When adding items in a sales invoice, we can select the account in which that transaction will be recorded (See Image)
I need help to understand how
accounts payable and
accounts receivable work in that tab.
Sometimes when selling multiple items in a invoice, there is one item that i don’t keep in my stock but buy it only when i need to sale it. (Like Dropshipping). When making an invoice for such items, i make a sales invoice like this:
• I select
accounts payable in account tab
• I select the supplier of that item
• I add item name in description box.
This process not only debits the customer’s account but at the same time it also credits the supplier’s account. Thus it saves time because i don’t need to make purchase invoices of these non-stock items anymore.
I would like to know is this the correct way to use accounts payable in a invoice? If not then what is their real purpose in a sales invoice?
I would say that recording transactions in this way would be more confusing than the time saving is worth.
The Accounts receivable and Accounts payable options are there to accommodate extraordinary situations, not for standard use like you describe. Financially, using them does have the effect of producing the desired balances in those accounts. But there are many drawbacks, including:
- No record of the transaction in the Customers or Suppliers tabs, making it very difficult to track down the transactions.
- No record of sales in the Sales Invoices tab or of purchases in the Purchase Invoices tab. Instead, sales and purchases are buried in line items of transactions for the opposite type of activity.
- No ability to assign future receipts or payments to desired sales or purchase invoices.
- No ability to record sales or purchases of inventory items. So this approach could not be used to buy or sell items of inventory, regardless of whether they are held in stock or drop-shipped from a supplier.
- No support for dispute resolution. For example, you will never be able to address a complaint with a supplier about delivery of goods by showing a sales invoice for an unrelated customer.
- No linkage to delivery notes or goods receipts if you are using the related tabs.
In fact, I cannot think of a situation in which your approach would be desirable.
Yes it has all those drawbacks, but in the end it has same effect on supplier’s balance as making a separate purchase invoice. I will start to avoid this process on normal situations as you suggested. But i would like to know more about extraordinary situations you mentioned in your reply.
Such circumstances would be so extraordinary I cannot think of an example. But that does not mean there is none.
I also did not mention that putting your payables entry on a sales invoice shares information about your transaction with a supplier with a customer, who has no business learning about it.
And I did not mention that this approach will totally interfere with tax accounting, because you cannot select tax codes for line items posted to Accounts receivable or Accounts payable.
In other words, unless you can come up with a compelling justification of your own (besides thinking it saves time), do not do this.
Besides saving time, There is actually no other reason to do this. Thank you for detailed answers.
I will create separate purchase invoice next time.