A Complicated Example

The financial ramifications of a revolving charge account are predictable (if you're an accountant).

The following table outlines the different financial events and their impact on the general ledger, arrearage history, and the amounts due (both current and payoff):
Event GL Accounting Arrearage Rule Effect On Payoff Amt Effect On Current Amt Payoff Balance Current Balance
Merchandise purchased

A/R 1000

Revenue <1000>

 n/a (current amount is zero) +1000 0 1000 0
Monthly bill

A/R 10

Int. Rev <10>

 $120 aged accordingly +10 +120 1010 120
Payment received

Cash 120

A/R <120>

 $120 relieved accordingly -120 -120 890 0

The following points describe the events in the above table:

  • Merchandise purchased. When a customer purchases an air conditioner:
    • The system generates an adjustment to book the purchase.
    • The customer doesn't really think they owe the entire $1,000 (because they've purchased it on credit), therefore no moneys are booked to current amount. However, if the customer wanted to cash out, they would owe your organization $1,000, therefore the entire amount of the purchase is booked to payoff amount.
    • Because no money was booked to current amount, this event has no impact on the arrearage history.
  • Customer billed. Monthly, the system calculates how much the client owes. In this example, interest is calculated to be $10 and the minimum monthly payment is set at $120.
    • The interest is posted to the GL, but principal isn't since it was booked when the merchandise was purchased.
    • The customer really thinks they owe the minimum payment amount, $120. Therefore, current amount is affected. However, if the customer were to cash out, they would owe your organization $1,000 + $10 (the interest); therefore payoff amount is affected by only $10.
    • Because current amount changed by $120, arrearage history is affected accordingly.
  • Payment received. With any luck, the client will pay the $120 that was billed (note, they could obviously pay more).
    • The payment has a normal affect on the GL (debit cash, credit A/R).
    • The amount the customer thinks they owe decreases by $120, therefore current amount is affected by the payment amount. And, if the customer was to cash out, they would owe $120 less, therefore payoff amount is affected by the payment amount.
    • Because current amount changed by $120, arrearage history is affected accordingly.