Cash Basis Problems With
Accounts Payable and Accounts Receivable Balances
companies keep their books on the accrual basis in QuickBooks, and when
it comes tax time 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
cash basis of accounting feature inherent in the software's
reporting. I have received a number of questions from business
owners and their accountants, as well as from public accountants, as to
why balances appear in accounts receivable and accounts payable on the
companies' cash basis financial reports.
The answer is surprising as it is simple: because QuickBooks is
limited in its design and structure. Period. For a couple
of hundred bucks, some business owners and accountants expect this
software to jump through circles and hoops in Olympic precision,
performing as well as those designed for specialized industries and
very large organizations; however, even though QuickBooks offers much
value as a product especially for its price, it cannot do everything,
and everything that it can do, it does not do flawlessly. Cash
basis reporting of accounts receivable and accounts payable is a
perfect example of its limitations.
Balances occur largely in accounts receivable cash basis QuickBooks
reports for two reasons:
Similarly, balances occur largely in accounts payable cash basis
QuickBooks reports for two reasons:
- Postings to balance sheet accounts;
- Receipts unapplied to invoices.
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 accounts for balance sheet accounts is beyond
its limited software intellect, while failing to apply receipts to
sales invoices and check payments to bills is due to the user's limited
intellect in using QuickBooks correctly.
- Postings to balance sheet accounts;
- Checks written against accounts payable and not
applied to bills.
To eliminate these unaccountable balances from cash basis financial
reports in QuickBooks, you must first locate all the entries accounting
for them. The procedure is quite simple:
If done correctly, your "Transactions by Account" report should show
just all of the individual transactions comprising the cash basis
balance in accounts receivable or accounts payable.
- Double click on the balance of accounts payable or
accounts receivable in the cash basis balance sheet;
- Upon the appearance of the "Transactions by Account"
report, click "Modify Report";
- Delete the date appearing in the "From" field on the
- Click on the "Advanced" oblong button located on the
lower right of the Display tab;
- On Advanced Options, select "Report Date" followed by
- Select the Filters tab, scroll down "Choose Filter"
and click "Paid Status";
- To its immediate right, under Paid Status, choose
"Open" and then "OK".
Easily you can see in the above report that the $500.00 payment to
CL&P was not 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. Since
the payment has not been applied, both the bill and check remain in
QuickBooks awaiting further instructions from the user. To
eliminate these two transactions from the accounts payable account,
simply execute the following steps:
The two transactions are now gone from accounts payable on our cash
basis "Transactions by Account" report.
- Double click on the utilities bill, which calls up
the screen "Select Bills to be Paid";
- Check the open bill;
- Select "Set Credits" to apply the $500.00 credit
awaiting to be applied to a bill;
- Click "Done" on 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 other transaction appearing in accounts payable on the cash basis
involves the $5,000.00 posting to the balance sheet account,
construction in progress. This is not due to any error or limited
intellect on the part of the user; rather, it is due to a quirk or
limited intellect of the QuickBooks software. Because the entry
is to a balance sheet account, frankly QuickBooks does not know what to
do with it. If it were to an account appearing on the Profit and
Loss Statement, it would simply exclude it from the cash basis balance
sheet; however, a balance sheet account of an existing asset, such as
construction in process, normally belongs on the balance sheet.
When this kind of balance sheet account appears in your cash basis
accounts payable, a simple quick fix to print cash basis reports in
order to submit them to your tax advisor involves the following steps:
The balance sheet on the cash basis will no longer show that
transaction under accounts payable, and now your accounts payable will
show no balance on the balance sheet. After you print your
desired financial reports on the cash basis, you would then locate the
altered bill and re-date it correctly.
- Double click on the transaction in the "Transactions
by Account" report;
- Change the date on the bill to the day following the
report date of your balance sheet report;
- Select "Save and Close" on the "Enter Bills" screen.
If that $5,000.00 entry had involved Inventory, the fix is not so quick
as that presented above. I recommend creating a journal entry
dated as of the end of the period, debiting accounts payable and
crediting cost of goods sold or an inventory variance account, but
making certain that the accounts payable credit entry does not appear
on the first line of the journal entry; use a fictitious vendor name
such as Cash Basis Adjustment, etc. Print your cash basis reports
and then delete the journal entry.
Some prefer to memorize the original entry as recorded in the
"Transaction Journal", delete it, print the cash 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 so that you can restore it in the event that you forget
or lose the original entries.
QuickBooks is a good 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
attempting to eliminate balances in accounts receivable and accounts
payable on financial reports modified to be presented on the cash basis
of accounting. Posting to balance sheet accounts and failing to
apply payments to invoices are two of the most encountered causes of
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.
This article is provided for informational purposes and is
not intended to be construed as legal, accounting, or other
professional advice. For further information, please consult
professional advice from your attorney and certified public
Have a tax or an accounting question? Please feel free to submit
it to William Brighenti,
Accountant, Hartford CPA Accountants. For information
and assistance on
any tax and accounting issue, please visit our website, Accountants CPA
Hartford, and our blog, Accounting and Taxes
only to the extent that this publication contains contributions from
professionals who are subject to the rules of professional conduct set
forth in Circular 230, as promulgated by the United States Department
of the Treasury, the publisher, on behalf of those contributors, hereby
states that any U.S. federal tax advice that is contained in such
contributions was not intended or written to be used by any taxpayer
for the purpose of avoiding penalties that may be imposed on the
taxpayer by the Internal Revenue Service, and it cannot be used by any
taxpayer for such purpose. The above tax advice was written to support
the promotion or marketing of the accounting practice of the publisher
and any transaction described herein. The taxpayer recipients of this
offering memorandum should seek tax advice based on their particular
circumstances from an independent tax advisor.