We will use this article to discuss using cash basis reports in QuickBooks. One of the very best features in QuickBooks is the fact that it doesn’t force you to use just the Cash or Accrual Basis. This means that QuickBooks will allow you to use accrual basis reports for management information throughout the year and you can also use cash basis reports when preparing taxes. It also doesn’t mean that QuickBooks stores two different sets of books; instead, to help you with keeping a cash basis financial statement, QuickBooks does its best to make the Accrual to Cash Basis conversion. It is important to note that the conversion can sometimes lead to inaccurate numbers that can be somewhat troubling. This is why it is important that you understand how QuickBooks makes their conversions.
In the simplest explanation, QuickBooks makes Accrual to Cash conversions by removing unpaid expenses and unreceived income from your reports. It will also add expenses and income from the previous year that were paid or received in the current year. However, there are a few nuances that can cause the cash basis report to show incorrect information. Here are the most common problem areas:
Before we dive into each of the common problem areas we will also quickly go over how to make changes to your reporting preferences for cash basis. To change the default setting in QuickBooks, you should:
Understanding the way Cash Basis Reports are Calculated
QuickBooks doesn’t include open invoices using items associated with expense or income accounts from the total income on the cash basis P & L Report. It also adds the total receipts to income against any invoices from previous years.
Similarly, QuickBooks also reduces Accounts Receivable on the Cash Basis Balance Sheet by the total amount of open Invoices that have items associated with expense or income accounts.
This also happens with unpaid bills except in that instance Accounts Payable and expenses are involved. This means that any unpaid bills will be removed from the P&L and Cash Basis Balance Sheets as long as the bill’s coding is to an income or expense account.
Normally, there wouldn’t be a balance in A/P or A/R on a Cash Basis Balance Sheet, but if one does occur it is most likely due to one of the following situations:
*It is important to note that if a Cash Basis Balance Sheet does show a balance in A/P or A/R it may not be enough to determine the cause. You might still have to go in and manually adjust the balance in the A/P or A/R.
The Limits of QuickBooks Cash Basis Reports
When calculating Cash Basis Balance Sheets there are a few things that QuickBooks can’t do:
Troubleshooting for Off Balance, Balance Sheets
If you find that your Cash Basis Balance Sheet is off balance (meaning the total assets doesn’t equal the total Equity and Liabilities) the problem could be caused due to using customer discounts rather than credit memos. There is a bug that exists in QuickBooks that makes the Cash Basis Balance Sheet appear off balance if discounted transactions are coded to accounts for balance sheets.
For instance, if an invoice was partially paid or paid in full using a discounted transaction and the Debit was coded to a balance sheet (such as Retainers or Customer Prepayments), the Cash Basis Balance Sheet will be off balance.
QuickBooks doesn’t currently provide a simple way to look for discounted transactions, so you will have to use the command for Find and filter it for all Payment transactions. The created find report will include the transactions “Type” column, and you will be able to look for any discounted transactions there. If you find any coded to balance sheet accounts, those transactions will be your problems.
Proofing A/P and A/R on the Cash Basis Balance Sheet
You can use QuickZoom to proof the balances on A/P and A/R on the Cash Basis Balance Sheet by displaying the transactions behind the numbers displayed on the Balance Sheet.