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terifromfinance
July 18, 2024
Question

Making adjusting entries makes the cash basis P&L incorrect

  • July 18, 2024
  • 2 replies
  • 0 views

Our invoices are set up to book to AR and Revenue when created. Our work is service-based and paid in advance, so we have not actually earned all revenue upon payment. We booked JE reclassing a portion of revenue to Deferred Revenue. This resulted in the cash-basis P&L showing the accrual-basis revenue (total billed less portion reclassed to Deferred Rev), even though on a cash basis, we've received all of that revenue. I tend to use the cash basis P&Ls as a shortcut to see what's been paid on a project, and I generally want reports in the system to be accurate. Does anyone know why this might happen? (In this case: the bill was created in Q2 and paid in Q3. The adjusting entry was posted to Q2; a cash-basis P&L run for Q2 alone shows negative revenue, in the amount reclassed)

    2 replies

    M
    Mark_AG
    July 18, 2024

    Hello there, @terifromfinance.

     

    Thank you for reaching out to the QuickBooks Community with your question. I understand the importance of having accurate financial reports, especially for managing your service-based business.

     

    When you adjust journal entries to reclass revenue to Deferred Revenue, it can affect the Cash Basis Profit & Loss (P&L) report in ways that might seem unexpected. Here's a breakdown of why this might happen:

     

    1. Cash Basis Reporting:
      • Adjusting journal entries impacts accrual-based reports because they do not directly involve cash. However, since your service was paid for in advance, the deferred revenue entry complicates the cash basis view.
    2. Timing of Transactions:
      • Since the invoice was created in Q2 but paid in Q3, your Q2 Cash Basis P&L should not show any revenue based on the received payment in Q3.
    3. Negative Revenue:
      • The negative revenue in your Q2 Cash Basis P&L is due to the adjusting entry reclassifying the revenue. While the money has been received, moving it to Deferred Revenue (a liability account) in Q2 is causing a conflicting appearance in your Cash Basis report because it reduces the revenue recognized in that period.

     

    To resolve this, follow the steps below:

     

    1. Adjust Report Parameters:
      • Run your Cash Basis P&L report for Q3 to see the revenue adequately recognized when the payment was actually received. Compare this with your Q2 accrual-basis P&L to understand the adjustments.
    2. Alternative Reports:
      • Consider running an Accounts Receivable Aging Summary or Detail report to see what has been billed versus what's been collected. This will help you quickly assess project collections without directly altering your P&L reporting view.
    3. Review Journal Entries:
      • Double-check the dates on your journal entries. Ensuring that the adjusting entries align appropriately with your intended reporting period for both accrual and cash basis can help minimize discrepancies.

     

    Furthermore, I recommend consulting with an accountant who can provide more detailed insights into managing these adjustments within your accounting framework. They can also help you clarify why your Cash Basis P&L appears incorrect and provide some guidance on how to address it.

     

    Moreover, you can also consider finding a QuickBooks Certified ProAdvisor to assist you with making these changes.

     

    Please let us know if you have any more questions about adjusting entries in QuickBooks Online. I'd gladly assist you at any time.

    T
    terifromfinanceAuthor
    July 22, 2024

    Hi Mark Angelo -

    "When you adjust journal entries to reclass revenue to Deferred Revenue, it can affect the Cash Basis Profit & Loss" << this is the part that is wrong. In cash basis accounting, there is no such account as deferred revenue, so a cash basis P&L should "ignore" any entries to that account by default. A cash-basis P&L should be reporting cash received in the report period as revenue, full stop. You can see from the comments below that this is an issue for QuickBooks users. While I can use the AR report to see client payments as well, I do want every report in the system to be accurate, and unfortunately as long as we are reclassing to deferred revenue, it seems they can't be. 

    I
    IrizA
    July 22, 2024

    Your insights are valuable to us as we strive to enhance our services, terifromfinance.

     

    Since you mentioned that the deferred revenue account appears when you pull up the Profit & Loss report using the cash method, I encourage you to submit your insights to our development team.

     

    Doing so will allow them to check and consider your suggestions in future updates. We sincerely appreciate your understanding and thank you for helping us improve QuickBooks Online (QBO).

     

    Here's how:

     

    1. Select the Gear icon, then choose Feedback.
    2. Enter your comments or product suggestions.
    3. Select Next to submit.

     

    You can track feature requests through the QuickBooks Online Feature Requests website.

     

    Once you want to use your report outside QuickBooks Online, you can print, export, or email it.

     

    We're still available if you want to share some insights or have further inquiries about the Profit and Loss report, terifromfinance. Please let us know in the comment section.

    Rainflurry
    Rainflurry
    July 19, 2024

    @terifromfinance 

     

    "This resulted in the cash-basis P&L showing the accrual-basis revenue (total billed less portion reclassed to Deferred Rev), even though on a cash basis, we've received all of that revenue. I tend to use the cash basis P&Ls as a shortcut to see what's been paid on a project, and I generally want reports in the system to be accurate. Does anyone know why this might happen?"

     

    This is a common complaint about QB.  The issue is that journal entries (JEs) are reported on both cash and accrual basis reports and there's no way to change it.  For years, users have been requesting a simple check box when creating a JE that would allow them to be ignored when running cash basis reports.   

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