €0 VAT. Which means we also have to reverse the IC statement.
We want to keep the invoice in the books, as is, as to not decrease the turnover value and to not impact the VAT/IC. Instead of having a cash receipt, we have a barter receipt. So, a zero-sum balance in the transaction on cash, but a remaining value with attached VAT.
That’s where the lines come in, the lines for the Credit/Debit Notes shouldn’t contain any item, shouldn’t refer to a revenue or expense account and shouldn’t have a tax code. You should have a defined clearing account for barter transactions and that account should show in the lines of both your Credit Notes and Debit Note.
As far as the 0 receipt, you received the amount of your invoice in one line and you pay the other invoice as (-) in the second line. Two transactions in one receipts that add up to zero. No sales or taxes involved.
OK. Done like that. Since we normally have a very simple and straightforward invoiced/settled process, having a clearing account to bypass the issue didn’t occur to us as an option. Now, the original invoice is simply marked as settled, but not as cash transaction as payment received, but with reference to the purchase invoice.
