Cash Basis in Account receivable

[Joe Williams]

First the basics. .Cash Basis accounting does not post Income or Expenses until they are paid. QuickBooks is an Accrual book keeping program and it can Report on Cash Basis. This means that in normal usage, the Accounts Receivable and Accounts Payable on a Cash Basis report should be zero. Remember that the Chart of Accounts is ALWAYS an ACCRUAL view.

QuickBooks reports on income from Invoices posted in Accounts Receivable based on the later of the invoice or payment date. The problem arises when there are items with negative amounts . There are treated as payments and the amount is pro-rated to ALL of the other items, including sales tax. This will cause the income for that invoice to be negative.
Example: Item Names Caps uses income account named Sales.

See attached JPG file



When the item Caps it is used on an invoice with a negative amount that amount is deducted from the income account Sales, and that amount is applied , prorated , to all other items on the invoice. The formula to get the prorated rate is "the NEGAITIVE Item Amount / Invoice total amount = Rate to use. In the following example there 2 sales items for 50.00 each and sales tax of 10.00 for invoice total of 110.00. 50 / 110.00 = .4545.

If there are two other sales items for 50.00 each for a total of 100.00 and a Sales Tax of 10.00 and the item Caps has a negative amount of 50.00. The income for the item Caps is a -50.00 (treated as a partial payment) and the income account used by the other sales items is reported as 45.45 ( 100 * .4545 =45.45 ) and sales tax is reported as 4.54 (10.00 * .4545). This leaves a negative income of 4.54 for that invoice

If ANY item on an unpaid invoice goes to another balance sheet accounts, like inventory or sales tax items, then their amount MUST be reported because the balance in the inventory asset and sales tax payable account has to be reported and QuickBooks keeps the balance sheet accounts in balance.
EXAMPLE: Sales tax on an unpaid invoice, without inventory items, is 10.00. The Cash Basis report will show a 10.00 balance in Accounts Receivable for that invoice and 10.00 in Sales Tax Payable.

[gibbo]

Cash Basis Balance Sheets under a Goods and Services Tax have been difficult to understand. I even had an accountant who did not understand what QuickBooks was doing.
As Joe explains above - under Cash Accounting, unpaid Invoices will not show on the Profit and Loss, going to the balance Sheet until paid. However, when you have a GST, the GST component never appears on the Profit & Loss, it goes straight to the Balance Sheet. But then, under Cash Accounting you do not owe the GST until you receive the payment. So under Cash Accounting there is a need to throw off the balance sheet that portion of the GST that you do not currently owe. But there is no third level in accounting - no place to throw things you do not want on the balance sheet. So they post an amount equal to the amount that you do not want to show to a Liability account instead of deducting it from the Asset. So you still get the over-stated Asset rather than the correct amount - but also a liability (that you didn't enter) appearing as well. This will also occur with Accounts Payable - but in reverse.
These things popping up have had people wondering what was going on - but when you think about it, there is no other way. Unless of course we invent a new accounting system with three levels - now there's an idea!

[mgraham467]

I'm on a cash basis and I'm having a problem getting accurate cash basis P&L's. I created invoices in QB dated 1/1/2010 and sent them to the clients in Dec 2009. Some of the client's paid in Dec 2009 and I applied the payment to their Jan 2010 invoice. What I thought would happen is that the payment would show on the cash basis Dec P&L but it doesn't. When I print the cash basis Jan 2010 P&L it shows the customer's invoice that he paid for in Dec 2009. I need to be able to see an A/R balance which is why I create invoices but this seems to be messing things up.

How can I get around this problem without getting into a lot of complicated accounting each month?

[Joe Williams]

In Cash Basis, the income and expense are reported on the DATE OF THE PAYMENT, not the date of the invoice or bill.
If you need to see the income on the invoice date then you need to be in accrual mode not cash basis.

