CC Purchase Accounting Disagreement: When Charged vs. When Paid

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Phineas J. Whoopee
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CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by Phineas J. Whoopee » Thu Jan 21, 2016 5:44 pm

Recently there was a contentious thread locked in accord with the OP's request. I don't mean to try restarting it. Contemplation of the thread did, however, prompt a thought this afternoon.

One part of the contention was whether a person has spent money when they make a charge, or spends the money when paying the credit card bill(s), including any interest; with opinion coming down heavily toward the latter.

Typically in the US businesses use accrual accounting, that is, they book revenue when there's a sale, and liabilities when they incur an obligation to pay, regardless of when (metaphorical) Accounts Payable sends the (metaphorical) check.

US individuals ordinarily use cash accounting, that is, income means when dollars hit the checking account, and outgo means when the order is given for money to exit it.

Can it be this part of the contention boils down to posters preferring to either:

A) Maintain a pure cash accounting approach, in which the purchase isn't paid for until the dollars come out of checking; or

B) Mix in a portion of accrual accounting, in which a credit card charge is outgo, with later paying of the bill a balance sheet transfer, whether or not using then-current income to fund it?

What do members think? I don't mean to start a debate over which is better, but rather to find out if the disagreement can be boiled down to preferred accounting approaches, even if people aren't thinking of them in those terms.

In full disclosure, I prefer and use an accrual approach for outgo, including to save up for large future anticipated expenses even if their dates and precise amounts are uncertain, and not to count those savings as spendable for any other purpose (barring true emergencies, naturally). Obviously as assets they contribute to net worth. I do not, however and for example, charge myself each day 1/30 of my monthly broadband bill. Clearly, what I prefer and use is a mixed system. For income tax purposes I strictly use cash accounting, as is customary.

Good thing for me I'm not a corporate CFO. :wink:

Any thoughts in response?

PJW
Last edited by Phineas J. Whoopee on Thu Jan 21, 2016 6:32 pm, edited 2 times in total.

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Re: CC Purchase Accounting: When Charged vs. When Paid

Post by Quark » Thu Jan 21, 2016 5:49 pm

Why does it matter?

I'd have said I bought something when I put it on my card, as I've, in effect, paid for the item. I don't distinguish among paper money, checks, credit cards, wire transfers, etc. I didn't read the other thread, so may be missing some context.

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Re: CC Purchase Accounting: When Charged vs. When Paid

Post by rmelvey » Thu Jan 21, 2016 6:02 pm

Count the expense when you swipe the card. If you don't already have the money to have paid cash you shouldn't have bought it in the first place. I use CCs for the cash back and that's it.

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Re: CC Purchase Accounting: When Charged vs. When Paid

Post by Phineas J. Whoopee » Thu Jan 21, 2016 6:08 pm

Quark wrote:Why does it matter?

It may not matter to you, but among other things I'm interested in why people hold the positions they do, especially when there's contentious disagreement.

Quark wrote:I'd have said I bought something when I put it on my card, as I've, in effect, paid for the item. I don't distinguish among paper money, checks, credit cards, wire transfers, etc.

Fine. You prefer at least partial accrual. That doesn't get to why people hold their opinions, but instead is about which approach is better. You're free to post what you like, but I am explicitly not asking for a debate on that point.

Quark wrote: I didn't read the other thread, so may be missing some context.

Quite.

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Re: CC Purchase Accounting: When Charged vs. When Paid

Post by cadreamer2015 » Thu Jan 21, 2016 6:09 pm

For contributions, the IRS says use the date you charged to a charge card, not the date you paid the charge card bill. So I'd say the IRS would say that you spent the money the day you charged the purchase.
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Re: CC Purchase Accounting: When Charged vs. When Paid

Post by Phineas J. Whoopee » Thu Jan 21, 2016 6:11 pm

rmelvey wrote:Count the expense when you swipe the card. If you don't already have the money to have paid cash you shouldn't have bought it in the first place. I use CCs for the cash back and that's it.

It appears you prefer at least partial accrual accounting. That's fine, but it doesn't get us anywhere toward working out why the disagreement is so contentious, which is the question the thread is exploring. You're free, of course, to post whatever you like.
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Re: CC Purchase Accounting: When Charged vs. When Paid

Post by Grogs » Thu Jan 21, 2016 6:11 pm

It's understandable why there are different schools of thought here. I could have made a purchase in late December and not have to pay off the credit card until late February, so was it 2015 spending or 2016 spending?

