Accounting for paying bills for (and being reimbursed by) another person

Question

I an currently using Gnucash to manage my expenses. I am new to double-entry accounting and find many aspects of it to be confusing. Here's a situation that currently happens monthly. I'd like to know the correct way to account for it.

There are a set of bills that Person owes Company. I pay these bills to Company from my checking account. Then Person deposits the full sum of these bills into my checking account.

How should I be accounting for this?

• Should I be making a single account for Person and crediting / debiting that account?
• Should I be creating a loan for Person? And if so, would I make a new loan each month or would I keep all of the loans in one account?
• How do I show the money moving from my checking account to Company and then to Person's loan?
• How do I (or should I even) show the money being reimbursed from the expense?
• Do I debit the expense at any point?
• Should I not concern myself with the source of a loan / repayment and instead just increase the size of the loan?

As far as I'm aware, double-entry accounting is supposed to leave a clear trail from point A to point B of where money comes and goes. I'm not quite sure how to make this trail or if it's even proper in this situation.

Note: Person is a friend and I do not charge any interest for my service.

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tl;dr How do I put into Gnucash that I paid a bill for someone and then they reimbursed me?

Answer 1

Should is a very "strong" word. You do what makes most sense to you.

Should I be making a single account for Person and crediting / debiting that account?

You can do that.

Should I be creating a loan for Person? And if so, would I make a new loan each month or would I keep all of the loans in one account?

You can create a loan account (your asset), you don't need to create a new account every time - just change the balance of the existing one. That's essentially the implementation of the first way ("making a single account for a Person").

How do I show the money moving from my checking account to Company and then to Person's loan?

You make the payment to Company from your Checking, and you adjust the loan amount to Person from Equity for the same amount. When the Person pays - you clear the loan balance and adjust the Checking balance accordingly. This keeps your balance intact for the whole time (i.e.: your total balance sheet doesn't change, money moves from line to line internally but the totals remain the same). This is the proper trail you're looking for.

How do I (or should I even) show the money being reimbursed from the expense?

You shouldn't. Company is your expense. Payment by the Person is your income. They net out to zero (unless you charge interest).

Do I debit the expense at any point?

Of course. Company is your expense account.

Should I not concern myself with the source of a loan / repayment and instead just increase the size of the loan?

Yes. See above.

Answer 2

I'm not familiar with Gnucash, but I can discuss double-entry bookkeeping in general.

I think the typical solution to something like this is to create an Asset account for what this other person owes you. This represents the money that he owes you. It's an Accounts Receivable.

Method 1:

Do you have/need separate accounts for each company that you are paying for this person? Do you need to record where the money is going?

If not, then all you need is: When you pay a bill, you credit (subtract from) Checking and debit (add to) Friend Account. When he pays you, you credit (subtract from) Friend Account and debit (add to) Checking. That is, when you pay a bill for your friend you are turning one asset, cash, into a different kind of asset, receivable. When he pays you, you are doing the reverse.

There's no need to create a new account each time you pay a bill. Just keep a rolling balance on this My Friend account. It's like a credit card: you don't get a new card each time you make a purchase, you just add to the balance. When you make a payment, you subtract from the balance.

Method 2:

If you need to record where the money is going, then you'd have to create accounts for each of the companies that you pay bills to. These would be Expense accounts.

Then you'd need to create two accounts for your friend: An Asset account for the money he owes you, and an Income account for the stream of money coming in.

So when you pay a bill, you'd credit Checking, debit My Friend Owes Me, credit the company expense account, and debit the Money from My Friend income account.

When he repays you, you'd credit My Friend Owes Me and debit Checking. You don't change the income or expense accounts.

Method 3:

You could enter bills when they're received as a liability and then eliminate the liability when you pay them. This is probably more work than you want to go to.