You operate an accrual-based company in QuickBooks yet prepare your tax return on cash basis – familiar with the (defiant!) accounts receivable (AR) and / or accounts payable (AP) accounts showing up on the cash-basis balance sheet? Although these aging accounts should not reflect, we will discuss a few reasons why this would happen. And as we identify the possible causes, we will be solution-focused.
1. One reason why an AR or AP account balance would show on a cash-basis report could be because of a previous adjusting journal entry that affected the AR or AP account and stays around.
Solution: Enter a journal entry to adjust this amount to its correct account. Consult with your accountant if you are unsure where this should post.
2. For bookkeeping convenience, booking customer deposits to the AR account before invoicing them (for reporting this is a liability) will create a credit balance in the AR account that will show up on the cash-basis balance sheet (since they are unapplied in the current period and will only be applied in a later period).
Solution: Since deposits are cash receipts from customers, it is recognized as income in cash-basis accounting. Enter a journal entry to debit AR and credit it to an income account. Remember to reverse this journal entry.
3. Similar to the situation above, but about AP, entering deposits to vendors before being billed (for reporting purposes this is a prepaid expense and thus an asset) will create a debit total in the AP account that will reflect on a cash-basis report (since they are unapplied in the current period and will only be applied in a later period).
Solution: Since payments are cash disbursements, a cash-basis reporter will recognize these payments as expenses. By crediting the AP account and debiting the applicable expense account, a journal entry will solve this problem. Remember to reverse this journal entry.
WORD OF CAUTION! Since AR and AP are not natural accounts on a cash-basis financial report, an adjusting entry that hits these accounts will require a bit of different treatment (than would otherwise be needed in accrual-based accounting). While your focus may be to adjust them and hence place them on the first line item in the journal entry, they should be entered “second in line.” This is because, if an AR or AP account is in the first line of an adjusting journal entry, it will not post correctly and therefore not reflect on a cash-basis report.
4. AR or AP balances on the cash-basis balance sheet may also show up because of receive payment entries that are not applied to invoices or bill payments that are not applied to bills.
Solution: You can correct this by simply applying it to the corresponding invoice/bill or by creating an invoice/bill if it was omitted in the first place.
Recording an adjusting journal entry where necessary (remember AR and AP accounts posted second!), and applying receive payment and bills payment entries, your balance sheet will now represent a true cash-basis picture with the AR and AP accounts neatly and correctly tucked away for tax purposes.
Contact us if you require further assistance.