Small businesses attempting to troubleshoot QuickBooks Accounts Receivable (A/R) and Accounts Payable (A/P) can often feel like the whole process amounts to monkey business.
Something way back when didn’t get entered correctly, and now you have to pay an expensive bill to your CPA to figure out where the problem is and how to fix it.
Except, maybe not.
In our CPA firm we see many small businesses make the same small handful of bookkeeping errors over and over again. With a little bit of knowledge of what A/R and A/P measure—and of how QuickBooks does the accounting for it—you might find out that you can fix a lot of problems with these accounts yourself. We’ve already written a blog post on some general DIY QuickBooks clean up, but for this article we’re going to delve further into one method to help you clean up A/R and A/P specifically.
Step 1: Make Sure You Know the Basics of A/R and A/P
We’ve already published two blog posts on this subject already, one on how A/R works in QuickBooks, and one on how A/P works in QuickBooks. Look over these articles and make sure you’re up to speed with how these two accounts work, then move on to Step 2.
Step 2: See If You Can Spot Any Obvious Errors on the Balance Sheet
Here are some procedures you can go through to spot errors in your accounting for A/R and A/P, just by looking at the balance sheet:
First, run a cash basis balance sheet. Do values generate for A/R and A/P accounts? If so, something has gone wrong. Remember from our articles on A/R and A/P (links in Step 1) that cash basis accounting doesn’t even track A/R and A/P. So if values for A/R and A/P are showing up at all on QuickBooks’ cash basis balance sheet, a transaction has clearly been mis-entered somewhere.
And by the way, here’s something to know about wacky A/R or A/P values on a cash basis balance sheet: If the balances for A/R or A/P show as negative numbers? What’s probably gone wrong here is that you’re receiving customer payments for work you never created an invoice for, and you’re paying bills to your vendors that you never entered a bill to match.
Note: It’s true, you can receive deposits from customers or pre-pay your bills, but those shouldn’t really show up in QuickBooks as negative asset or negative liability accounts, if you’re recording things right. Instead, the customer deposits should be a liability account, and the vendor pre-payments should be an asset account. Click the links for instructions on how to property record these types of transactions in QuickBooks.
Here’s one last bookkeeping error you can potentially spot. Look at A/R and A/P again on your accrual basis balance sheet. Do the numbers keep increasing from year to year, by a very large amount? Are they increasing drastically even though the size of your business is about the same from year to year? If A/R is massively (or even noticeably) increasing from year to year, this could be a sign that you have the opposite problem as described above. You’re creating invoices for your customers, but then not entering the payments as you receive them in QuickBooks.
Step 3: Isolating Which Customer/Vendor Accounts have A/R and A/P problems
If you’ve spotted problems with A/R and A/P in Step 2, then your next step is to isolate which customer accounts have the bad transactions, or the missing transactions, that are messing up A/R (or which vendor accounts have the bad transactions or missing transactions that are messing up A/P). If you’re comfortable with using Excel PivotTables (here’s a helpful tutorial if you’re not, it’s a four-part video series), then finding which accounts have the bad transactions doesn’t have to be too grinding of a task:
- Run a cash basis balance sheet in QuickBooks
- Double-click on the line for A/R or A/P to get a detail report, then export this detail report to Excel
- Fix the report formatting so you can easily convert the report into a PivotTable
- For A/R, debited amounts should be positive and credited amounts should be negative (since A/R is an asset)
- For A/P, credited amounts should be positive and debited amounts should be negative (since A/P is a liability)
- Create a PivotTable with Customer/Vendor Name as the first column and Amount as the second column. Filter out customers/vendors with accounts balances that are 0. What’s left are the customer/vendor accounts where there are problems.
Step 4: Fixing the Transactions
Unfortunately, for this last step it’s tough to give a good one-size-fits-all answer. But hopefully you understand enough at this point about how the accounting for A/R and A/P works in QuickBooks that you can figure out where you’ve gone wrong. If you’re missing invoices to match customer payments, add the matching invoices to QuickBooks. If you haven’t been entering bills before you record paying them, it’s a similar solution. If you spot a customer deposit or expense pre-payment that hasn’t been entered properly, you now know how to record it correctly to fix it. These fixes will likely address 90+% of your bookkeeping problems.
Some Final Tips
Here are some final tips we have to keep the accounting for A/R and A/P working smoothly:
Sometimes A/R can get messed up when you record credit memos, refunds, or customer discounts improperly. If you think these sorts of transactions might be your problem, we’ve included some links below to instructions on how to record these transactions correctly. Check the instructions against your own accounting and see if you can figure out where stuff might have gone wrong.
- How to Record Credit Memos (for entering returned items and refunds)
- How to Create Discount Items (don’t use this for early payment discounts)
- How to Calculate Early Payment Discounts (don’t use this for any other type of discount, like a sales promotion)
Also, sometimes A/P can get messed up when you wait a while to mail out checks after you’ve printed them. Be sure to mail out checks the same day you’ve printed them, if you can. If you don’t have enough money in your checking account to pay your bills yet, just wait to record making the payment. That’s what A/P is there to keep track of, anyway.