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Cash Accounting Question - End of Year

Forum|Forum|4 years ago
January 1, 2022
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Hello,

I own rental properties and have invoices automatically generate on the 1st of each month for all of my tenants. Some tenants will pay before the first. When that happens, I am not able to receive their payment because there is no invoice date. A workaround I use is to find the upcoming invoice on memorized transaction list, open it, then close and save it. This will allow me to receive the payment for the upcoming invoice.

The problem I just discovered is that the payment gets recorded on the invoice date and not the received or deposited date, even though I am using cash accounting.

An example would be I receive a check from a tenant on Dec 31 for their January 2022 rent and I deposit it to my bank the same day. In QB(Desktop) I am not able to receive the payment without an invoice so I do my workaround of saving and closing the upcoming memorized transaction. Then I receive the payment and deposit it on the 31st.

Today is the first day of 2022 and I am trying to look at my totals for the year. I discovered that this particular payment is not showing up in 2021 totals since it gets recorded on the invoice date.

Why is QB doing this, it seems like for cash accounting, the payment would be recorded the day it is received and deposited. Is there a way to do things differently so income received in 2021 shows up in 2021 reports. I am using the cash option for my reports.

Thank you and Happy New Year!

QuickBooks Desktop

Best answer by BigRedConsulting

Interesting. In that case there are several ways you could handle this case:

- Don't post-date the invoice for rent when you receive the money early.

- Make a Journal adjustment to recognize the prepaid rent on 12/31 and a reversing entry on 1/1.

- Do neither and adjust the numbers directly on your taxes as appropriate.

R

Rasa-LilaM

I’m glad to see you in the Community, danh123.

Thank you for being detailed about your concern. This will guide us on how to get the payments to show in your reports (2021).

Cash basis reporting only shows income when cash is received and expenses once they’re paid. The date that will show for the payment is the time you receive the transaction and not the invoice date.

Let’s create a sales receipt since this transaction type is used to receive payment at the time of the sale. Once done, open the report again to check if the entry is posted in the correct year (2021).

If you continue to get the same result, run the Verify and Rebuild Data Utilities. These built-in tools will help determine and remove common data issues. Before proceeding, create a backup of the company file to keep a record of your transactions.

Once done, let’s start running the utilities. I’m here to help make sure the process is a breeze for you.

Navigate to the File menu at the top to choose Utilities and Rebuild Data.
Click OK to create a backup of the company file.
Press Save to keep the copy.
Tap the OK button once the Rebuild is completed.
Then, go back to the File menu to choose Utilities and Verify Data.

If it finds an issue, choose Rebuild or OK to continue using the company file. If none of these suggestions work, I recommend performing Solutions 2-4 in the following article: Fix data damage on your QuickBooks Desktop company file.

Let me share some resources to help you in the future. These articles contain solutions on how to resolve any damaged entries such as item history or transaction out of balance. You’ll also learn about setting up reporting preferences in QuickBooks Desktop (QBDT).

Click the Reply button below and post a comment if you have additional questions on how to handle your cash transactions and reporting. I’ll be right here to help and make sure this is taken care of for you. Enjoy your weekend.

D

danh123Author

Thank you for your reply. It sounds like my way of handling a rent payment from a customer who pays before the invoice date is not the correct way and maybe using a sales receipt is the correct method. Is that correct?

I have never used a sales receipt before. How exactly would it work? I clicked the link you sent but it doesn't address my situation.

Let's say I have a memorized monthly invoice that is going to be created on February 1 and a tenant pays me for February rent on January 28. Is the correct way to enter this payment to use a sales receipt? If that is the case, then what do I do once the invoice is created on February 1? Is there a way to apply the payment from the sales receipt to that invoice? Will the rent payment be recorded to January income when I enter the sales receipt or in February when the invoice is generated?

Also, what is the best way to change the 5 or so transactions that are currently linked to invoices for 2022 but were actually paid in 2021. Should I change the date of those invoices?

Then going forward I can use sales receipts for the early payers if that is the correct way to handle these transactions.

G

Giovann_G

I'll share the best way about handling rent payment from your customer, danh123.

Sales receipts and invoices are handled differently in QuickBooks. If your consumer agrees to pay you later, you can use an invoice. Then, when your consumer pays you on the spot, create a sales receipt. If your customer pays you in advance, the best to handle this is to delete the invoice and create a sales receipt to record the payment.

Here's how:

Go to the Customers menu, then select Create Sales Receipts/Enter Sales Receipt.
Choose a customer or job from the Customers: Job dropdown.
Fill in all the necessary information.
Once done, hit Save & Close.

You can open and delete the invoice for customers who pay in advance. Repeat the same process for payments made in 2021. You produce a sales receipt with the actual date of payments. Then, remove the invoices for the year 2022. This way, those transactions will reflect in 2021.

Check out the following resource below for more insights:

If customers want credit or refund for the products and services they paid for, you may learn more about the process in this article: Give your customer a credit or refund in QuickBooks Desktop for Windows.

You can reply again if you require further help with handling payments. I'll be here to help you.

BigRedConsulting

@danh123 RE: The problem I just discovered is that the payment gets recorded on the invoice date and not the received or deposited date, even though I am using cash accounting.

This is normal.QuickBooks is following GAAP rules for recognizing income on a modified cash basis.

- The P&L - even on a cash basis - isn't a cash flow report. It won't show you your total cash receipts for a period.

- Cash receipts are not the same as income in any case, (cash or accrual) because they might be for things that are not income, like sales tax on sales. Or, they might be things like unearned retainers, deposits to secure a future sale, or loan repayments, none of which are not income.

- Your cash-basis P&L will show income only after you received payment for a sale and you have earned the sale. This is key. In your case, you received the money and then later you earned it.

Here's the (GAAP/IRS) logic:

- If you receive a payment and don't apply it to a sale, then there is no income. Among other reasons, from an accounting POV there is no way to know what the payment is for unless it is applied to something.

- If you later complete a sale and record it, and you apply the payment to it, then you have a cash basis income event because by recording the sale you indicate that, on that date and not earlier, you earned the sale.

- QuickBooks uses the transaction dates you enter to determine the order of events, regardless of when you actually recorded the transactions.

- Based on the dates, in the case where the invoice follows the payment, there is no way to really know what the payment is for until the invoice date.

While in your case you have actually pre-recorded the sale, and so the payment is applied, this logic is still reasonable because until the actual date of the sale it is fair to assume the sale is not final - is not earned - and may be changed or may not actually happen (and that is in fact how some companies regularly operate.)

This seems to be the case for you as well. While your tenants may not be able to leave within days and so avoid the next month's rent, in theory you are earning your income each month based on the calendar. Consider if a tenant prepaid four months rent in December and then a month later gave notice and then moved out at the end of the third month. You would then owe the tenant a month's rent because you haven't earned it. This is, basically, why the GAAP & IRS logic allows you to defer reporting cash receipts until you earn them, and why the sale dates are used to recognize prepaid funds.

Rainflurry

@BigRedConsulting:

"This is, basically, why the GAAP & IRS logic allows you to defer reporting cash receipts until you earn them, and why the sale dates are used to recognize prepaid funds."

While that may be true for GAAP, the IRS requires prepaid rent to be recorded as income when received regardless of when it is earned:

Per the IRS:

Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.

BigRedConsultingAnswer

Interesting. In that case there are several ways you could handle this case:

- Don't post-date the invoice for rent when you receive the money early.

- Make a Journal adjustment to recognize the prepaid rent on 12/31 and a reversing entry on 1/1.

- Do neither and adjust the numbers directly on your taxes as appropriate.

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