Personally, I count the spending based on when I actually swipe the card. This just makes a little more sense to me. If I were to carry a balance over several months, then the actual connection between a particular payment and the charges would be harder.

When it comes to planning spending, like "How much can I contribute to my Roth?" I tend to base that on the current checking/savings balance and my forecast for the monthly CC charges.

ETA: When I compile my annual expense, I combine spending from checking, credit cards, etc. I use a couple of fudge factors to line up CC spending with the checking (where the CC payments come from). The carryover is balance of unpaid CC charges as of December 31st. So for 2015 I had 2014 carryover (an expense) and 2016 (a credit). On average, these two should cancel out.
Last edited by Grogs on Thu Jan 21, 2016 6:19 pm, edited 1 time in total.

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Re: CC Purchase Accounting Preference: When Charged vs. When Paid

Post by Phineas J. Whoopee » Thu Jan 21, 2016 6:12 pm

I've added the word preference to the thread title, in case certain posters are responding to nothing else.
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Re: CC Purchase Accounting Preference: When Charged vs. When Paid

Post by ChrisOK » Thu Jan 21, 2016 6:16 pm

I'm gonna go with B. I use Quicken to track my finances. I have Banking asset accounts and Credit Card liability accounts. The CC shows the expense the day it occurred. When the bill is paid, there is a transfer from my banking account to the CC account. In Quicken's reports it will show the expenses within the month of the purchase....the transfer will adjust account balances for the month which it occurred, but is otherwise not often reported on. The only way I can think of doing a cash based record keeping would be to not itemize the expenses in a credit card liability account.

Accrual seems to make the most sense to a boglehead...because as was said above, you shouldn't be swiping the card if you don't have cash on hand to pay for it.

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Re: CC Purchase Accounting Preference: When Charged vs. When Paid

Post by Phineas J. Whoopee » Thu Jan 21, 2016 6:18 pm

cadreamer2015 wrote:For contributions, the IRS says use the date you charged to a charge card, not the date you paid the charge card bill. So I'd say the IRS would say that you spent the money the day you charged the purchase.

Thanks. Use tax in my state works the same way. That may be a valid part of the reasoning behind which method a person prefers.
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Re: CC Purchase Accounting Preference: When Charged vs. When Paid

Post by Jags4186 » Thu Jan 21, 2016 6:19 pm

When you swipe the card is when you pay for something. Credit card float is a convenience of accounting. If you are carrying a balance and paying interest then you have bigger worries than if something is paid for now or later.

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Re: CC Purchase Accounting Preference: When Charged vs. When Paid

Post by Phineas J. Whoopee » Thu Jan 21, 2016 6:26 pm

Sure, but is a preference for strict cash accounting, vs. partial accrual accounting as you favor, sufficient to explain the contentious disagreement?
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Last edited by Phineas J. Whoopee on Thu Jan 21, 2016 6:28 pm, edited 1 time in total.

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Re: CC Purchase Accounting: When Charged vs. When Paid

Post by nisiprius » Thu Jan 21, 2016 6:27 pm

I'm going to check with my wife to see if she thinks the same way, but I consider the money as spent when the charge is made, not when the credit card bill is paid. I just asked my wife and she looked at me as if I were nuts and said "When the charge is made." We will, in fact, say things to each other like "our checking account balance is $9,000 but don't forget we've got $1,100 on the credit card from the trip, so we're really under $8,000."

So, for us it's B. I don't see this as anything that should be contentious, though. It's just what we do, and it works for us, and I'd advocate for it mildly... but I don't think A is unsound.

One of the unresolvable issues in finance is just how to regard things that are not really quite the same, but causally and very closely linked, short-term and with near-certainty. And they are contentious. Just try discussing whether a buyback is really exactly the same thing as a dividend payment, for example.

To me, the amount of money I "have" is the amount that's truly and safely available to me for spending.

The moment I commit to a making a payment, soon, that's the moment that the money is spent, because it may still be in the bank account but I can no longer safely spend it on anything else.

I do not regard a payment made to me as received until the bank is showing it in the account as "available funds," for the same reason. It may be virtually certain to be there within, say 24 hours, but until it shows as "available funds" I can't safely spend it on things.

