The business keeps it books and records on the cash basis. When downloading banking activity for the prior 2 years, the bookkeeper did not attempt to match deposits against existing AR. So, at the end of each year, income is reported for cash basis, and income is also recognized on the accrual basis as cash received while also having recognized as income when the original AR was recorded.
So, on the accrual basis, income/retained earnings is overstated, as well as the current AR balance.
The business now wants to clear all of the AR out, and correct the accrual based retained earnings so they can run an accrual based P&L for potential lenders.
We have tried issuing credit memo's (bad debt expense) to record payment against the AR, but this results in an adjustment to bad debt and the recognition of income on the cash basis statements - now overstating gross income (although it has a corresponding bad debt expense).
We tried to set up the credit memo noninventory item as a retained earnings adjustment, rather than as bad debt expense, but then it adjusted our Cash Basis retained earnings as well.
We even toggled the company's accounting method to Accrual, and then tried the adjustments above to see if the AR/Retained Earnings offset would only be applied to the Accrual basis books, but it still showed up as a cash basis adjustment to Retained Earnings.
How do we clear out AR that has already been closed out into the Accrual-based retained earnings, without affecting Cash-based retained earnings, income or expense?
