When you run financial statements on a Cash Basis in QuickBooks®, the results may not be what you expect. For example, you may find balances for Accounts Receivable and/or Accounts Payable on Balance Sheets run on a Cash Basis. This often means that the client has assigned a Payable or a Receivable to a Balance Sheet account, rather than to an Expense or Income account. There are other reasons this happens too.

Reasons for Accounts Receivable on a Cash Basis Balance Sheet

• There may be open balances on Invoices that use Items linked to Balance Sheet accounts. An example would be a Customer Deposit linked to a Liability account.
• There may be a prorata cost of Inventory Items listed on open Invoices. For example, if an Invoice that includes Inventory Part Items is half paid, half the cost of the Inventory Part Items will remain in Accounts Receivable.
• There may be unapplied credits from Credit Memos or Payments. You can find these entries easily because they appear as negative numbers on the Open Invoices report.
• There may be Sales Tax due listed on an accrual basis. You can change the Sales Tax Preference to Cash Basis to eliminate this problem. CAUTION: Check with your State taxing agencies for rules regarding payment of Sales Tax – some States require the basis for Sales Tax accruals to match the basis for Income Tax filing.

Reasons for Accounts Payable on a Cash Basis Balance Sheet

• There may be Bills using Items linked to Balance Sheet accounts.
• There may be Bills entered for a Note Payable or to buy a Fixed Asset.
• You may find the cost of Inventory Part Items on open Bills.
• There may be unapplied Vendor Credits or Prepayments.

To review balances in Accounts Receivable and/or Accounts Payable: 

Filter a transaction report with a paid status of Open transactions and date range of All to get a report showing the transactions that QuickBooks® did not reverse as part of the internal Cash Basis conversion.

1. From the Reports menu, choose Company & Financial
2. Choose Balance Sheet Standard from the submenu
3. Click Customize Report
4. Select Cash as the Report Basis
5. Click OK
6. Double-click the balance in the Accounts Receivable and/or Accounts Payable account
7. Click Customize Report, and then click the Filters tab
8. In the Filters list, select Paid Status and then select Open
9. Click OK

Complete the Cash Basis Conversion

To complete the Cash Basis conversion, use a Journal Entry to adjust away the Accounts Receivable and/or Accounts Payable balances. For the Journal Entry, create a Customer called ***A/R CPA Use Only*** and an Accounts Payable Vendor called ***A/P CPA Use Only***. Use these names to transfer the balances to whatever accounts you choose for the adjustments.

These Journal Entries are Reversing Entries as of the first day in the next fiscal period and you must apply the Journal Entry and the Reversing Entry against each other to offset them or you will have Unapplied Credits going forward.

Do not use Accounts Receivable and/or Accounts Payable as the first line of a journal entry in QuickBooks®. To find out why, see our next Accounting Professionals Only newsletter.

Please contact me if you have any questions or need further details regarding this information. This article was based on the 2012 version of QuickBooks®.

Rhonda Rosand, CPA
Certified QuickBooks® ProAdvisor
New Business Directions