In our business, let say we have bought 1 LCD ($150 USD) and 1 Software ($200 USD).
Both of them are gonna be our assets (we are not going to sell them)
Me and my partner, are both paid the amounts by cash (so each of us paid $175 USD for both of these.)
In purchase invoices tab, we have no problem. Products with their price and their suppliers are listed.
And because of our business type, we are using “Cash in Hands”. It means when we need any money, we both contribute in capital at that time.
With these assumptions, please let me know if I’m right here or not:
To express our expense, I’m using “Expense Claims” module.
I have a little problem with Account filed in this module. Regarding my business type, when I’m going to express a purchase made by our own cash in hands, should I put that under the “Capital Account”? (like the image below) Or I should show that somewhere else?
Thanks in advance!
An expense claim only records the purchase by you or your partner. In this case, you must have two expense claims, since each of you has a claim against your company because both of you spent your own money on behalf of the company. When creating these claims, allocate them to the expense account matching what you bought: office equipment or whatever.
Creating the expense claims generates liabilities. These should somehow be cleared periodically. How frequently depends on how current you want your accounts to be. Monthly could work well, or even annually, but you probably would not want to carry the
Expense claims liability over into the next accounting year. That is just unnecessary clutter on your balance sheet.
You have two choices for clearing the liability, since you are a partnership. You could actually reimburse yourselves from a bank or cash account by spending money. Allocate the payments to
Expense claims and the individual payer. You would do exactly the same for another employee.
But since you are partners, a more usual approach would be to clear the liabilities to your individual capital accounts. Do this with a journal entry, since no money will actually enter or leave the company. Debit
Expense claims and credit
Capital accounts. You can combine this into one transaction, but will need two debit lines and two credit lines because you must clear two payers’ accounts.
Now, that being said, remember that some things you purchase may have to be treated as fixed assets and depreciated over time. That makes things enough more complex that it would probably be easier to contribute the capital directly to your capital accounts and have the company buy the assets.
When you setup partners under
Capital Accounts, don’t use name as
Contributed by Hadi… use the real name
Then when recording expense claim, select your capital account name under
As for what to enter into
Account field, I would just select some expense account such as
Office equipment or similar.
Do this for each partners, so that’s $175 per expense claim.
What will happen is that $350 will show as office equipment under expenses and at the same time $350 will also show as an amount the business owes to partners. (because partners bought office equipment on behalf on the business)
Thank you Tut for every details : )
I should work on all of them!
I see lubos, thanks for every details : )
So you mean in this case, both LCD and Software should be categorized as
But may I know why there is an
Equity (capital accounts) part is in the
So when do we select expense as an equity? (because at first, I thought I should categorized both LCD and Software in this part)
Thanks in advance!
You have raised a number of points, @torabian, that have little to do with the Manager software.
@lubos used Office equipment only as an example. You should record all expenses in the account that matches your particular chart of accounts and any descriptions you use for it. These accounts may be influenced by local laws, especially tax reporting laws. These specific assets might also be considered fixed assets, since they are long-lasting. In that case, only the current accounting period’s depreciation will be recorded as an expense. Their full cost would be recovered over time.
The various transaction entry screens in Manager include the accounts that might be used. The presence of a particular account in any dropdown list does not mean that account is appropriate in all cases.
Expenses and equity accounts are never interchangeable options. Equity represents the net investment remaining in the company. It could be owner’s equity, if you are a sole trader or proprietor. It could be partners’ capital. It could be shareholders’ equity and retained earnings. If you need a refresher on basic accounting principles, I recommend starting at Accounting Equation | Explanation | AccountingCoach. This excellent web site is free and covers most of what a small business needs, with excellent examples.
In the example you gave, the LCD and software were both purchased with partners’ personal funds, so the actual purchase transaction should be recorded via an expense claim. Because you have partners’ capital accounts, Manager shows the partners as allowed expense claim payers. Anything recorded as being purchased by one of the partners will go automatically to that partner’s capital account. It is equivalent to contributing capital (money) to a bank account and then buying the items from the bank account by spending money.
The remaining question is how to categorize the purchases. If the items are of small enough value and short enough economic life, they are usually thought of as current operating expenses and allocated to an expense account. But if their value is large enough or their life is long, they might be fixed assets. Read about how to handle fixed assets in the Guides. In such a case, the purchase is recorded to the Fixed assets account. Periodic depreciation entries are allocated to a current expense account for depreciation, reducing the book value of the assets. As I said before, many factors can influence the decision as to whether you handle something as a current expense or fixed asset. For example, sometimes the initial expenses of getting a business up and running must be capitalized, even if they would normally be considered current expenses. If in doubt, consult a qualified accountant who can advise you on local requirements. The small expense will be worth it if it prevents trouble during an audit.
Thank you Tut.
I will try to consider all your information about this case.
[Btw, I don’t know how “having little to do with the Manager Software” do! : ) ]
There is a use-case for this.
Partner 1 needs to take money out of the business for personal reasons but business is short of cash. If
Partner 2 pays to
Partner 1 some amount on behalf of the business, then expense claim could be written as
Partner 2 is a payer and the amount paid would be categorized to to
Capital accounts →
Partner 1 →
Basically we are saying…
Partner 2 paid on behalf of the business but it wasn’t spent on some expense, it was given to other partner.
I know this might seem very unusual but you’d be surprised how often it happens.
Thank you lubos, that was a great practical answer for this case.