If you are running a Cash basis Profit and Loss, you might see a couple accounts that are unfamiliar:
- Unapplied Cash Payment Income
- Unapplied Cash Payment Expense
This article will talk about what they are, how they got there, and how to correct it.
“Who are you, and how did you get in my P&L?!?”
Unapplied Cash Payment is a unique account that QuickBooks creates and refers to as a “Special Account.” Try as you might, you cannot delete this account on your chart of accounts, so rather than get frustrated, let’s understand why it’s there, and what it’s purpose is. There is some obscure IRS publication that states on a cash basis, payments received are considered income. Sounds reasonable, right?? So again, where does this account come from? It’s used in two circumstances:
- The transaction is unapplied – In this instance, you recorded a payment (Customer) or bill Payment (vendor) and didn’t apply it to a corresponding transaction – in this case, the transaction is “unapplied” (hence, the name of the account), so on a cash basis, the revenue or expense must be accounted for. So the amount of the payment will appear on the cash basis Profit and Loss in either of these two accounts.
- The dates are reversed – This is when you receive a payment, but the date is before the invoice it’s applied to. This one is a little more tricky and requires some more explanation. On a Cash Basis P&L, QB Online will see the payment first then put the amount in Unapplied Cash, if the date of invoice is also part of the date range of the report, then the amount of the payment will be reduced from the Unapplied Cash account, and then recognized according to the invoice/bill.
“HUH??? Say What?!?! Why?!?”
Let’s just take an Invoice/payment situation. Based on those pesky IRS rules, the payments are recognized as revenue on the date of the payment, but the invoice data hasn’t happened yet. So the only account that QBO has to use is the Unapplied Cash Payment account, so it puts the amount of the payment in there. If you apply the payment to a future dated transaction the report has to wait until that data happens to apply the amounts properly.
“Okay now I know how you got here, so how do I get rid of you??”
If the transaction is unapplied, then simply enough, edit the payment transaction and apply it to the corresponding Invoice/Bill. As long as the dates are in order (Invoice/Bill first, payment later), your cash basis report will look like you expect and it won’t have the Unapplied Cash Payment accounts at all.
Correct the dates of the transactions
If the dates are out of sequence (Payment first then Invoice) then correcting it requires you to answer the following question: “Are the dates accurate?”
If the answer is Yes, then edit the Invoice or Bill date to be before the date of the payment, or edit the payment to be after the Invoice or Bill. Once you do that, the payment will not be considered Unapplied and that account won’t show up. If the date of the payment and the date of the invoice are in the report, then the Unapplied Cash Account will wash out and the correct revenue accounts will be affected. If the dates span across different periods, you will see the Unapplied amount increase on the first report, then it will be decreased and the correct revenue accounts will be affected in the second report.
If the answer is No, the dates of the transactions should remain intact, then correcting becomes a little more trickier. Now we are entering into Unearned Revenue or Prepaid Expenses territory. In the case of a customer payment, that would be considered a deposit or retainer. In accounting terms, that is not recognized as income until the invoice is created. Unearned Revenue is a Liability Account and therefore shouldn’t hit the P&L at all. Check on this course to see how to handle that situation.
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