Balance Sheet changes after period closed - Cash Basis

JoshuaSuntide · ‎April 27, 2023

I have a tenant that overpaid their rent 5/3/22 and so had a credit balance of $6,266.83. In the following months of 2022 they short paid their rent a total of $2,800 but we did not apply that credit balance to their rent.

Now we decided to and so on 4/27/23 I went to Customer Center, right clicked on the Customer and clicked "Receive Payments" and applied that credit balance towards those balances in 2022.

The issue is that now my Balance Sheet A/R for 12/31/22 has different amounts than the Balance Sheet I provided the tax accountant on 12/31/22.

Is that ok that things will be different from what is filed on the taxes? Should I have done this differently? A less important questions is that since it is a closed period why does QB Desktop Enterprise 2023 allow it to change things that affect the balance sheet? ***Note: I am not getting an error on my balance sheet, this is more a question about the tax implications and the method of how to do this.

Rainflurry · ‎April 28, 2023

@JoshuaSuntide

A few things:

1) "I still have unpaid invoices from 2020 that I will eventually write of as bad debt straight from the A/R account."

How/why are you writing off uncollectible invoices to bad debt expense? Cash basis taxpayers do not have bad debt expense because they only report income when payment is received. If payment is never received, you should zero out the invoice - no income, no expense = $0 change in net income. Accrual basis taxpayers need to write off uncollectible A/R because the income was recognized when the invoice was issued and the bad debt expense offsets that.

2) "We do not use Prepaid rent in our accounting. We have been treating this as Accrual accounting until the end of the year and then providing a Cash Basis report for the tax accountant."

That makes perfect sense and, intuitively, you would think that would work. However, the issue is that the cash basis balance (BS) sheet shows A/R, which is a red flag. This is partly a limitation of QB. Since you received payments, QB will not ignore them when you run a cash basis BS, so it reports the cash in your bank account and the corresponding reduction in A/R. It's up to you or your tax accountant to determine why there is an A/R balance on your cash basis BS and make the necessary adjusting entries. Deposits are not income unless the deposit will be applied to rent, but other prepaid rent should be income when received.

3) "This is the first time I have realized that the when I apply credits or write off a debt, it is changing the previous years balance sheet/operating statement."

I'm confused. Are you trying to apply the credits to invoices dated in previous periods?

View solution in original post

Rustler · ‎April 28, 2023

The P&L is what feeds your tax filing primarily, I would check that. I think, think is the operative word here, that since you are filing on a cash basis, income may change as a result of applying the customer credit.

Rainflurry · ‎April 28, 2023

@JoshuaSuntide

When you received the overpayment on 5-3-22, did you record it under 'Receive Payment'? If so, that was not the proper way to do it as a cash basis taxpayer unless you applied the payment to an invoice for rental income. When you use 'Receive Payment' and leave the amount as a customer credit, you debit (increase) your bank account and credit (decrease) A/R. The problem with that is that cash basis accounting does not use A/R and any prepaid rent should be recorded as income to you, not a reduction in A/R (both credits in double-entry accounting). Then, the subsequent reduction in rent received will balance out the overpayment. Hopefully, your tax accountant realized that having a balance in A/R was improper for a cash basis taxpayer and was/will be able to adjust.

JoshuaSuntide · ‎April 28, 2023

When I received the payment I used Receive Payment because a portion of the payment was for an existing invoice but then it had a remaining credit. What would the proper way to do be?

JoshuaSuntide · ‎April 28, 2023

@Rainflurry

Also, what do I do now? I have a lot of Open A/R for many different customers, even going back to 2020. Is there a way to properly clear them out without it changing the CBBS?

JoshuaSuntide · ‎April 28, 2023

@Rustler

I did check and it does change the cash basis income.

Rainflurry · ‎April 28, 2023

@JoshuaSuntide

How did you end up with a balance in A/R when running a year-end balance sheet on cash basis? They must be either journal entries or payments received that were not applied to invoices (prepayments or overpayments). Or are there other entries hitting A/R when running a balance sheet on cash basis?

JoshuaSuntide · ‎April 28, 2023

@Rainflurry

Yes they are payments received that were not applied to invoices. Or they are credit memo's created for Op Cost Adjustments. One is rent received 12/22/23 for a 1/1/23 invoice.

Also I still have unpaid invoices from 2020 that I will eventually write of as bad debt straight from the A/R account.

We do not use Prepaid rent in our accounting. We have been treating this as Accrual accounting until the end of the year and then providing a Cash Basis report for the tax accountant. This is the first time I have realized that the when I apply credits or write off a debt, it is changing the previous years balance sheet/operating statement.

Rainflurry · ‎April 28, 2023

@JoshuaSuntide

A few things:

1) "I still have unpaid invoices from 2020 that I will eventually write of as bad debt straight from the A/R account."

How/why are you writing off uncollectible invoices to bad debt expense? Cash basis taxpayers do not have bad debt expense because they only report income when payment is received. If payment is never received, you should zero out the invoice - no income, no expense = $0 change in net income. Accrual basis taxpayers need to write off uncollectible A/R because the income was recognized when the invoice was issued and the bad debt expense offsets that.

2) "We do not use Prepaid rent in our accounting. We have been treating this as Accrual accounting until the end of the year and then providing a Cash Basis report for the tax accountant."

That makes perfect sense and, intuitively, you would think that would work. However, the issue is that the cash basis balance (BS) sheet shows A/R, which is a red flag. This is partly a limitation of QB. Since you received payments, QB will not ignore them when you run a cash basis BS, so it reports the cash in your bank account and the corresponding reduction in A/R. It's up to you or your tax accountant to determine why there is an A/R balance on your cash basis BS and make the necessary adjusting entries. Deposits are not income unless the deposit will be applied to rent, but other prepaid rent should be income when received.

3) "This is the first time I have realized that the when I apply credits or write off a debt, it is changing the previous years balance sheet/operating statement."

I'm confused. Are you trying to apply the credits to invoices dated in previous periods?

JoshuaSuntide · ‎June 26, 2023

Thank you for all of your feedback. I was able share these concerns with the tax accountant and they will work with things the way we do them now. Essentially doing accrual accounting with a Cash Basis report. I learned a lot from your responses.

QueenC · ‎June 26, 2023

Hi there.

You're most welcome! I appreciate you taking the time to let us know that the solution given by my colleagues was able to help you. I also applaud you for following the suggestions given and using all of your resources to come up with the solution you have right now.

As always, the Community is brimming with professionals who are knowledgeable in every aspect of QuickBooks, so if you need anything, don't hesitate to contact us here. We're always happy to help you along your road to victory. Wishing you and your business continued success!

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Balance Sheet changes after period closed - Cash Basis