Friday, December 11, 2020

AR And AP Balances On Cash Basis Balance Sheet

 Cash Basis Difficulties With QuickBooks:

Accounts Payable and Accounts Receivable Balances


Many companies keep their books in the accrual basis in QuickBooks, so when it comes tax time for you to submit their business records to their outside certified public accountant, they modify their QuickBooks balance sheet, profit and loss statement, and trial balance by selecting the bucks basis of accounting feature inherent in the software's reporting.  I have received a number of questions from business owners and their accountants, along with from public accountants, as to why balances come in accounts receivable and accounts payable in the companies' cash basis financial reports.


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The answer is surprising as it's simple:  because QuickBooks is limited with its design and structure.  Period.  For two hundred bucks, some business people and accountants expect this software to jump through circles and hoops in Olympic precision, performing along with those created for specialized industries and incredibly large organizations; however, and even though QuickBooks offers much value as an item particularly for its price, it cannot try everything, and everything that it could do, it doesn't do flawlessly.  Cash basis reporting of accounts receivable and accounts payable is a great example of its limitations.


Balances occur largely in accounts receivable cash basis QuickBooks reports for two reasons:


  • Postings to balance sheet accounts;
  • Receipts unapplied to invoices.


Similarly, balances occur largely in accounts payable cash basis QuickBooks reports for two reasons:


  • Postings to balance sheet accounts;
  • Checks written against accounts payable and not applied to bills.


In converting accrual basis reports to those of cash basis, QuickBooks eliminates virtually all open revenue and expense accruals to accounts payable and accounts receivable, respectively; however, correctly adjusting the applicable is the reason balance sheet accounts is beyond its limited software intellect, while failing woefully to apply receipts to sales invoices and look payments to bills is due to an individual's limited intellect in using QuickBooks correctly.


To eradicate these unaccountable balances from cash basis financial reports in QuickBooks, you must first locate all of the entries accounting for them.  The procedure is fairly simple:


  • Double click the balance of accounts payable or accounts receivable when you look at the cash basis balance sheet;
  • Upon the look of the "Transactions by Account" report, click "Modify Report";
  • Delete the date appearing within the "From" field on the Display tab;
  • Click the "Advanced" oblong button located on the lower right associated with Display tab;
  • On Advanced Options, select "Report Date" accompanied by "OK";
  • Find the Filters tab, scroll down "Choose Filter" and click "Paid Status";
  • To its immediate right, under Paid Status, choose "Open" and then "OK".


If done correctly, your "Transactions by Account" report should show just every one of the individual transactions comprising the cash basis balance in accounts receivable or accounts payable.


Easily you can view within the above report that the $500.00 payment to CL&P had not been applied to the bill that had been entered in QuickBooks under "Enter Bill".  The QuickBooks user simply wrote a check in QuickBooks under "Write Checks", posting it to accounts payable without applying the payment to the open invoice.  Considering that the payment is not applied, both the bill and look stay static in QuickBooks awaiting further instructions from the user.  To get rid of these two transactions through the accounts payable account, simply execute the following steps:

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  • Double click on the utilities bill, which calls up the screen "Select Bills to be Paid";
  • Check out the open bill;
  • Select "Set Credits" to use the $500.00 credit awaiting to be reproduced to a bill;
  • Click "Done" in the subsequently appearing "Discounts and Credits" screen;
  • Select "Pay Selected Bills" on the "Select Bills to be Paid" screen;
  • Click "Done" on "Payment Summary".

The 2 transactions are now actually gone from accounts payable on our cash basis "Transactions by Account" report.


One other transaction appearing in accounts payable on the cash basis requires the $5,000.00 posting into the balance sheet account, construction in progress.  This is not because of any error or limited intellect from the an element of the user; rather, it really is because of a quirk or limited intellect associated with QuickBooks software.  Due to the fact entry will be a balance sheet account, frankly QuickBooks does not understand what to do with it.  If it were to an account appearing in the Profit and Loss Statement, it could simply exclude it from the cash basis balance sheet; however, a balance sheet account of a current asset, such as construction in process, normally belongs from the balance sheet.  If this type of balance sheet account appears in your money basis accounts payable, an easy magic pill to print cash basis reports in order to submit them to your tax advisor involves the next steps:


  • Double click the transaction within the "Transactions by Account" report;
  • Change the date in the bill towards the day following the report date of the balance sheet report;
  • Select "Save and Close" on the "Enter Bills" screen.


The total amount sheet on the cash basis will not show that transaction under accounts payable, and from now on your accounts payable will show no balance on the balance sheet.  Once you print your desired financial reports regarding the cash basis, you would then locate the altered bill and re-date it correctly.


If that $5,000.00 entry had involved Inventory, the fix is certainly not so quick as that presented above.  I suggest creating a journal entry dated at the time of the termination of the period, debiting accounts payable and crediting cost of goods sold or an inventory variance account, but making sure that the accounts payable credit entry will not appear on the initial type of the journal entry; use a fictitious vendor name such as Cash Basis Adjustment, etc.  Print your money basis reports and then delete the journal entry.


Some would rather memorize the first entry as recorded in the "Transaction Journal", delete it, print the money basis reports, and then recall and re-enter the memorized entry.  Before deleting any original journal entries, it is recommended always to back up your QuickBooks file to enable you to restore it in the event that you forget or lose the initial entries.


QuickBooks is a great program for the money.  However, it has its share of limitations.  Converting from accrual to cash basis accounting has wreaked havoc with accountants, spending hours wanting to eliminate balances in accounts receivable and accounts payable on financial reports modified to be presented from the cash basis of accounting.  Posting to balance sheet accounts and failing woefully to apply payments to invoices are two of this most encountered factors that cause these balances in accounts receivable and accounts payable on cash basis statements.  Before undertaking any of these fixes in your QuickBooks file, always make a backup of your data before proceeding.

We hope that this article will help you the issues regarding AR And AP Balances On Cash Basis Balance Sheet. This short article is provided for informational purposes and it is not designed to be construed as legal, accounting, or other professional advice.  For more info, please consult appropriate expert advice from your own attorney and certified public accountant.

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