GovCon Accounting Concepts — The Ideas Behind the Coding
This is the "read once" foundation for understanding why Arcvue codes a transaction the way it does. You don't need an accounting background. Each idea is explained from the ground up. Once these five click, almost every coding decision Arcvue makes — and every question it asks you in the escalation queue — will make sense.
These five principles are the rules the AI bookkeeper follows, the rules the parallel run grades against, and the rules you're confirming when you click Confirm on an escalation.
First, one idea everything rests on: accrual vs. cash
There are two moments in the life of any cost:
- When you incur it — the work gets done, the expense happens, you now owe someone. An employee flew to a client site on the 3rd. A subcontractor worked 40 hours the week of the 10th. A vendor delivered software this month.
- When you pay it — money actually leaves your bank account. That might be weeks later, next month.
Accrual accounting records the cost at moment 1, not moment 2. The instant you incur a cost, Arcvue books two things at once (every entry has two sides — that's "double-entry"):
- the expense (e.g. "Travel," "Subcontractor labor," "Software"), and
- a matching payable — an IOU that says "we owe this money."
Then, later, when you actually pay, Arcvue books a different pair:
- the bank account goes down (cash out), and
- the payable (the IOU) goes away — it's settled.
This two-moment structure is the single most important thing to understand, because the four principles below are all consequences of it. Government contractors must use accrual accounting — it's not optional; it's what DCAA (the Defense Contract Audit Agency) and the FAR cost principles require, and it's what makes your indirect rates defensible.
Principle 1 — Paying a bill is not a new expense
An outbound bank payment that clears an existing payable is never a new expense-recognition event.
Because the expense was already recorded at moment 1 (when you incurred it), the payment at moment 2 must not record it again. If it did, the cost would be counted twice — once when accrued, once when paid — and your books would overstate spending.
So when Arcvue sees money leaving the bank, the correct booking is almost never "that's a Travel expense" or "that's a Software expense." It's "that payment is clearing an IOU we already booked." The bank goes down; the payable goes down; no expense account is touched.
Why this matters for you: the hardest escalations are outbound ACH payments
where the bank descriptor is opaque (it just says something like
Outbound ACH with a reference number and hides who got paid). The instinct is
to ask "what was this for?" and code it as that kind of expense. That's the
trap. The right question is "which existing bill was this paying?" — and
that's exactly the question the bookkeeper will ask you in the escalation chat.
You're matching a payment to a payable, not inventing an expense.
Principle 2 — Billable vs. non-billable: it follows the cost, not who you paid
When Arcvue does record a payable (at accrual time), it has to decide what kind of payable it is. The two big buckets are:
| Payable | What it is |
|---|---|
| Vendor Billable (VB) | A payable for a direct, billable cost — a cost you can bill to a specific contract/customer. |
| Vendor Non-Billable (VNB) | A payable for a cost that is indirect — overhead, G&A, anything you can't bill directly to a contract. |
(These are the roles the two accounts play; in your chart of accounts they carry whatever account numbers your setup assigns — the Confirm pill in the escalation queue always shows you the account name alongside its number.)
The split follows the billable character of the expense — not whether you paid a company vs. a person, and not whether the worker is an employee vs. a contractor.
This is the rule people get wrong most often, because "billable" sounds like it should track "is this a vendor or a person" or "direct labor vs. indirect labor." It doesn't. The only question is: can this specific cost be billed to a contract?
- Travel that an employee took for a specific contract → direct, billable → the reimbursement payable is Vendor Billable (VB).
- A meal, a G&A subscription, an overhead expense → indirect, not billable to a contract → Vendor Non-Billable (VNB).
Worked examples: an employee's direct-contract travel reimbursement codes to VB (it's a direct contract cost); a G&A or overhead expense, or a business-development consultant's cost, codes to VNB. Across a company's reimbursement history the pattern is overwhelming: direct travel → VB; G&A / overhead / meals → VNB.
Principle 3 — Timesheet subcontractors: no invoice, ever
Some subcontractors are individuals who put their hours on a timesheet, just like an employee — they're effectively staff who happen to be 1099 rather than W-2. These are timesheet subcontractors.
A timesheet subcontractor's cost accrues through their timecard to your subcontractor accrued-payable account, and you pay them directly from that accrual. There is no invoice step.
This is different from a normal vendor:
- Normal vendor: sends you an invoice → you book the expense + a payable → you pay the invoice.
- Timesheet subcontractor: submits a timesheet → Arcvue accrues their labor cost to your subcontractor accrued-payable account the same way it accrues employee wages → you pay them straight from that accrual. No invoice arrives, and none should be expected.
Why this matters for you: if the bookkeeper sees a payment to a timesheet subcontractor and there's no invoice on file, that's normal — not a missing document. The cost was already recognized through the timesheet. The payment clears the subcontractor accrual (this is just Principle 1 again). If the queue ever asks about a subcontractor payment with no invoice, the answer is usually "that's a timesheet sub — it cleared the timecard accrual," not "go find the invoice."
Principle 4 — Reimbursements clear the reimbursement payable
When an employee spends their own money (a flight, a hotel, a client dinner) and you owe them back, two payables are in play over the life of that cost, and it's easy to mix them up:
- At accrual time, Arcvue books the expense (e.g. Travel) and a reimbursement payable — "we owe this employee $171.83."
- When you pay the employee back, that payment clears the reimbursement payable — it does not touch the original Travel expense account again.
An employee-reimbursement payment clears the reimbursement payable, not the original expense account.
This is Principle 1 applied to people instead of vendors: the expense was already recognized when the employee incurred it; the payment is just settling the IOU. Coding the payment back to "Travel" would double-count the travel cost.
(Note the interaction with Principle 2: the reimbursement payable itself is VB or VNB depending on whether the underlying expense was billable. An employee's direct-contract travel reimbursement clears a VB payable; an overhead reimbursement clears a VNB payable.)
Principle 5 — The direct/indirect decision is made at accrual time
Whether a cost is direct or indirect (and therefore VB or VNB, billable or not) is decided when the cost is accrued, not when it's paid.
By the time money leaves the bank, the direct/indirect character of the cost was already locked in at moment 1. The payment is just settling an IOU whose nature is already determined. So a payment should inherit the classification of the payable it's clearing — it should never re-derive direct-vs-indirect from scratch at payment time.
This is why, throughout the system, the payment side trusts the accrual side. If you find yourself trying to decide "is this payment direct or indirect?", step back: the real question is "what payable is this clearing, and what was that classified as when we accrued it?" The accrual already answered it.
How these five fit together
They're really one idea seen from five angles:
- Cost is recognized once, at accrual time (the accrual principle).
- Payments settle IOUs; they don't recognize cost (Principle 1, and Principles 3 & 4 are special cases — subcontractor accruals and reimbursement payables).
- The classification — billable vs. indirect, VB vs. VNB — is set at accrual time and the payment inherits it (Principles 2 and 5).
If a coding decision ever feels confusing, return to the two-moment timeline: when was this cost incurred, and what did we book then? The payment almost always just clears what's already there.
Where to go next: the Bookkeeper guide shows how these principles play out in the daily escalation queue, and Flightdeck is the live board where you watch Arcvue apply these rules correctly — and, while you are going live, how close it is to reproducing your old system before cutover.