Source group accounting changes in v16.162
posted 2018.01.31 by Clark Wilkins, Simplexable

We made yet another signficant adjustment to the source group analysis tool which is related to v16.161, announced yesterday.

In the case where you are running a source group with an outside investor, you have a situation where certain costs in the group have to be satisfied before profit sharing starts. Assume that an investor has $30,000 in sunk costs that are to be recovered before the group becomes profitable, but the actual realized payments on these expenses are less than that — perhaps a bill that has not been paid yet.

In this case, with normal cash-basis accounting, the “break-even” point is not fixed. Each time the total payments made on the group changes, this point moves with the change. If you are calculating distributions and this point is not settled, your distributions are going to be in flux — not a desirable situation for you or the investor.

What you can do as of v16.162 is set the accounting basis of a source group to accrual (regardless of your basis in your accounting). This makes the analysis run using the total expense amount instead of the total paid amount. If we assume there are no more new costs in the group, the break-even point is no longer moving and you can rest assured that your profit sharing distributions are correct.

If you're worried about the accounting inconsistency — if we have not fully paid all expenses on the group and are running cash-basis accounting, the amount extracted from inventory (sum of all expenses) will be greater than the inputs to inventory (payments on all expense) — you can relax, because, once you've paid off all expenses in full, these two values are the same. So run in accrual basis when you need to fix a break-even point, but leave it in cash mode and let it recalculate if not.