How Do I Fix a Cash Basis Balance Sheet

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This is the essential question we were asked in our brand new Answers forum at schoolofbookkeeping.com. How do I fix a cash basis balance sheet when there are balances in Accounts Receivable or Accounts Payable? First we have to understand why this is a problem. In order to understand why this is a problem we need to understand the difference between cash and accrual basis.

Simply put, a cash basis balance sheet should never have accounts receivable or accounts payable. A cash basis balance sheet should also not have any pre-paid expenses or customer deposits (pre-paid income). For this reason when we run a cash basis balance sheet and we see any of these things that means we need to fix that cash basis balance sheet so that these things do not appear.

There are a number of reasons these things will come up such that we have to fix a cash basis balance sheet. For this purpose we will focus on how to correct accounts payable and accounts receivable.

Why don’t I just keep my books on a cash basis?

You can’t run a business on a cash basis because that’s just not reality. We file on a cash basis because we only want to pay taxes based on income that we’ve actually been paid. In the real world, however we have to invoice customers and get paid later and we need to be able to track that. For this reason a cash basis balance sheet won’t work. It has to be accrual for analytical purposes.

QuickBooks in particular has trouble converting the balance sheet from accrual to a cash basis balance sheet. This happens when an entry affects 2 or more balance sheet accounts. If I post a bill to pre-paid insurance it affects 2 balance sheet accounts. Debit Pre-paid expenses, and credit accounts payable. Then when I run a cash basis balance sheet and assuming that bill has not been paid yet, QuickBooks will not eliminate that Payable because it is tied into another balance sheet account – pre-paid insurance.

A debit balance in accounts payable is a negative balance. When we see that on a cash basis balance sheet what that likely means is we have a payment dated in the current year which is applied to a bill dated in the following year. In other words the payment pre-dates the bill it paid. On any cash basis balance sheet dated between the payment date and the bill date you will see the negative balance resulting from the payment because QuickBooks doesn’t know what to do with it until you cross the date of the bill it paid.

How do I fix a cash basis balance sheet?

There’s actually a simple way. From the cash basis balance sheet double click accounts payable. Then total by vendor. This will give you a clear view into each vendor with activity in accounts payable and you will be able to quickly decipher where the items that make up the cash basis balance sheet balance are coming from. You can do the same thing with accounts receivable, but of course you have to total by customer on that one.

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