Ask the Expert - Cash versus Accrual Reports

Q - My client uses A/R and A/P to manage their receivables and payables. It is now time for me to prepare their taxes on the cash basis. I have checked the box to change from accrual basis to cash when modifying the report, but a balance for each account still remains. What am I doing wrong?

A - You are not doing anything wrong. The first important issue is to understand what QuickBooks is doing when it creates a report on cash basis versus accrual. Each open invoice or unpaid bill (including credits, credit memos, unlinked payments, etc) is reverse if it is coded to a Profit & Loss account. If it is coded to a Balance Sheet account it is not reversed. The gut instinct for most accountants is to adjust the A/R and A/P accounts to zero by creating a journal entry to income or cost of goods sold, respectively. This is not correct, because the amount is left because it is coming from a Balance Sheet account.

The next issue is to understand that the books are kept on an accrual basis, it is simply a reporting function to switch to cash basis. Only Accounts Receivable and Accounts Payable are reversed, any other asset or liability is not, including credit cards.

The main issue when troubleshooting any balance that remains is to look at the Open Invoice and Unpaid Bills reports as of the Balance Sheet date and make sure that all the transactions are "linked." By "linked" for Accounts Receivable, for example, I mean that there are not payments that have not been used to pay invoices. Since the cash versus accrual only reverses P & L activity and a payment would be an entry to cash or undeposited funds (Balance Sheet accounts) they would not reverse. The same could be true for bill payments on the Accounts Payable side. Scrolling through an unpaid bills or open invoice report (be sure to click on the advanced tab to choose as of report date, not current faster to see what was outstanding as of that date, not what is still unpaid) as of the Balance Sheet date should help to determine if this is the problem.

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Bonnie J. Nagayama, CPA (925-247-0100) has been featured by Intuit in their QuickBooks Advisor Spotlight and frequently teaches and consults on using QuickBooks to its maximum advantage. For a FREE weekly newsletter of QuickBooks tips and tricks, plus many free and low cost QuickBooks resources visit www.4luvofbiz.com.