Why does AR and AP still appear on my Cash Basis Balance Sheet?
Overview
A Cash Basis Balance Sheet should not show AR and AP balances because these accounts track open invoices and unpaid bills. It should include only closed, or paid, transactions. However, QuickBooks sometimes does include AR and AP on the CBBS. Explaining why, and what to do about it, follows:
The underlying cause of AR and AP balances showing on the Cash Basis Balance Sheet is because you are using QuickBooks on the Accrual Basis (recommended for business management) and AR and AP transactions have been entered, but taxes and are being reported on a cash basis. QuickBooks was not designed to be used in this way and reporting anomalies result. That being said, you can deal with it!
Every QuickBooks transaction has one source and one or more target accounts. You can view these accounts by clicking the Journal button at the top of the transaction window, or by pressing Ctrl+Y on your keyboard. The first line of the transaction journal is the source. All subsequent lines are the targets. A transaction has one account for the source and one account for each target.
Open AR and AP transactions that include balance sheet accounts as target accounts create this issue! Even if a transaction status is open, QuickBooks includes the target amounts in the Cash Basis Balance Sheet, so in order to keep the Cash Basis Balance Sheet in balance; QuickBooks also includes an offset amount in the source account of the transaction. If the transaction is an invoice, the source account is AR and the offset shows in AR. If the open transaction is a bill, the source account is AP and the offset is shown in AP. (When the transaction is paid, the offset goes to cash instead of AR or AP).
A list of transactions that create cash basis AR and AP balances follows:
AR Debit Balances:
· An open invoice with sales tax if the preference is set to "As of invoice date (accrual basis)."
· A check to a customer not linked to a credit memo.
· An open Invoice or statement charge for an inventory item.
· A JE debiting AR as the source account and crediting a balance sheet account as a target.
· A JE debiting AR as a target account.
· 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.
AR Credit Balances:
· 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 between the two dates.
· 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 JE crediting AR as the source account and a target is a balance sheet account.
· A JE crediting AR as a target account (e.g., transferring a credit to another job).
AP Debit Balances:
· 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 JE debiting AP as the source acct and a target is a balance sheet account.
· A JE debiting AP as a target account.
· A credit card charge that relieves AP that is not linked to a bill.
AP Credit Balances:
· A bill for an inventory item or to an asset account
· A JE crediting AP as the source acct and a target is a balance sheet account.
· A JE crediting AP as a target account.
How to fix the problems
You can use QuickBooks reports to find the transactions that are causing AR and AP balances to appear on the Cash Basis Balance Sheet.
Open Invoices Report:
1. Choose Reports > Customers & Receivables > Open Invoices.
2. Click the Date drop-down arrow and select the correct date.
3. Click Modify report, Advanced, and then click As of Report Date.
Any payments that appear on the report (included in the Cash Basis Balance Sheet) have been received but not applied to an invoice.
Unpaid Bills Report:
1. Choose Reports > Vendors & Payables > Unpaid Bills Detail.
2. Click the Date drop-down arrow and select the correct date.
3. Click Modify report, Advanced, and then click As of Report Date.
The bill payment checks that appear on the report (included in the Cash Basis Balance Sheet) have been entered but not applied to a bill.
Customer Transaction Detail Report: each customer who has a non-zero subtotal is impacting your AR balance. To identify customer transactions that are causing an AR balance to show on your Cash Basis Balance Sheet, run the following report:
1. Choose Reports > Company & Financial > Balance Sheet Standard.
2. Click Modify Report.
3. On the Display tab, select Cash for Report Basis.
4. Delete the From date, keep the To date, and click OK.
5. To bring up the Transactions by Account report, double-click (QuickZoom) the AR amount.
6. Click Modify Report.
7. On the Display tab, delete the From date and keep the To date.
8. Click Advanced, select the Open Balance / Aging Report Date option, and click OK.
9. Select Customer in the Total by field.
10. Click the Filters tab:
a. In the Filter list, click Account.
b. Click the Account drop-down arrow and select All Accounts Receivable.
c. Select No for Include Split Detail.
d. In the Filter list, select Paid Status, select Open, and then click OK.
e. (Optional) Click Memorize to save this report to use again.
Vendor Transaction Detail Report: each vendor who has a non-zero subtotal is impacting the AP balance. To identify vendor transactions that are causing an AP balance to show on your CBBS, run the following report:
- Choose Reports > Company & Financial > Balance Sheet Standard.
- Click Modify Report.
- On the Display tab, select Cash for Report Basis.
- Delete the From date, keep the To date, and click OK.
- To bring up the Transactions by Account report, double-click (QuickZoom) the AP amount.
- Click Modify Report.
- On the Display tab, delete the From date and keep the To date.
- Click Advanced, select the Open Balance / Aging Report Date option, and click OK.
- Select Customer in the Total by field.
So, if you are seeing AR and/or AP on your Cash Basis Balance Sheet, check the following:
· Sales Tax Preferences – if set to the Invoice Date (required by the state of California), you will need to take action to remove the Sales Tax Liability and the AR.
o This can be done by your tax preparer with an adjusting J/E and never posted to QB or you can pay the Sales Tax before tax year end, or you can temporarily change the Sales Tax Preferences to print your Cash Basis Balance Sheet and then change them back!
· Review the Open Invoices Report for a check refund to a customer that is not linked to a CM or Payments Received earlier than the Invoice date
· Review the Unpaid Bills report for Items linked to Fixed Asset accounts or Bill Payments dated earlier than the Bill.
· Look for Journal Entries that list the AR or AP account on the 2nd line (the target). Edit the J/E to make the AP or AR entry on the first line, so it is no longer the target and it will not appear on your Cash Basis Balance Sheet.
· Review the Open Invoices and Unpaid Bills reports for unpaid transactions that list Inventory Items. Again, take action: you can mark open Invoices as “Pending” which will remove them from the Cash Basis Balance Sheet, but you can’t do the same with Bills, so you may want to have your tax preparer do an adjusting J/E to credit Inventory for the amount of the unpaid Bills and Debit AP to remove it or you may want to edit the Bill dates (temporarily!) to the first of the new year, print your Cash Basis Balance Sheet and then change them back!
As always, if you need help or want more information about this process, please call 760-722-6839 or visit http://tinyurl.com/ybg6fy2 and enter "CBBS" in the Additional Comments box and we will contact you.