Three reports are the mainstay of financial reporting, 1) balance sheet, 2) profit & loss statement and 3) statement of cash flows. In this article, the balance sheet and some issues commonly seen in QuickBooks with it are addressed.
The balance sheet is the common moniker for the Statement of Financial Position. It lists a company’s financial position with its assets, liabilities and equity. The assets provide future value to a company, the liabilities are future costs and the equity is the net worth.
I. Finding Errors
The balance sheet may be used as one method to find errors in QuickBooks. Please note, this is not the only way to find errors, but one of them.
Run a balance sheet on any given date as either accrual or cash. Then change the reporting method to the other method, i.e., if you ran it as accrual now run it as cash or vice versa. Make sure both of the balance sheets balance. If they do not balance, run balance sheets at past dates to determine the date they went out of balance. For instance, if you run both an accrual and a cash basis balance sheet as of 9/30/2012 and one of the balance sheets does not balance, you will need to go back further until you find a date at which they balance. More about this later.
Here is a step-by-step method to get you started:
Open a balance sheet for the current period, put your cursor on the date and touch the letter “r’ on your keyboard. That will change the report to the end of the current year. Then select “collapse” at the top of this report. This will make the report more concise so it is easier to work with. Set the Show Columns to “Year.”
Customize Show Columns on Balance Sheet
Now go to Customize Report. Set the beginning date back a few years; make sure the Display Columns drop-down is set to “Year.” Now click on OK.
Customize Balance Sheet
You can now check to see if any years have a balance sheet out of balance. In this sample, the years shown do balance. Note this report has been run on the accrual basis.
Accrual Basis Balance Sheet
Now go back to customize and change this report to a cash basis report. Leave everything else the same.
Cash Basis Balance Sheet
In this case they also balance. But if one year did not balance you would continue this process by running balance sheets first by the year. Once you identify the year, you could run this by the month and then work your way down to the day, each time selecting options to display the data by smaller and smaller date increments (year, month, week, day, etc.). Once you have found the actual date you can look at the transactions for that day, and easily find the offending one and correct it. (Author’s note: I used this procedure in 2014 and found 2 errors in the client’s file. One error occurred in December 2002 and the other in September 2003.)
II. Cash Basis Balance Sheet Still Has Amounts in AR and AP
A frequent issue that appears is an amount in accounts receivable or accounts payable when a cash basis balance sheet is run. First let’s look at what happens when you convert that report from accrual to cash. QuickBooks addresses items that appear on the profit and loss / income statement; however, the conversion does not fully address items on the balance sheet. Now we should consider what you can do to determine the remaining items and what you should do with them.
Below is an example of an accrual balance sheet. Note the balance of $97,003.97 in accounts receivable.
A/R on Accrual Balance Sheet
Now look at the same balance sheet on a cash basis (below).
A/R remains on the Cash Balance Sheet
In the above example A/R (accounts receivable) still has a balance of $5,531.73. Here is how you can find what is causing this.
Double click on the accounts receivable amount. QuickBooks will open a Transaction by Account report that looks similar to the one below.
QuickZoon Transaction Report
Now customize this report to find out what is making up the balance. Select Customize Report, and then change the date range to all because you need to include all transactions in this account going back to the beginning of this file. Next pick the filters tab, then select Paid Status and click on the radio button that indicates Open. Now click OK. QuickBooks will recompile the Transaction by Account report to look similar to the one below.
Customized Detail Report
You can now see the transactions that make up the balance of $5,531.73. Note that the entries are all associated with balance sheet accounts. There are not any entries linked to income statement accounts.
Now, I’m sure you want to know 2 things: 1) why is this happening and 2) what can you do about it?
- This happens because when QuickBooks creates a cash basis balance sheet, it removes transactions from the income statement. These remaining transactions are all related to balance sheet accounts.
- For many people this is not an issue. However for CPAs, EAs and other tax preparers that need to prepare a cash basis tax return or cash basis financial reports, it is a real issue.
- Adjust these transactions with a journal entry effective the last day of the reporting period and then reverse the journal entry on the first day of the next reporting period.
- Some accountants choose not to make these adjustments on the client’s copy of the books unless they give the client a careful explanation as to the new entries, and so they make the adjustments only on a copy of QuickBooks that they keep in their office to match the tax return with their financial reports.
- On the other hand, many accountants will either make the adjustment in the client’s books, or send the client adjusting entries to make both the correction and reversal so that the client’s books also match the tax records.
When you make such entries, QuickBooks will want you to designate this as an adjusting entry. Technically this is not an adjusting entry; it is a reclass entry and should be marked as an RJE (reclass journal entry). A reclass journal entry is created when the debit and credit of the transaction is booked to the financial statement as it would be in this case. An adjusting journal entry is one that occurs across financial statements. Since QuickBooks does not have an option to mark RJE entries, you will have to enter it as an AJE (adjusting journal entry).
About the author:
Marilyn Sudbeck, CPA is an Advanced Certified QuickBooks ProAdvisor in Lakewood, CO. She is a member of Intuitive Accountant's 2014 Top 100 QuickBooks ProAdvisors, and a Charter Member Intuit Trainer/Writer Network (only Colorado member). Marilyn is also an Intuit Premier Reseller (Charter Member), Former Member - Intuit Advisory Council for QB Enterprise/POS, and Co-author of various Intuit Training Materials for POS certification.