Cash Basis Reporting

The purpose of Cash Basis Reports is to produce cash-based financial reports for the Balance Sheet and the Profit and Loss.

How is this accomplished in an accrual-based program?

  • 'Backing out' balances from balance sheet accounts that are linked accrued assets, liabilities and equities.
  • Moving these 'backed out' amounts into the P&L statement.
  • Determining whether the income and expenses on the P&L are paid or not.
  • If paid, they are kept on the report.
  • If NOT paid, the income and expenses are backed out.

When producing a Cash Basis Report, no actual adjustments will be made to G/L accounts, therefore you cannot drill-down on the Cash-basis reports.

What happens on the Balance Sheet:

  • All linked accruals such as A/R, and A/P will zero out.
  • Amounts zeroed out from the current year will be adjusted into Current Year Earnings (CYE)
  • Amounts zeroed out from previous years will be adjusted into Retained Earnings.

General Rules for the Balance Sheet:

  • When a balance sheet is run as of a particular date, under the accrual method, it includes balances on accounts that are accrued assets, accrued liabilities, and equity.
  • When a balance sheet is run as of a particular date, under the cash method, it will zero out balances in accrued assets, accrued liabilities, and equity accounts for those accounts that are also linked accounts.
  • All linked asset accounts for tracking receivables are accrued assets that are represented as income on the P&L.
  • If there is a linked asset account for tracking deposits paid to vendors, (expenses already paid but bills have not been recorded) the expense has to be declared on a cash basis P&L.
  • All linked liability accounts for tracking payables are accrued expenses that are represented as expenses on the P&L.
  • If there is a linked liability account for tracking customer deposits, (deposits received from customers but sales have not been recorded) the sale has to be declared on a cash basis P&L.
  • The Current Year Earnings equity account on the Balance Sheet must equal the Net Income (Loss) on a basic P&L, if the P&L is run for the same period.
  • Amounts backed out from the balance sheet will be adjusted to the Current Year Earnings and/ or Retained Earnings accounts.
  • The balance sheet backed out amount(s) that represent current period activity (net change) will be backed out of the Current Year Earnings account.
  • The balance sheet backed out amount(s) that represent prior year activity will be backed out of the Retained Earnings account.

What happens on the P&L:

  • Accumulators for Deferred Income and Expenses are created. All are accumulators only, not actual GL accounts.
  • The adjusted Current Year Earnings (CYE) figure from the Balance Sheet will be used to:
  • Adjust Deferred Income Accumulator for 'backed-out' accrued assets
  • Adjust Deferred Expense Accumulator for 'backed-out' accrued liabilities and equities. These accumulators will be reduced by finding OPEN sales and purchases as of the selected period, and backing them out from the Accrual Based Report. This will remove accrued expenses and income from the P&L.
  • An accumulator called Raw Materials Expenses accumulator will be used on the Profit and Loss statement when 'backing out' an unpaid purchase or putting back the expense for a paid purchase for an item that is an I Buy and I Inventory but not I Sell because a linked account is not provided for a Cost of Sales or Expense account associated for this option, we need to assign the unpaid purchase (the Accounts Payable value of the purchase) to this accumulator. Note: Raw Materials Expense accumulator is used only in the scenario stated above. Each of the accumulators will be displayed only if there is a non-zero amount.

General Rules for the Profit and Loss Statement

  • When a profit and loss statement is run for a particular time period, under the accrual method, it includes income and expenses that are accrued along with paid income and paid expenses.
  • When a profit and loss statement is run for a particular time period, under the cash method, it will attempt to remove income and expenses that are accrued and show only paid income and paid expenses.
  • When a profit and loss statement is run for a particular time period, under the cash method, it will go through the zeroing out process of accrual accounts that are on the balance sheet.
  • The adjusted Current Year Earnings (CYE) from the balance sheet should match the Net Income on the P&L if the P&L and balance sheet are run for the same time period.
  • Accumulators called "Adjustment for Deferred Income" and "Adjustment for Deferred Expenses" are created. These accumulators will work in a manner similar to the Gross Profit or Operating Profit lines on the profit and loss statement; they are not actual G/L accounts.
  • The sum of all accrued asset amounts that represent current period activity (net change) will be transferred to the "Adjustment for Deferred Income" accumulator.
  • The sum of all accrued liability and equity amounts that represent current period activity (net change) will be transferred to the "Adjustment for Deferred Expense" accumulator.

Adjusting The Profit & Loss Statement to Reflect a Cash Basis Report

When the user elects to run any type of cash-basis profit and loss statement, the backing out of the balance sheet linked accrual accounts must first take place for the time frame specified in the report customization window.

Once the balance sheet balances have moved over to the P&L into the deferred income or deferred expense accumulators, we can adjust the balances in these accumulators against the income and expense accounts on the P&L. To do this we need to determine the types of transactions that took place within the requested time period and do the adjustments. We must also observe the "Include 13 Period Transactions" check box from the report customization window and include 13th period transactions, if the check box is marked.

Not all types of transactions will be adjusted on the P&L. The following lists transactions that will be adjusted on the P&L:

  • Sales Invoices
  • Purchases (Bills)
  • Receive Payment (payments from customers)
  • Pay Bills (payments to suppliers)
  • Customer Discounts (entered in the Receive Payments or Settle Returns & Debits window)
  • Supplier Discounts (entered in the Pay Bills or Settle Returns & Debits window)
  • Settled Credits
  • Settled Debits
  • Credit Refund Checks
  • Debit Refund Deposits
  • Customer Deposit Transfers
  • Supplier Deposit Transfers
  • Pay Employees (Write Paychecks)

The following lists transactions that will not be adjusted on the P&L:

  • Historical Sales
  • Historical Purchases
  • General Journals
  • Spend Money
  • Receive Money
  • Customer Finance Charges
  • Customer Deposits (deposits on sales orders)
  • Supplier Finance Charges
  • Supplier Deposits (deposits on purchase orders)
  • Inventory Adjustments
  • Inventory Transfers
  • Bank Deposits
  • Electronic Payments

While historical sales and purchases have no cash impact, their payments do, therefore we will track customer payments and supplier payments for historical sales and purchases.

When producing the Cash Basis reports, AccountEdge does not determine whether the linked account it is accessing is a correct account. The software only goes by what is entered as the linked account. Because of this, it is very important to have your linked receivables and payable accounts set up correctly.

AccountEdge begins the process of producing cash based reports by looking at all linked accounts. If it is an accrued liability the balance will zero out and be placed into Deferred Expenses. Even if the account is not a liability account, but it is set up in as a linked liability account, it will be zeroed out and moved to deferred expenses. To access the Linked Accounts, go to the Setup Menu and select Linked Accounts.

If it is an accrued asset the balance will zero out and be placed into Deferred Income. Even if the account is not an asset account, but it is set up as a linked asset account, it will be zeroed out and moved to deferred income.

The software does not consider the allocation account on the transactions it zeroes out.