How to handle A/R understatement

[thomtax]

I recently had a client come to me and ask me to take over doing their books that had been done recently by a local CPA firm. There were several problems in several areas, but am working through most of them.

However, I have one now that I am not sure of the exact procedures. It seems that they were showing the accounts receivable as a negative figure on the balance sheet. (Can't talk to them since they are mad they lost the account.) The amount actually should be a positive figure. I know this is a tax forum, but hope that some of you experts will put me on the right track as to entries to correct this.

Thanks.
LT

[Maribeth]

You have to determine the entries that should or should not have been posted to a/r. Once you have determined what is creating the negative balance, then you will have the information in order to make the correcting entries. If you are using QB, look for payments posted through the a/r system and also posted directly. Have your debits to a/r gone to another account and not to a/rt. What about the sales postings? Are the g/l accounts correct? Have the sales even been posted?

Also remember that if you are using your client's QB version, many times the entries made by the CPA to adjust the client's data in order to prepare the tax return, are not entered into the client's QB until much later, sometimes not at all.

The CPA that had the account before you may be mad that they lost the account. They also may be mad that they have not been paid. You might want to check that.

Maribeth

[BOB W]

You have to determine the entries that should or should not have been posted to a/r. Once you have determined what is creating the negative balance, then you will have the information in order to make the correcting entries. If you are using QB, look for payments posted through the a/r system and also posted directly. Have your debits to a/r gone to another account and not to a/rt. What about the sales postings? Are the g/l accounts correct? Have the sales even been posted?

Also remember that if you are using your client's QB version, many times the entries made by the CPA to adjust the client's data in order to prepare the tax return, are not entered into the client's QB until much later, sometimes not at all.

The CPA that had the account before you may be mad that they lost the account. They also may be mad that they have not been paid. You might want to check that.

Maribeth

I also agree with Maribeth. Be sure to check the beginning AR balance with the Tax return of last year to see how tied in they both are.

[thomtax]

You are both correct

The previous CPA is upset that he no longer has the account and therefor there is no cooperation.

Some facts that I probably should have put in, that may help give the overall picture.

1. The client gave to the CPA, each month, a copy of the checks written, the bank statement, and a monthly summary printout from the computer showing totals, by category, of services rendered. All postings were done at the cpa office.

What the client got back was:
1 - A balance sheet
2 - A P & L statement
3 - The bank statement
4 - A sheet showing what adjustments needed to be made to the checkbook to make it balance.
5 - A bill

There was nothing supporting and as I said, they are not forthcoming with any help.
They were paid in full the month after services terminated. I saw the check in the bank statement. Plus the client barely can read the bottom line and had no idea what was happening. That's not his field. Also, all the lady at the front desk knew nothing - she just provided the information requested and when the info came back from the firm, filed it.\.
I was told that the cpa office never asked any questions about any of the checks as to what they were for. The final break came when it was discovered that the payroll taxes had not been deposited for almost two years and the IRS got involved. There was a deposit coupon in the envelope mailed to them with the statements, but no one from
the office ever mentioned to the client that there was not a check made for the deposits. I don't know how they handled the returns in previous years without catching it, but oh well.
Apparently there was a big animosity between the client's clerk and the bookkeepers at the firm so there was no communication.

So now I am trying to pick up the pieces.

BTW - there is a new person handling things at the clients office.

Sorry to be so long.
LT

[Maribeth]

What type of entity is your client? Are they a cash or accrual basis taxpayer?

Maribeth

[Gretel]

I, too, wanted to ask the question about being on cash basis. Also if QuickBooks was used. It is very common in QB to have a negative balance in A/R if report are on cash basis.

[thomtax]

What type of entity is your client? Are they a cash or accrual basis taxpayer?

Maribeth

Cash basis

S corp

[taxcraft]

Negative Numbers

I'm not entirely sure of this but if you close the AR account into the Balance Sheet account(Sales) you will get the cash Sales and a zero ending AR balance. Then go through your list of outstanding open AR accounts to make an entry for the ending AR. Someone else might want to comment on this method.....its easier than other options.

__________________________________________________ _____________________
This post is for discussion purposes only and is not meant to be accurate advice.

[taxcraft]

See My Entry

See my entry under Negative Numbers

[thomtax]

I, too, wanted to ask the question about being on cash basis. Also if QuickBooks was used. It is very common in QB to have a negative balance in A/R if report are on cash basis.

The cpa firm did use QB. So, ok, I'm too dense to understand. How can the accounts receivable be negative, even though they always have outstanding accounts owed to them? Not arguing with you about what QB may do, just don't see how it can be correct.

LT

[BOB W]

The cpa firm did use QB. So, ok, I'm too dense to understand. How can the accounts receivable be negative, even though they always have outstanding accounts owed to them? Not arguing with you about what QB may do, just don't see how it can be correct.

LT

Since they are on a "cash basis", no one ever cared if the AR was correct or not. AR has nothing to do with completing the tax return. The negative may have been that way for years. Appearently the books were not fully kept on an accrual basis.

As Gretel posted : "It is very common in QB to have a negative balance in A/R if report is on cash basis.

[Gretel]

The cpa firm did use QB. So, ok, I'm too dense to understand. How can the accounts receivable be negative, even though they always have outstanding accounts owed to them? Not arguing with you about what QB may do, just don't see how it can be correct.

LT

QB works in it's own ways. There are adjustments that need to be done every year to come up with the correct income. The income probably was never reported correctly. Look at the report for Open Invoices. Any credits or payments not applied to invoices are also not included in income. Another cause is inventory if they have any. Yet another cause is an invoice wrongly coded to a balance sheet account.

[geekgirldany]

My biggest problem in QBs, A/R, A/P showing any number at all in cash basis. I've had to spend ALOT of time tracking down the problem. Gretel listed all the likely reasons why this may be showing. The way I have been tracking down is looking at the A/R account by doing a Quick Report. I go back as far as I have to... where it is either balancing out to zero and start from there. I then look at each customer individually and see if all payments were applied correctly. If you are dealing with inventory... it may be a big job.

[Gretel]

A way to pinpoint the differences the differences in A/R on cash basis is:

Once you opened the "Transaction by Account" report after double clicking A/R on the B/S modify the report - "Report Date Range" remove the "From" date and leave the "To" date - then click on the Filters tab - "Paid Status" open.

[thomtax]

Thanks

to all of the repliers. I stated that the previous cpa used QB and of course that is not available to me. I use Drake CWU.

But in these discussions a couple of points were made that has helped get me back on track. I have been used to accrual basis and was completely overlooking the obvious - cash basis. Thanks for the help getting my head back on straight.

LT