You are using QuickBooks Online (QBO) and you have prepared a report in cash basis. You have noticed two strange lines on your Profit & Loss report. These are the Unapplied Cash Payment Income and Unapplied Cash Bill Payment Expense accounts.
You may have wondered why Unapplied Cash Payments in QBO appear on your cash basis reports. What makes up these amounts? In this article, we go behind the scenes to explain what is going on.
How are cash basis reports different from accrual basis reports in QBO?
For cash basis reports, revenue (or income) is recognized when a customer payment is received. Additionally, expenses are recognized when an expense is paid. There is a difference between accrual and cash basis reports, but with cash basis, timing is everything.
When you are preparing some reports in QBO you have the option of choosing either cash or accrual basis as the accounting method. You may have wondered:
- Does it matter which basis I choose?
- Will the amounts be different if I choose cash vs accrual basis?
- Can I switch back and forth between the two methods?
It can definitely matter which basis you choose. Both can be accurate, but some amounts can differ between the two reports. This is especially true for the amounts on your Profit & Loss report.
You can toggle between the two methods on the report screen in QBO, but most times you will need to provide the same basis reports each year to your tax professional to use for the preparation of your taxes.
What makes up the amount for Unapplied Cash Payment Income?
Let’s first talk about the Unapplied Cash Payment Income account. On a cash basis, revenue is recorded when a customer payment is received. This means that if you invoice a customer on 12/31/2021, and receive the customer payment on 01/15/2022, on a cash basis, the revenue is recognized on 01/15/2022.
Things get tricky with cash basis when a customer payment is received before the date of the related invoice. Let’s look at an example:
- Your customer overpays $500 on 12/15/2021
- You issue an invoice for $700 on 01/15/2022
- You apply the $500 customer overpayment to the invoice dated 01/15/2022 on 01/15/2022
- On a cash basis Profit & Loss report there will be a positive, or credit, transaction dated 12/15/2021 in Unapplied Cash Payment Income of $500
Here’s the tricky part. Since the revenue was recognized on 12/15/2021, QBO does not want to recognize it again on 01/15/2022.
This means that on 01/15/2022, QBO records:
- An increase, or credit, of $500 to the income account associated with the 01/15/2022 invoice
- And a negative, or debit, of $500 to the Unapplied Cash Payment Income account
- The net result to the Unapplied Cash Payment Income for 12/15/2021 and 01/15/2022 is zero
This is why you may see both positive and negative transactions in this account on a cash basis report. Depending on the net result of the transactions, you may see either a positive or negative amount on your Profit & Loss report.
Like we said earlier, it is all about timing.
What makes up the amount for Unapplied Cash Payment Expense?
Something similar happens with expenses. For a cash basis, expenses are recognized when an expense is paid. This means that if you enter a bill dated on 12/31/2021 but do not pay the bill until 01/15/2022, the expense is recognized on 01/15/2022.
Things get tricky with cash basis, when a bill payment is paid before the bill date. Here’s an example we see frequently:
- A bill for $1,000 for rent expense is dated 01/01/2022
- A bill payment for $1,000 is dated and paid on 12/31/2021 for the 01/01/2022 bill
- On a cash basis Profit & Loss report, there will be a positive, or debit, transaction on 12/31/21 in Unapplied Cash Payment Expense for $1,000
Again, here’s the tricky part. Since the expense was recognized on 12/31/2021, QBO does not want to recognize it again on 01/01/2022.
To adjust for this, on 01/01/2022, QBO records:
- An increase, or debit, of $1,000 to rent expense
- And a negative, or credit, of $1,000 to the Unapplied Cash Payment Expense account
- The net result to the Unapplied Cash Payment for 12/30/2021 and 01/01/2022 is zero.
Just like with the income side of things, you may see both positive and negative transactions in this account on a cash basis. And depending on the net result of the transactions, you may see either a positive or negative amount on your Profit & Loss report.
When working with cash basis, Unapplied Cash payments in QBO are a common occurrence. Does all of this leave you feeling overwhelmed? There is no need! Reach out to begin your journey with bookkeepers who understand both the numbers behind your business and the numbers behind the numbers. Here at Beyond, we love this kind of stuff!