Many choose QuickBooks over other accounting software packages because of its flexibility and ease of use. One feature that defines and separates QuickBooks from its competition is the ability to convert reports from cash basis to accrual basis (or vice versa).  While this feature is a wonderful feature, there are some considerations to be aware of when using it.  First of all, the feature only works on accounts receivable or accounts payable balances by using QuickBooks transactions such as invoices, and their linked payment transactions to determine how the balance should show up on the balance sheet.  QuickBooks does its best to convert from one basis to the other, but there are some circumstances where it cannot convert an accrual balance sheet to the cash basis.  Because of the limitations, you may find that QuickBooks will show accounts receivable balances, even on the cash basis at times: QuickBooks uses the underlying account coded on the invoice or bill to convert the balance sheet to the cash basis.  For instance, if an accounts payable bill is coded to an expense account such as office supplies, QuickBooks will remove the accounts payable and office supplies balances from the statement if the bill had not been paid on the date of the report.  If the bill was paid on the date of the report, the accounts payable balance would already have been removed when the payment posted so there wouldn't be anything for QuickBooks to do to convert to cash.  If however that same bill was coded to a fixed asset account such as Computer Equipment, and unpaid on the date of the report, QuickBooks is not able to determine what should be done with the balances.  This issue will also come up if an accounts receivable invoices has been coded to a balance sheet account such as Prepaid Income.  Remember, QuickBooks will not be able to remove accounts receivable or accounts payable balances from a cash basis balance sheet if the underlying transactions are coded to balance sheet accounts.

Because of the vast amounts of transactions running through the accounts receivable and accounts payable accounts, its difficult to determine which transactions are the offending ones when finding accounts receivable and accounts payable balances on a cash basis balance sheet.  This simple procedure will help to find those transactions in almost all cases:

  1. Double-click on the accounts receivable or accounts payable balance amount showing up on the cash basis balance sheet to produce a detail report of all transactions in the report date range.  This report is likely a lengthy report with many transactions listed.
  2. Click on Modify Report and go to the Filters tab.  Highlight the Paid Status filter and select Open.  Click Ok to apply the changes.

After the modification, the report should be much shorter and look something like this:

Please note that the amount listed on the report matches the amount listed on the original cash basis balance sheet, and lists the offending transactions.  We see that in this case, these transactions were coded to the Inventory Asset account, so the correct entry to correct this on the cash basis will be a debit to the Inventory Account and a Credit to the Accounts Receivable account.  Of coarse, be careful not to make this entry in the QuickBooks file if the company uses the accrual based reports since that entry would render the accrual based reports incorrect.  For more information on how to make cash basis only adjustments that don't affect the accrual based reports or for more information about the implications of this article, give us a call.