Troubleshooting AR and AP Balances on Cash Basis Balance Sheets

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Troubleshooting A/R and A/P Balances on Cash Basis Balance Sheets

Each year, especially at year-end or tax-time, Accountants and ProAdvisors get calls about why QuickBooks Cash Basis Balance Sheets contains Accounts Receivable (A/R) or Accounts (A/P) balances since cash basis balance sheets should not show A/R or A/P balances. Intuit never meant for the Balance Sheet to be used for cash basis reporting and certain transactions cannot be off-set properly during the process of converting transactions which make use of A/R and A/P to cash basis reporting. 

The following are some of the transaction types that result in QuickBooks misstating cash basis balance sheets:

A/R Debit Balances

  • A journal entry debiting AR as the source account and crediting a balance sheet account as a target.
  • A journal entry debiting AR as a target account.
  • A check to a customer not linked to a credit memo.
  • An open invoice with sales tax if the preference is set to "As of invoice date (accrual basis).
  • An open Invoice or statement charge with an inventory parts.
  • Transferring a credit from one job for a customer to another job for the same customer before the journal entries are linked to the credit memo for one job and the invoice for the other job.

A/R Credit Balances

  • A credit memo to a customer not linked to an invoice or a refund check.
  • A deposit not linked to a payment or an invoice.
  • A journal entry crediting AR as the source account and a target is a balance sheet account.
  • A journal entry crediting AR as a target account (e.g., transferring a credit to another job).
  • An invoice with an item recording retainage posting to another current asset account.
  • A payment from a customer not linked to an invoice.
  • A payment linked to an invoice dated in the future if the report date is before the invoice date.
  • A credit memo to a customer not linked to an invoice or a refund check.
  • A deposit not linked to a payment or an invoice.
  • A journal entry crediting AR as the source account and a target is a balance sheet account.
  • A journal entry crediting AR as a target account (e.g., transferring a credit to another job).

A/P Debit Balances

  • A journal entry debiting AP as the source acct and a target is a balance sheet account.
  • A journal entry debiting AP as a target account.
  • A credit card charge that relieves AP that is not linked to a bill.
  • A Bill from a vendor crediting a retainage payable account to reduce the amount due.
  • A check or bill payment check not linked to a bill.
  • A bill payment check linked to a bill with a future date if the report date is between the two dates.

A/P Credit Balances

  • A journal entry crediting AP as the source account and a target is a balance sheet account.
  • A journal entry crediting AP as a target account.
  • A bill for an inventory part.
  • Bill offset to a balance sheet account.

Researching the Cause of the Misstatements

You can prepare a report that will assist you in determining the exact transaction(s) representing the amount of A/R or A/P on your cash basis balance sheet.  The following example prepares the report for Accounts Receivable, but the same steps can be used to prepare a report for Accounts Payable.  To prepare the report:

  1. Create a cash basis Balance Sheet.
  2. Double-click the on the Accounts Receivable account; QuickBooks displays a Transaction by Account report.
  3.  Click Modify Report.
  4. On the Display tab, clear the value in the From field (and leave it blank); in the To field, enter the last day of the fiscal period.
  5. Click the Filters tab and filter the report by Paid Status for all Open transactions

The resulting report will show you all of the transaction that QuickBooks did not convert during computation of the cash basis balance sheet. 

Correcting the Cash Basis Conversion

The following steps assume you are using one of the Accountant versions of QuickBooks.  If you are not using an Accountant version, the General Journal Entries menu option can be found under the Company menu; however, only an Accountant version offers the ‘reverse’ option for Journal Entries.

Correct Accounts Receivable

Perform the following steps to correct an Accounts Receivable balance on your cash basis balance sheet:

  1. Open the Accountant menu drop-down and click Make General Journal Entries.
  2. Enter the appropriate Date usually the ending date of the fiscal period, and Entry No. (You may wish to accept the default entry number).
  3. Click the first line under Account column select an appropriate offset Account.(Note: The offset account must be an account other than Accounts Receivable and will frequently be an income or asset account.)
  4. Enter the corrective amount as a Debit.
  5. Click the second line under the Account column and enter or select Accounts Receivable.
  6. Enter the identical amount as a Credit and enter a customer name under the Name column (something like, A/R Adjustment).
  7. Enter an appropriate Memo describing the specifics of the adjustment; then click Save and close.
  8. On the first day of the new fiscal period, enter a reversing Journal Entry by reversing the previous steps.
  9. Click the Accountant menu drop-down and click Make General Journal Entries.
  10. Select the Journal Entry created on the last day of the previous quarter which removed Accounts Receivable from a Cash Basis Balance sheet.
  11. Change the date to the first day of the next fiscal period, if prompted to save changes, click No.
  12. Click the Reverse button on the top of the Journal Entry window; then click Save and close.

Correct Accounts Payable

Perform the following steps to correct an Accounts Payable balance on your cash basis balance sheet:

  1. Open the Accountant menu drop-down and click Make General Journal Entries.
  2. Enter the appropriate Date, usually the ending date of the fiscal period and Entry No. (You may wish to accept the default entry number).
  3. Click the first line under Account column select an appropriate offset Account.(Note: The offset account must be an account other than Accounts Payable and will usually be an expense or liability account.)
  4. Enter the corrective amount as a Credit.
  5. Click the second line under the Account column and enter or select Accounts Payable.
  6. Enter the identical amount as a Debit, and enter a vendor name under Name column (something like A/P Adjustment).
  7. Enter an appropriate Memo describing the specifics of the adjustment; then click Save and close.
  8. On the first day of the fiscal period, enter a reversing Journal Entry by reversing the previous steps.
  9. Click the Accountant menu drop-down and click Make General Journal Entries.
  10. Select the Journal Entry created on the last day of the previous quarter which removed Accounts Payable from a Cash Basis Balance sheet.
  11. Change the Date to the first day of the next fiscal period, if prompted to save changes, click No.
  12. Click the Reverse button on the top of the Journal Entry window; then click Save and close.

Conclusion

While the transactions resulting in the appearance of Accounts Receivable or Accounts Payable on your cash basis balance sheet maybe somewhat different from those specifically illustrated in this article, the examples show in this article are typical of the cash basis balance sheet misstatements seen by QuickBooks users. With some understanding of the possible causes and a little time spent in reporting, you can easily research and identify the cause, and then apply the appropriate solutions.

William “Bill” Murphy