Now that's not the only way to do things. I realize that it is a very reasonable risk to think that things will work out as long as flows are roughly equalized, especially if there's a decent buffer in the checking account. It's OK to swipe a charge card based on the idea that you'll get your paycheck in a few days, and the credit card bill won't become "due" for a few days more. It just means that your checking account balances fluctuates around a neutral point instead of staying above a neutral point. And if you have other resources that can be brought to bear before you incur an overdraft charge on the checking account or a finance charge on a checking account, then it doesn't matter much. And your life isn't over if you incur a finance charge once in a while.
Last edited by nisiprius on Thu Jan 21, 2016 6:56 pm, edited 1 time in total.
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Re: CC Purchase Accounting Preference: When Charged vs. When Paid

Post by Phineas J. Whoopee » Thu Jan 21, 2016 6:30 pm

Thanks nisi. Do you think the contentious argument can be explained by some of us preferring partial accrual accounting, especially for outgo as you expressed, and others taking a pure cash accounting approach? I'm trying to work out why the point became so big of a disagreement. Thanks again.
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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by Phineas J. Whoopee » Thu Jan 21, 2016 6:33 pm

Phineas J. Whoopee wrote:I've added the word preference to the thread title, in case certain posters are responding to nothing else.
PJW

In the subject line I've replaced the word preference with disagreement, to see if that helps. Should it read contention, instead?
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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by rmelvey » Thu Jan 21, 2016 6:43 pm

The moment you swipe the card is when your net worth goes down. Your assets stay the same but your credit card liabilities go up. When I think about how much "cash" I have I net my checking + savings with my credit card liability. I like to think of my net worth rather than just my assets so I count it when I swipe the card :greedy

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Re: CC Purchase Accounting Preference: When Charged vs. When Paid

Post by Epsilon Delta » Thu Jan 21, 2016 6:44 pm

Phineas J. Whoopee wrote:
cadreamer2015 wrote:For contributions, the IRS says use the date you charged to a charge card, not the date you paid the charge card bill. So I'd say the IRS would say that you spent the money the day you charged the purchase.

Thanks. Use tax in my state works the same way. That may be a valid part of the reasoning behind which method a person prefers.
PJW


For an accountant using cash accounting you would use the date the credit card is charged. This is regarded as two transactions, the purchase and a separate loan.

IMHO there is no question that accrual accounting, done in good faith, more correctly represents your financial position. To me cash accounting is acceptable only to the extent is a good approximation to accrual.

OTOH If I can show that an approximation is good enough, and above all counts everything once and only once, I feel free to use it. Obsessively following accounting rules leads to silly things, like having $100 per hour employees counting zip ties on the assembly line.

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Re: CC Purchase Accounting: When Charged vs. When Paid

Post by Quark » Thu Jan 21, 2016 6:47 pm

Phineas J. Whoopee wrote:
Quark wrote:Why does it matter?

It may not matter to you, but among other things I'm interested in why people hold the positions they do, especially when there's contentious disagreement.

Why did the contentions disagreers say that it mattered? What difference does it make as a practical matter?
Phineas J. Whoopee wrote:
Quark wrote:I'd have said I bought something when I put it on my card, as I've, in effect, paid for the item. I don't distinguish among paper money, checks, credit cards, wire transfers, etc.

Fine. You prefer at least partial accrual. That doesn't get to why people hold their opinions, but instead is about which approach is better. You're free to post what you like, but I am explicitly not asking for a debate on that point.

I hold the opinion that I've bought something when I put it on my card because I consider a credit card a current payment method, not a promise to pay in the future. I'd say I'm using cash accounting.
Phineas J. Whoopee wrote:
Quark wrote: I didn't read the other thread, so may be missing some context.

Quite.

Would you link to the other thread or provide some useful search terms to find it? I'm curious why this should be a contentious issue.

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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by Phineas J. Whoopee » Thu Jan 21, 2016 6:47 pm

^ and ^^ Sure.

Is the postulated difference in approaches sufficient to explain the strong disagreement between posters over whether later paying of the bill was the point at which spending occurred, or not?

I'm not asking you what you prefer. I'm asking you whether we're getting toward the bottom, the fundamental underlying reason, for the strong disagreement?

