Why QuickBooks Needs Adjustments for Cash Basis

Most small businesses use cash-basis accounting for taxes (counting income and expenses when cash changes hands). QuickBooks is designed primarily for accrual-basis accounting, which recognizes income and expenses when earned or incurred. This mismatch can cause problems in your tax reporting, and QuickBooks itself suggests manual fixes.

Step 1: Run Two Accrual-Basis Profit & Loss Reports

• One for the current year-end (e.g., December 31, 2016)

• One for the previous year-end (e.g., December 31, 2015)

Step 2: Analyze Accounts Receivable Changes

Compare the Accounts Receivable balance on both reports and compute the difference.

Example: If A/R was $20,000 in 2015 and $30,000 in 2016, it grew by $10,000. For cash-basis tax purposes, that $10,000 should not be counted as 2016 income because it wasn’t collected in cash yet.

Step 3: Post the Adjustments to Convert to Cash Basis

• Reduce Accounts Receivable by the full current amount (e.g., $30,000)

• Reduce current-year Sales by the growth amount (e.g., $10,000)

• Reduce beginning Owner’s Equity by the prior-year amount (e.g., $20,000)

Your books should still balance after these changes.

Time-Saving Options

The easy way is to export your reports to Excel and make the adjustments there. You can also use QuickBooks general ledger entries or set up temporary accounts to post corrections.

Don’t Forget Related Items

Similar adjustments may be needed for inventory, sales tax payable, and accounts payable to complete the cash-basis conversion.