I am setting up another bookkeeping system. I discovered an account called “Rounding Account” in the setup chart of accounts.
I clicked on Edit.
I don’t see any Rounding Account in other bookkeeping systems I set up.Where does the built-in Rounding Account come from?
It’s new and appears with the first sales invoice. You cannot get rid of it. See my discussion with @lubos here: Rounding expense account always visible
Rounding expense account is put into Chart of Accounts automatically to accomodate for rounding discrepancies which can happen when multi-line invoices are paid partially on cash-basis.
I know it’s a bit ugly and I will find more elegant solution in the future.
I am having difficulty understanding the problem, probably because I am not a professional accountant. I would think:
The customer receives goods, accrual basis:
Dr Accounts Receivable
Cr Sales
In cash basis accounting, we cannot credit sales when the customer receives goods. We still have to credit something, though. Could we credit a contra asset account called Uncollected something?
The customer receives goods, cash basis:
Dr Accounts Receivable
Cr Uncollected
Then, when the customer pays part or all, we can now transfer the amount from Uncollected to Sales. And then, we need to reduce Accounts Receivable by the amount of the payment. So, we would have:
Customer pays, cash basis:
Dr Uncollected
Cr Sales
Dr Bank Account
Cr Accounts Receivable
I don’t understand why we have to apply a payment to individual line items. Is it a GAAP rule? If a business wanted to track how much the customer still owes on two different things, maybe the business could issue separate invoices on each item?
Is there something I can read that might help me understand why we have to apply a payment to each item on an invoice?
Each item on invoice can be different income account. So if you have 3 line items ($100 for goods, $100 for services and $100 for something else). And customer pays 1/3 of the invoice - $100. You need to split $100 in 3 parts. In this case 3 equal parts. It’s impossible to split $100 by 3 equal parts. This is where rounding discrepancies happen and need to be accounted for somewhere.
And instead of Manager picking one random line where to hide this 1 cent, I will simply post it to Rounding expense account.
Other accounting systems can perhaps post this 1 cent to the first line item on the invoice rather than having special account for it. Maybe this is what Manager should do because I doubt anybody is going to complain about sales being inflated by 1 cent on cash-basis due to rounding discrepancies. Looks like lesser evil than having special P&L account for it.
Thank you. Now I understand. I see how an invoice can have two income accounts. The images I posted earlier are from a school. The school wants separate tracking of income from registration fees, tuition, and over hours.
It is beyond me how this could be accomplished. Maybe somehow the user can choose how to allocate a payment amongst income accounts, even on a cash basis.
That would allow the student’s parents to say, I’m paying the over hours part this week. When I see how much the government subsidy is, I’ll pay the rest of the tuition.
In this case, I would want to allocate all the payment to over hours.
A parent might also say, I’ll pay the over hours and a fifth of the tuition part. When I learn the amount of the government subsidy, I’ll pay the rest of the tuition.
That is going too far. In this case it’s simply better to issue multiple invoices if you want customers to choose which invoice they are paying.
I see what you mean. As I was expressing the idea, it seemed to be complicated to implement. And say it is implemented, it would tend to be complicated for users to understand.
I am happy you helped me understand what the issue is that led to the Rounding Account.
Have a good day (or night).
I personally think that you are over thinking the problem. I’m very much a details person, but even I don’t care whether this income account has 1 penny more or that one. I would do as other accounting programs do and just allocate the penny to the first line transaction. This would be much simpler and hide complexity from the end user.
The problem that I see with having a rounding account is threefold.
For many users, they will never use the account, so it sits unused, but you can’t get rid of it.
It is adding yet another account to the P&L when there may already be a lot of accounts on the P&L.
It will probably cause confusion amongst users because I myself when I saw the name of the account thought it was being created for the purpose of VAT tax rounding where suppliers invoice me and they do VAT tax rounding at the invoice level, but Manager does tax rounding at the transaction level. With those suppliers I usually have to add or remove a penny so I created an account called VAT Rounding for this purpose. People will end up thinking this account you have created is for this purpose.
I don’t think anyone really cares if one income account has one penny more. I would highly recommend going with that option instead.
