how far in advance should I put anticipated expenses in liabilities:accountspayable?

[Chris Ryan]

More of an accounting question than a strictly hledger question. Hope that's OK.

I have an account called liabilities:accountspayable. How far in advance should I record anticipated expenses in it?

One scenario that I think is pretty straightforward is buying something with my credit card. I have the goods/services already; I just haven't paid for them yet, because the credit card bill won't arrive for a couple weeks. So it seems reasonable to record that expense in

liabilities:accountspayable:amexcard

But how about my professional liability insurance? I am currently 7 months into a 12-month policy. It will renew in July of this year (2024). Unlike the scenario above, I haven't actually bought the renewal yet, but I will. Should I record that now, in somthing like

liabilities:accountspayable:insurance

Thanks.

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Chris Ryan
rya...@fastmail.co.uk

[Will Robinson]

I'm not an accountant, but for your professional liability insurance I'd expect that when you pay the annual premium (that is, pay for a policy covers you for the following 12 months), that cash payment isn't actually accounted as an expense; it's instead a transfer from your checking account to a "prepaid expense" asset account. Then each month (or whatever) you'd amortize an expense out of that prepaid expense asset. Just before you pay your next year's premium, you will have gotten your prepaid expense asset account down to zero.

Expense amortization of this kind is a bit like depreciation of capital assets (office furniture etc) where you realize the expense over time even though the cash outlay all comes up front.

Depending on how big your operation is this may not be worth the complexity. But this is my best amateur understanding of how you'd do this.

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[Brandon Olivares]

The credit card expense should not go in Accounts Payable at all. It’s merely a credit card account, which is a liability. Accounts Payable is a very specific thing that this is not.

 

Similarly your insurance should go into Prepaid Expenses, not Accounts Payable. The only reason you’d use Accounts Payable is if they bill you and you pay the bill later on, like the next month or something.

 

Neither of these examples are really Accounts Payable, but they are both liabilities.

 

[Will Robinson]

I'm pretty sure that Prepaid Expenses is an asset, not a liability:

https://www.investopedia.com/terms/p/prepaidexpense.asp

https://www.blackline.com/resources/glossaries/prepaid-expenses/

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Will Robinson (willro...@gmail.com)

[Brandon Olivares]

Sorry yes, I misspoke. Yes Prepaid Expenses is an asset. Accrued Expenses would be a liability.

 

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[Chris Ryan]

I'm going to "think out loud" here; helps me to understand. Would this be a reasonable rationale:

Accounts payable are things that my business would still be on the hook for paying even if today I ceased operations and folded my tent. So the widgets that have already arrived, with the bill from United Widgets still en route in the mail, and then due within 30 days.

Then my July insurance renewal makes sense: If I fold my tent today, I would not owe any money to my insurance company in July.

Thanks.

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Chris Ryan
rya...@fastmail.co.uk

[Brandon Olivares]

You’re overthinking it a bit.

 

It’s literally as simple as this: if the vendor has sent you a bill and you haven’t paid it yet, it goes into Accounts Payable.

 

If they haven’t given you a bill, then there’s no Accounts Payable.

 

It’s the exact inverse of Accounts Receivable. If you’ve generated an invoice for the client and they’ve not paid yet, it’s in Accounts Receivable as an asset. Not before the invoice is generated.

 

Accounting above all reflects reality. You wouldn’t enter any transactions for your insurance in July because it has no impact on your books today. No expenses were incurred, no cash has changed hands. Therefore, no transactions are recorded.

 

When they send you the bill, now there is an expectation of payment and you are “on the hook”, as it were, for that amount. So it goes into Accounts Payable.

 

From: hle...@googlegroups.com <hle...@googlegroups.com> on behalf of Chris Ryan <rya...@fastmail.co.uk>
Date: Tuesday, January 9, 2024 at 3:53 PM
To: hle...@googlegroups.com <hle...@googlegroups.com>
Subject: Re: [hledger] how far in advance should I put anticipated expenses in liabilities:accountspayable?

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