We have a customer that we will bill in the future with fixed monthly sales invoices. I know how to do that.
This same customer helped get us get established in the past by paying for various expenses (legal fees, equipment, stationary, etc) with the agreement that those expenses would be reimbursed back to them, in the form of a credit on their account. I made all of those as expenses to our business by making them purchase invoices.
The problem: Purchase invoices create a liability to the Supplier, Sales Invoice create an asset from a Customer. How do I make the Supplier and Customer the same account?
Edit:
As I look into this more, I’m thinking I should not have used purchase invoices, but rather made sales invoices for the expenses and entered the expenses as negative numbers. correct?
Absolutely not
Your business purchased goods and/or services which are a cost to the business
The money given by your customer is like a loan or a prepayment on their customer account
Did they pay your suppliers or pay the money into your bank account and then you paid the suppliers ?
They (our customer) paid the suppliers directly.
You should have used expense claims.
expense claims does not make sense to me in this situation. The “paid by” field on that form is only populated with employees…
You probably should use a journal entry to record the payment of the invoice and the creation of a credit in the customer’s account
That is not true! You an setup any Expense Claim payer in Settings. Please read the guides!
https://www2.manager.io/guides/14398
I think that the advise by @Tut is correct. These people paid expenses on behalf of the business and that is exactly what expense claims are for.
The problem with using an expense claim is that you cannot link it to a customer account
In this case these people have been investing, they paid for various expenses (legal fees, equipment, stationary, etc). So Expense claims are the better option here. Do not forget that the “Customers” would get reimbursed but it is much “cleaner” not to confuse consumption with expenses.
That is as it should be, because the transactions did not occur within a customer relationship. That is, no goods or services were provided to the entity paying the expenses on behalf of the business. There is no question, as @eko wrote earlier, that this is exactly the sort of situation expense claims are meant to cover. So that should just be accepted.
The real question is how the entity that paid for the expenses gets reimbursed, and that in turn depends on the exact legal and business relationships, which @Beau_G did not explain.
If, as @eko hints, the entity made start-up investments in the business, it should probably have a capital account, in which case, it would appear in the list of expense claims payers. But whether a capital account is appropriate depends on the legal relationship and company organization. @Beau_G should check with a qualified accountant to verify exactly what circumstances apply. Conceivably, shares of stock might need to be issued. And there could be income tax consequences.
Assuming the expense claim was credited to a capital account, a reimbursement payment could be made directly, posting to the capital account. On the other hand, if the arrangement was to credit the customer’s transactional account, a journal entry is the right method, transferring the credit from the Expense claims liability account to the customer’s sub-register in Accounts receivable. The journal entry would debit Expense claims and credit Accounts receivable. This would function effectively as an advance from the customer. The customer’s Accounts receivable balance would then move in the negative direction on the balance sheet.
This may seem like extra steps, and indeed simpler processes could produce the same financial end result; but there are valid accounting reasons for doing it as described:
- There are multiple transactions and counter-parties involved. The original purchases of equipment, supplies, and services did not actually directly involve @Beau_G’s business, so they should not be recorded as though they did. They involved the customer dealing with various suppliers. This is what the expense claims would record. Hence, neither sales invoices, purchase invoices, nor payments are appropriate. Worse, they would actually be misleading as to what transactions took place, because they would make it look like @Beau_G’s business had made the transactions, something that could not substantiated in an audit. @Beau_G’s business was only indirectly involved, in that liabilities were created for it to somehow make the customer whole.
- A reimbursement payment might be considered a return of capital. (Again, check with an accountant.) If so, it is correct to record it separately.
- A crediting of a customer’s account, if that was the agreed method of reimbursement, should likewise be recorded separately so the customer’s balance in Accounts receivable can be tracked in an understandable manner.
- Lastly, if @Beau_G’s accountant determines there are equity or tax considerations, necessary calculations and reporting will be simplified.
The point of accounting is not to make things simple, but to make them right. A time may come when @Beau_G is not available to explain the agreements and expectations to those responsible for fulfilling them. The accounting records should be able to guide them.
If I have understood the scenario,
- The company has paid your innitial set up cost but are not share holdrers
- You have a set up recurent sales invoices for them (doing business with them) which makes them your debtors
- And you want to offset their account in order to clear the debt you owe them.
Charge piont number one as an advance payment by making a receipt to their customer account.
Then make recurrent sales invoices as planned.
Lastly make payment to the supplier with amount in point number one.
I think thats how I would do it.