Accounts Receivable vs. Payable on a Cash-Basis Balance Sheet
You keep your books based on the accrual method for reporting income and expenses, and you prepare your taxes on a cash basis. Accounts receivable and accounts payable appear on your balance sheet both ways, even though they should not appear on a cash basis. We will identify why they occur and suggest a few solutions to address them.
1. Due to a Previous Adjusting Journal Entry
A previous adjusting journal entry affects increases or decreases to a specific account, which affects the balance of an account on the balance sheet. In other words, an adjusting journal entry may have increased or decreased accounts receivable or accounts payable, which will cause them to be reported on the balance sheet even though they should not.
1.1. Accounts Receivable
A business is not purchasing inventory; it is purchasing cash. The difference is that companies are not buying the stock until it is needed, so there is no market for those items. Because of this, they will not receive payments until they sell the items. The balance sheet should not show a line item for receivables because they are nonexistent in the short term.
1.2. Accounts Payable
On a cash basis, sales are recorded when they are completed, not when they are received. The balance sheet should not show a line item for payables because you are not purchasing items until you need them. Furthermore, you do not owe others cash until you have received it.
2. Deposits to the AR Account Before Invoicing Them Creates a Credit Balance in the AR Account
Accounts receivable are assets, so they are reported on the balance sheet. Your balance sheet will show if your AR account is a positive or negative balance or in the black. However, you will also have your AR account listed as a liability.
To have a credit balance in your AR account, you have to deposit more money than you bill. If you are billing a client $20,000, but you deposit $30,000 for the credit balance, the credit balance does not belong on the balance sheet.
3. Entering Deposits to Vendors Before Billing Creates a Debit Total in the AP Account
Your balance sheet should never show a debit total in the accounts payable account. For one thing, you will lose money if you have to pay vendors before you receive payment from your clients. However, there is also the fact that vendors are not inventory suppliers. They are suppliers of your inventory when you take possession of it, but they are not on your balance sheet until then.
4. Receiving Payment Entries Not Applied to Invoices or Bill Payments
If a business uses the cash basis method, entries in the general ledger are not applied to either invoices or bill payments. These are typically incoming or outgoing payments that are not yet complete. For example, if a sale is made and the business does not yet receive compensation, it will not be recorded in accounting until payment is received.
Therefore, the receivable account will show a higher balance than the sale. Likewise, if a business writes a check for a purchase before accepting it, the receivable account will display a lower balance than the expense account.
Conclusion
This post taught you the differences between a cash-basis balance sheet and an accrual-basis balance sheet. We have also taught you how to identify the irregular discrepancies that may appear in a cash-basis balance sheet from the accrual-basis balance sheet. If you apply these skills, you will be able to use the information on your balance sheet to make sound business decisions.
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