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Accrual vs. Cash Basis Accounting

Receivables handles transactions differently depending on the method of accounting you use.

Accrual Accounting Cash Basis Accounting
   
Creation of transactions such as invoices, debit memos, deposits and chargebacks affect the account balances immediately. There is no effect on the account balances until payment is received to close the transactions.
Accounting Rules may be used to recognize revenue across different periods. Accounting Rules are redundant as revenue will be recognized only when payment is received.
Receipts can be reversed using the Standard Reversal or Debit memo reversal. Receipts can be reversed using the Standard Reversal only. Debit Memo reversal is not permitted.
Automatic receipts such as Direct Debits and Bills of Exchange affect the cash balance only when the receipts are cleared. Automatic receipts affect the cash balance on the maturity date, if the GL date = maturity date or on the GL date, if the GL date is after the maturity date.
Deposits and Guarantees both affect on-account balances in Receivables. Guarantees do not affect on-account balances since there is no exchange of cash. In the case of deposits, the cash collected on deposits will be posted to the revenue account of the deposit instead of that of the invoice against the deposit. Use the Other Application report to view all invoices against deposits.
Table 1 - 97. (Table 1 of 1)

Adjustments (Cash Basis Accounting)

When you create an adjustment that has the same sign as that of the related transaction, the adjustment amount goes to a separate adjustment account, instead of increasing the balance of the original revenue account.

Consider an example of an invoice created for $1000, followed by an adjustment for $100. The full amount of $1100 is paid off. The following journal entry is created when cash is received:

DR Cash $1100
CR Revenue $1000
CR Adjustment $100

You have to set up an adjustment account (which is the same as the revenue account) if you want the adjustment to hit the original revenue account. In this case the journal entry would be:

DR Cash $1100
CR Revenue $1000 (Original amount)
CR Revenue $100 (Adjustment)

In case of multiple line invoices, Receivables creates a separate account to record the full adjustment. Consider an example:

DR Cash $1100
CR Line #1 Revenue $800
CR Line #2 Revenue $200
CR Adjustment $100

If you want to prorate the adjustment across the two revenue accounts, you will have to specifically enter two adjustments of $80 and $20 each to hit the two different revenue accounts. In this scenario, the journal entry would be as follows:

DR Cash $1100
CR Line #1 Revenue $800 (Original amount)
CR Line #1 Revenue $80 (Adjustment)
CR Line #2 Revenue $200 (Original amount)
CR Line #2 Revenue $20 (Adjustment)

If you make an adjustment that has an opposite sign to the transaction it is adjusting, Receivables does not record the adjustment in a separate account. Instead, Receivables subtracts the adjustment from the Revenue account.

Consider an example of an invoice for $2000. If you make an adjustment of -$200 to it, there will be only one journal entry at the time of receipt of cash:

DR Cash $1800
CR Revenue $1800

The adjustment is not recorded anywhere, it is taken into account by reducing the revenue by the $200.

Chargebacks

When a partial payment is received against an invoice, and you create a chargeback for the remaining amount due, the journal entry created is:

DR Cash $800
CR Revenue (invoice) $800

No entry will be created when a chargeback is created for the balance $200. However, when cash is received against this chargeback the following journal entry is created:

DR Cash $200
CR Chargeback Adjustment $200

Credit Memos and On-Account Credits

Regular credit memos will not be posted, as no cash is exchanged. Therefore, if you use credit memos, ensure that the accounts on the credit memo are the same as those on the invoices associated with the credit memos. You can achieve this by setting your profile option AR: Use Invoice Accounting For Credit Memos to Yes.

An on-account credit will be posted when it is applied to an invoice or combined with a cash receipt.

Consider the journal entries created in the following instances:

An on-account credit is issued. No journal entry is created.

The on-account credit is applied to an invoice for $100.

DR Revenue (on-account credit) $100
CR Revenue (invoice) $100

Instead of applying the on-account credit memo to an invoice, the user combines it with a cash receipt of $200.

DR Cash $200
CR Unapplied Cash $200
DR Revenue (on-account credit) $100
CR Unapplied Cash $100

By applying the on-account credit to a cash receipt, the available unapplied cash balance is increased from $200 to $300. The user applies the $300 unapplied cash balance to an invoice.

DR Unapplied Cash $300
CR Revenue (Invoice) $300

See Also

Accounting for Transactions (Accrual method)

Journal Entries

Preparing Receivables

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