You, of course, are free to post anything you like.

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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by Phineas J. Whoopee » Thu Jan 21, 2016 6:54 pm

Quark wrote:...
Would you link to the other thread or provide some useful search terms to find it? I'm curious why this should be a contentious issue.

The whole point of this thread is that I'm also curious as to why the issue was so contentious. It was. I don't know why. I think I may have had an insight. That's what I'm asking about.

Because it's locked I've PMd you the link to the thread.

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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by rmelvey » Thu Jan 21, 2016 7:10 pm

Phineas J. Whoopee wrote:^ and ^^ Sure.
I'm asking you whether we're getting toward the bottom, the fundamental underlying reason, for the strong disagreement?
PJW


Assets - Liabilities = Net Worth

The moment you swipe the card your liabilities go up. If you are managing net worth (as most people planning for retirement are) that is when your metric of success (net worth) goes down.

If you are managing to something other than net worth (perhaps liquidity if you are asset heavy but short on cash) you could use a different way of thinking about it.

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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by nisiprius » Thu Jan 21, 2016 7:14 pm

rmelvey wrote:The moment you swipe the card is when your net worth goes down. Your assets stay the same but your credit card liabilities go up. When I think about how much "cash" I have I net my checking + savings with my credit card liability. I like to think of my net worth rather than just my assets so I count it when I swipe the card :greedy
I'm definitely not trying to start an argument, this is 90% joke. Let's say I'm online and I pay with a credit card. I click the "buy" button. A little gadget starts spinning and says "Don't refresh the screen or press the 'back' button."

Did my net worth go down when I pressed the "buy" button?

15 seconds later, the screen refreshes and I see a completed order with an order number and a "print this" icon on the screen, and ten minutes later I get an email saying the same thing.

Is my net worth down yet?

Now I go to my credit card website and look. No charge is there yet. Some number of hours later--maybe 24, I've never hung over the screen refreshing it over and over to find out, and I'm sure it varies--it will appear as "pending," but it does not show up in my current balance. Right now, for example, my current balance is $0.00, but there is an $0.99 Amazon Kindle bargain book purchase "pending." The card company says:
Pending transactions are deducted from your Available Credit. They are not final and may differ from the posted amount. Transactions in a pending status cannot be disputed and generally post within 5 days.
Is my net worth down yet?

Several days later, the transactions are no longer "pending" and are now included in my balance.

It seems to me that there's no obviously right, unchallengeable answer as to when my credit card liability went up and my net worth went down. We have a chain of events which follow each other causally with probabilities that are almost, but not quite certain.

But, sure, it's the instant when there was some chunk of money in our checking account that changed from "we can spend this on anything" to "we can't spend this on anything else because we have decided to spend it on X."
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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by Phineas J. Whoopee » Thu Jan 21, 2016 7:18 pm

^^ Great. I'm not asking how I should handle accounting, nor how you prefer to.

I'm asking whether the very strongly and frequently expressed opinion that payment happens when the credit card bill gets paid, as opposed to when the item or service is charged (a view I disclosed I do not hold) can be adequately explained by the difference in approaches I postulated in the first post in this thread.

Interestingly, nobody in this thread so far has expressed the view I'm asking about the origin of. It was stated repeatedly and forcefully in the locked thread.

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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by Epsilon Delta » Thu Jan 21, 2016 7:30 pm

nisiprius wrote:Did my net worth go down when I pressed the "buy" button?

Is my net worth down yet?

Several days later, the transactions are no longer "pending" and are now included in my balance.

[Is my net worth down yet?]


Buying something does not, in theory, change your net worth. It changes the form of your net worth from cash to stuff.

So your net worth goes down when you purchase things only if you over pay for stuff.

Normally your net worth goes down again when you consume (or depreciate) the stuff.

While we're at it the value of stuff is not the liquidation value, unless you have to liquidate.

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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by Quark » Thu Jan 21, 2016 7:38 pm

"a credit card purchase is considered a cash purchase for accounting purposes."

http://www.ehow.com/info_7797102_cashba ... harge.html

First hit from google search "cash accounting credit cards". The next few hits agreed. I didn't look further, as these support my views. :D

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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by Phineas J. Whoopee » Thu Jan 21, 2016 7:41 pm

^ Wonderful. Thanks for the reference.

