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