AR Transaction differences in CASH vs ACCRUAL

chadwixk · ‎November 03, 2022

The Problem

Our balance sheet shows 2 different values for AR based on if it is run in Cash vs Accrual mode. Cash mode has a much higher AR balance vs Accrual as only one type of "revenue in" transaction (bank deposits recorded as payments against journal entries) is being recognized in the Cash list of transactions that reduce AR.

The Question

Trying to figure out the reason for the differences. I understand Cash (when you actually receive payment) vs Accrual (when you recognize the revenue via the Invoice date). (Yes, those are simplied explainations of Cash vs Accrual I know). But I don't understand why, when I click on the Balance Sheet AR account to see the detailed transactions, some of those transactions show up in the Cash transactions, some in the Accrual list of transactions, and some show up in both. Note I'm a business owner, not an accountant and just trying to learn/understand what is going on and how to correct the way we're recording revenue payments.

Summary of which transactions show in which list (Accrual vs Cash):

	Accrual	Cash	Comments
Invoices	X		Expected
Invoice Payments	X		Expected
Journal Entries	X	X	Thought would only show in Accrual
Bank Deposits (Recorded as Deposits)	X		Thought would show in Cash only
Bank Deposits (Recorded as Payments)	X	X	Thought would show in Accrual only

Details

We track AR and Payments differently for 2 different types of customers: Individuals and Businesses.

Individuals as Customers

We have a software system we use that manages customer billing for individuals. It posts journal entries weekly to debit AR and credit services revenue. These Journal Entries show up in both ACCRUAL and CASH transaction lists. Then bank EFT deposits are recorded as a DEPOSIT Received From "Individual" to account AR. These show up in the ACCRUAL transaction list and not the CASH transaction list. This confuses me, I'd expect the opposite as it is a simple deposit not tied to any prior revenue recognition transaction like an Invoice.

Sometimes QB had matched the bank deposit amount to an outstanding Journal Entry and suggested it to be a payment, which I accepted, so it recorded it as a PAYMENT to that journal entry. In this case, these show up in the CASH transaction list, but not the ACCRUAL (opposite of above DEPOSIT scenario).

So should we always record bank deposits that represent individual payments as PAYMENTS to these journal entries instead of simply DEPOSITS with a Received From: Individual?

Business Customers

For these, we create explicit invoices and record payments. These both (Invoice and Payment) only show in the ACCRUAL list of transactions (which is what I'd expect).

MichelleBh · ‎November 03, 2022

I appreciate you for sharing a detailed scenario of your concern, @chadwixk. The information is helpful.

I'll explain how the transactions will be recorded in QuickBooks Online's Balance Sheet report. This way, I can guide you appropriately in recording your revenue payments and reduce confusion.

The Journal Entry (JE) transaction will post directly to your account. Hence, it will always show on your reports regardless of the accounting method used (cash or accrual basis). That said, the illustration you provided for JE is also correct.

Bank deposits recorded as "deposits" will appear as Accrual, while those posted as payments will show as Cash. Thus, your sample image is also correct.

To answer your question, it is up to you what transaction type will meet your business needs. Let me explain the effects or benefits of using JE and Deposits for a better understanding:

JE:

Enter debits and credits manually, like in traditional accounting systems.
Transfer money between income and expense accounts.
Transfer money from an asset, liability, or equity account to an income or expense account.
Move money between accounts and force your books to balance in specific ways.
When you buy goods, it increases both the inventory also the accounts payable.

Bank deposits:

It allows you to get customer-level detail later.
It gets the cash into your checking account as quickly as possible.
It enables you to record daily "lump sum" sales promptly and efficiently.
Group payments together into a single bank deposit record.

If you're unsure, I'd recommend speaking with an accountant. They can advise and assist you in determining the transaction best suits your company's needs.

Check out this link to learn more about why balance sheet reports do not match up with other reports, even when all filters are set to the same: Run a Balance Sheet report in QuickBooks Online.

Furthermore, visit the articles below on how to manage a chart of accounts and accounts receivable in QuickBooks:

Drop me a line if you have follow-up questions about the explanation above, and I'll get back to you. Keep safe.

Rainflurry · ‎November 03, 2022

@chadwixk

The bottom line is that cash vs. accrual reports only work when you use invoices for customers and bills for vendors. Journal entries bypass QBO's ability to run accurate cash vs. accrual reports. So, if you use journal entries in place of invoices or bills, your accrual vs. cash reports will be wildly inaccurate.

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