Does the difference I postulated in the first post in this thread adequately explain the strong disagreement over whether the money was spent when the charge was made or when the credit card bill was paid?

Yes, I read your PM.

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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by dm200 » Thu Jan 21, 2016 8:04 pm

I did not see the other contentious discussion, and it puzzles me that differences of opinion or approach would (or should) get contentious.

It seems to me that charging a purchase would mean that the expenditure is made right then and you have taken a loan to pay for the purchase. When you pay the credit card bill, you have paid the loan.

If someone pays the credit card bills in full every month, and wants to "count" the expenditure then (the next month, normally) - that seems like no big deal.

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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by Phineas J. Whoopee » Thu Jan 21, 2016 8:15 pm

^ Great. Thanks for your thought that the contentious disagreement that happened shouldn't have happened.

I'm interested in why it did.

Are the different approaches I postulated in the first post in this thread adequate to explain why the contention did in fact occur, whether or not anybody thinks it was justified?

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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by Epsilon Delta » Thu Jan 21, 2016 8:22 pm

dm200 wrote:I did not see the other contentious discussion, and it puzzles me that differences of opinion or approach would (or should) get contentious.

It seems to me that charging a purchase would mean that the expenditure is made right then and you have taken a loan to pay for the purchase. When you pay the credit card bill, you have paid the loan.

If someone pays the credit card bills in full every month, and wants to "count" the expenditure then (the next month, normally) - that seems like no big deal.


I believe the big deal was that the OP was not counting the purchase as an expense when it was charged and was not counting it as an expense when the credit card was paid. So the both the people who said "it was an expense when paid and not when charged" and the ones who said "it was an expense when charged and not when paid" saw the other side as partially agreeing with the completely indefensible.

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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by Rodc » Thu Jan 21, 2016 8:26 pm

Do I have to be internally consistent and logical?

I keep track of funds via my (electronic) check book. In my check book money leaves when I send a check/payment. Now of course that is not quite right because often it takes a couple of days for a payment to clear, or in the case of a personal check it might take a very long time. So my actual checking account lags my check book, but if I want to know how much liquid money I have I check the check book, not the actual bank account. I also count inflows when the occur, mostly via direct payment, and only once in a blue moon via an actual paper check (which might have a lag but these are always small so of little consequence).

I do not keep track of what goes on my credit card, so there is no "accounting" for that money spent/encumbered/whatever. The only "accounting" happens when I pay the credit card bill.

So I guess I use the cash account method. I do this for ease of use, not for philosophical reasons.

But, I keep a forward looking ledger as well out a month or so just to make sure the checking account does not get into a cash flow bind, or if it is going to I can take care of things so the checking account does not go negative. That has known inflows like paychecks. And known bills. And estimates for thinks like groceries and up coming credit card bills (with place keeper amounts until the real bill shows up). I do not try to get everything in the forward looking account, but I have a general sense of what sort of routine "other" expenses tend to show up so as long as the forward look has an appropriately sized balance all is good.

So I suppose I use accrual accounting as well. This is because this makes sure I will have sufficient funds on hand when needed.

So you could say I use some ad hoc mix. It is just a practical mix that serves my needs.

I would further add, if I go to the store and buy a pair of shoes on my card, and you ask what did you do at the store, I would say with a straight face and utter disregard to any notion of accounting, "I bought a pair of shoes". :)
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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by Phineas J. Whoopee » Thu Jan 21, 2016 8:55 pm

Rodc wrote:Do I have to be internally consistent and logical?
...

No. Not in the least. Nisiprius beat me to it, but Whitman in Song of Myself wrote "Do I contradict myself? Very well then I contradict myself, (I am large, I contain multitudes.)"

Is the difference I postulated at the beginning of this thread adequate to explain why there was such strong and vigorous disagreement over whether the expense happened when it was put on the credit card or when the credit card bill, over months, was paid?

It isn't about what you, or I, or anybody else prefers to do. For the record, my practice is roughly in line with yours.

It's about why there was such a strong disagreement in the first place.

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Re: CC Purchase Accounting Disagreement: When Charged vs. When Paid

Post by Alex Frakt » Thu Jan 21, 2016 8:58 pm

Locked for the following reasons:

- Restarting locked thread
- Not investing, so off-topic for this forum. Not personal, so OT for any other forum.

Locked