[ridhdhi2002]

One of my client is using cash basis of accounting and they have account receivable in their balance sheet, how could it be possible? and do i have to consider total revenue as per P/L as the total cash collected from customers and Accounts Receivable shows amount yet tobe collected from the customer.

[Joe Williams]

If there are UNPAID invoices that have items that access a balance sheet account, like Sales Tax or Inventory item) the UNPAID AMOUNT for those items will show in AR as a negative amount. Any un-linked / unused Payment will show as a positive amount in AR.

[ridhdhi2002]

Thanks for reply Joe, though I am trying to understand with an example, let's say there is $10000 of total invoices, so if cash received is $8000, then $2000 will be in A/R being is an excess of cash and unpaid invoices, am I right? please correct me if I am wrong.

[Joe Williams]

Originally Posted by ridhdhi2002

I am trying to understand with an example, let's say there is $10000 of total invoices, so if cash received is $8000, then $2000 will be in A/R being is an excess of cash and unpaid invoices, am I right? please correct me if I am wrong.

If ALL of the items on the invoices were inventory and sales tax items, then the unpaid balance is $2000.00 and it is NOT excess cash.
On a CASH BASIS balance sheet report the AR balance is -2000.00.
On a ACCRUAL BASIS balance sheet report the AR balance is 2000.00.
NOTE: This is why most cash basis business DO NOT have AR and AP they only do cash transactions.

[nishant1500]

Accounting on Cash Basis is tricky initially.
For understand purpose, we should say that there are three basis of accounting

1. Accrual Basis - where incomes and expenses are recognized when they accrue
2. Due Basis - where the above the recognized when they fall due, or when the liability to pay, right to receive arises
3. Cash Basis - when the above is actually paid/received

When asked to do accounting on Cash Basis, most people would end up doing it on Due Basis. For someone who has been doing accounting on accrual basis, the absence of A/R and A/P in the balance sheet is unnerving.
There are no A/R A/P in case of Cash Basis, but not quite so in case of Accrual and Due Basis.

[profloor]

Accounts receivable is principally not used with the cash basis of accounting as income is not recognized until cash is received. A technique for keeping track of cash owed is supposed to still be incorporated nevertheless.
The cash basis balance sheet (CBBS) must not show Accounts Receivable (A/R) or Accounts Payable (A/P) balances since these financial records track open (unpaid) invoices and unpaid bills. Several companies use A/R and A/P accounts and report on the cash basis.

[Joe Williams]

What profloor stated is true with exception for UNPAID BILLS or INVOICES.

If ANY item on an unpaid invoice or bill goes to another balance sheet accounts, like inventory or sales tax items, then their amount MUST be reported because the balance in the inventory asset and sales tax payable account has to be reported and QuickBooks keeps the balance sheet accounts in balance.

EXAMPLE: Sales tax on an unpaid invoice, without inventory items, is 10.00. The Cash Basis report MUST show a 10.00 balance in Accounts Receivable for that invoice and 10.00 in Sales Tax Payable.

[dmckenzie13]

So if there's an amount in accounts receivable on a cash basis balance sheet resulting from unpaid invoices and a customers opening balance which was entered via invoice how do you get rid of the balance?

[maximlib]

QuickBooks bookkeeping can be tricky. If you are using cash basis, unpaid invoices will not count towards your income. With accrual basis, they will count towards income (based on invoice date) whether or not you received payment. You have to close out invoices that you believe will never be paid using bad debts expense.

Go to Customers - Receive Payments - Select the invoice you want to write off. Click Discount & Credits and enter the amount to write off. Use a Bad Debt Expense account to debit this expense.

[dmckenzie13]

So write the invoice off even though this is a cash based balance sheet we are looking at? I thought with cash basis you recognize the expenses when they are paid out. In this case nothing is being paid out so would that still be the fix?

[maximlib]

If you are using cash basis your A/R on balance should technically not reflect the balance. If it shows for any reason and you want to clear it out because those invoices will never be paid, you can use bad debts expense. You can also create a credit memo to close the invoice out.