17 Nov How to Handle the Cash versus Accrual
The first and easiest approach is to decide that the software is technically correct, and leave it as is. A review of the open invoices and unpaid bills with their account coding will usually confirm that this is correct.
The most efficient way to do this is to perform the following procedures:
1. Create a Balance Sheet and change the date as needed
2. Confirm the report basis is cash
3. Create an open invoice and/or unpaid bills report as of the report date and confirm there are not any transactions that have not been “linked.”
4. If Accounts Receivable or Accounts Payable still has a balance, double click on it. This will create a report for the activity for the period
5. Click on modify report and then filters
6. Change the paid status to open. This will provide a list of the transactions and amounts that are coded to a Balance Sheet account and have not been reversed automatically. It is possible that the date range will need to be adjusted and add any unlinked payments (payments are, by default, considered closed transactions even if they have not been linked to another transaction).
7. It may prove helpful to modify the report to include the item column (check it on the display tab). Usually the transactions are sales tax, inventory, customer deposit liabilities, etc.
8. If the situation is not clear, it is possible to double click on the transaction to get to the form and then choose Reports > Transaction Journal to see the actual journal entry created by the form. This is specifically important for inventory items that do not show as a dollar amount on the invoice (COGS is based on average cost). Note: Any transactions that have been partially paid will be prorated to each line on the invoice.
Depending on the reporting basis of the financial statements and any related rules, it may be preferred to make a journal entry to reclassify the balance to a prepaid or accrued account, respectively. That is the second approach.
The second approach would be to make a journal entry to reclassify the balance. This approach works because journal entries are assumed to be on a cash basis as long as the A/R or A/P amount is not on the first line of the entry. The journal entry can only have one Accounts Receivable or Accounts Payable account and will need a customer or vendor for each Accounts Receivable or Accounts Payable transaction, respectively. Creating a Misc A/R customer or Misc A/P vendor will eliminate extraneous transactions in the history of any actual customers or vendors. The first day of the subsequent period, the journal entry should be reversed to eliminate the activity in Accounts Payable or Accounts Receivable. Keep in mind that the entry should typically be to a prepaid or accrued account, or to the actual Balance Sheet account that has been affected by the transaction based on the research performed in the first approach. An entry to income or cost of goods sold type accounts is incorrect. That is not the origination of the issue and doing so will distort both the Balance Sheet and Profit & Loss reports.