Excerpt from original Intuit article:
In Theory, the cash-basis balance sheet should not show Accounts Receivable (A/R) or Accounts Payable (A/P) balances because these accounts track open (unpaid) invoices and unpaid bills – Cash basis should never show open invoices an unpaid bills. Yet, for many companies, A/R and A/P accounts still show while in cash basis. QuickBooks was not designed to work well in cash-basis and reporting anomalies may result. The only way to assure that cash basis reports have no anomalies is to use only transactions that do not affect A/R or A/P.
For the discussions below, please be aware that every QuickBooks transaction has one source account and one or more target accounts. You can view the posted accounts in any transaction by running the Transaction Journal report. The first line of the Transaction Journal Report shows the source account. All subsequent lines in the transaction show the target accounts.
The root cause transactions, that cause a debit or credit balance are the following:
- An open invoice with sales tax if the preference is set to “As of invoice date (accrual basis).
- A check to a customer, recorded to the A/R account, but not linked to a credit memo.
- An open Invoice or statement charge with an inventory parts.
- A journal entry debiting A/R as the source account and crediting a balance sheet account as a target.
- A journal entry debiting A/R as a target account.
- Transferring a credit from one job for a customer to another job for the same customer before the journal entries are linked to the credit memo for one job and the invoice for the other job.
- An invoice with an item recording retainage to another current asset account.
- A payment from a customer not linked to an invoice.
- A payment linked to an invoice dated in the future if the report date is before the invoice date.
- A credit memo to a customer not linked to an invoice or a refund check.
- A deposit, recorded to the A/R account but not linked to a payment or an invoice.
- A journal entry crediting A/R as the source account and a target is a balance sheet account.
- A journal entry crediting A/R as a target account (e.g., transferring a credit to another job).
- A Bill from a vendor crediting a retainage payable account to reduce the amount due.
- A check or bill payment check not linked to a bill.
- A bill payment check linked to a bill with a future date if the report date is between the two dates.
- A journal entry debiting A/P as the source acct and a target is a balance sheet account.
- A journal entry debiting A/P as a target account.
- A credit card charge that relieves A/P that is not linked to a bill.
- A bill for an inventory part.
- A Bill offset to a balance sheet account.
- A journal entry crediting A/P as the source account and a target is a balance sheet account.
- A journal entry crediting A/P as a target account.
- Example 1: Open invoices that include Inventory Parts are included in the A/R balance on a Cash Basis Balance Sheet. The amount showing in A/R account is the amount posting to the Inventory Asset account as a credit. (The Source account is A/R and the target account is Inventory Asset and both are balance sheet accounts.)
- Example 2: Open bills that are entered to purchase Fixed Assets such as office Equipment will appear on A/P account on a Cash Basis Balance Sheet.(Source account is A/P and the account is Fixed Asset and both are balance sheet accounts.)
- Example 3: Open bills entered with Inventory Parts debit the Inventory Asset account credits A/P; (The source account is A/P and the target account is Inventory Asset both are Balance Sheet Accounts.)
- Example 4: A General Journal transaction that has an expense account (source) as a debit on the first line and the A/P account (target) on the second line as a credit will show on a Cash Basis Balance Sheet. Note: Reverse the lines by entering A/P account (source) credit on the first line and the expense account (target) as a debit as the second line. The transaction will not show on a Cash Basis Balance Sheet.)
- Example 5: A General Journal entry that has an Income account (source) on the first line as a credit and the A/R account (target) as a debit on the second line will show on a Cash Basis Balance Sheet. Reverse the lines by entering the A/R account (source) as a debit on the first line and the Income account (target) credit on the second line the transaction will not show on a Cash Basis Balance Sheet.