Accountants CPA Hartford
William Brighenti, Certified Public Accountant
Certified Business Valuation Analyst
Certified QuickBooks ProAdvisor
Office Address:  46 Mildrum Road, Berlin, Connecticut 06037-2423      Phone:  (860) 828-3269      Email:  [email protected]
New Britain
Cash Basis Problems With QuickBooks:
Accounts Payable and Accounts Receivable Balances

Many 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:
  1. Postings to balance sheet accounts;
  2. Receipts unapplied to invoices.
Similarly, balances occur largely in accounts payable cash basis QuickBooks reports for two reasons:
  1. Postings to balance sheet accounts;
  2. 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 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.

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:
  1. Double click on the balance of accounts payable or accounts receivable in the cash basis balance sheet;
  2. Upon the appearance of the "Transactions by Account" report, click "Modify Report";
  3. Delete the date appearing in the "From" field on the Display tab;
  4. Click on the "Advanced" oblong button located on the lower right of the Display tab;
  5. On Advanced Options, select "Report Date" followed by "OK";
  6. Select the Filters tab, scroll down "Choose Filter" and click "Paid Status";
  7. To its immediate right, under Paid Status, choose "Open" and then "OK".
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.

QuickBooks Cash Basis Accounts Payable Detail

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:
  1. Double click on the utilities bill, which calls up the screen "Select Bills to be Paid";
  2. Check the open bill;
  3. Select "Set Credits" to apply the $500.00 credit awaiting to be applied to a bill;
  4. Click "Done" on the subsequently appearing "Discounts and Credits" screen;
  5. Select "Pay Selected Bills" on the "Select Bills to be Paid" screen;
  6. Click "Done" on "Payment Summary".
The two transactions are now gone from accounts payable on our cash basis "Transactions by Account" report.

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:
  1. Double click on the transaction in the "Transactions by Account" report;
  2. Change the date on the bill to the day following the report date of your balance sheet report;
  3. Select "Save and Close" on the "Enter Bills" screen.
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.

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 appropriate professional advice from your attorney and certified public accountant.

Have a tax or an accounting question?  Please feel free to submit it to William Brighenti, Certified Public 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 Simplified.
If and only to the extent that this publication contains contributions from tax 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.
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