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QuickBooks Tips Blog

Why is a Balance Sheet in Cash/Accrual Basis Out of Balance?

Posted by Austin Walker on Jun 23, 2016 8:30:00 AM

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Your balance sheet not only plays an important role in attracting investors but also allows you to see what your company is worth is at the moment. The balance sheet reveals the financial position of the company at any particular point in time. It reports how much assets, liabilities, and equity the company has at a given time. It can easily show how much the company owns and owes.

It is important that the balance sheet is always correct. The assets should always be equal to the liabilities combined with the equity (Assets = Liabilities + Equity).

Managing the balance sheet

Unbalanced Balance Sheet

Having a difference between the total assets and the sum of the liabilities and equity raises a red flag. It means that something is wrong and actions need to be taken to balance it out. In QuickBooks, it is possible to have either the accrual basis or the cash basis that are not balanced. But in some instances, both report types display a discrepancy in your balance sheet.

QuickBooks automatically creates a balance sheet, thus eliminating some other issues that usually cause the report to be out of balance. However, there are still a few reasons why the report does not balance even when using accounting software.

1. Data damage

Most unusual behaviors in QuickBooks, such as sudden discrepancies in reports, are caused by the file being damaged. So, if you pulled up a balance sheet for "all dates" where everything is balanced while "this fiscal year" gives you an out-of-balance report, it is most likely to be transaction damage. As usual, depending on the extent of the damage, it may be fixed easily by re-sorting the lists and rebuilding the data.

2. Incorrectly linked or entered transactions

Some transactions, although they appear to be entered correctly, can push the Cash Basis out of balance. The usual scenarios include the use of credit memos for returned inventories, discounts for jobs, and general journal entries that offset other transactions. Such entries need to be located and corrected manually to fix the issue.

3. Multi-Currency 

When in multi-currency mode, the problem occurs when the exchange rate of the payment is different from the exchange rate from when the invoice was created. When this happens, the gain or loss does not reflect in the balance sheet, making it off by such-and-such an amount. This is already an identified issue within QuickBooks that has taken some time to be resolved, as it requires a major modification to the software. At the moment, QuickBooks users having this issue are being advised to sign up for an article to be notified if an update or fix becomes available.

Locate the Date and the Transaction Causing the Issue

If, after doing the basic data damage troubleshooting steps (which are to re-sort the lists and rebuild the file), the issue still persists, then we need to proceed to the next step. Make sure that at this stage, you have already determined whether the report is out of balance in either a cash or accrual basis, or both. It is important as these steps require report customization.

1. Find the date when the report went out of balance:

  1. Pull up a balance sheet summary report under "Company & Financial."
  2. Customize the report by either cash or accrual from the "Display" tab.
  3. Set the dates to "all" from the same tab, select "Year" in the "Display" columns by, then click OK.
  4. Select "Year" in "Show Columns" and compare the total assets with the total liabilities and equity to determine which year is out of balance.
  5. Re-customize the report for month, week, and day to find out the specific date(s) that the balance sheet came out of balance.

2. Locate the transaction:

After determining the specific date when the discrepancy occurred, move on by identifying the transaction in question. This includes both customer and vendor reports.

  1. From "Custom Reports," choose "Transaction Detail."
  2. Customize it by either cash or accrual basis, select the date identified on the previous process, and set "Total by to Customer" on the "Display" tab.
  3. Under "Filters", filter it by "Transaction Type," then "Multiple Transaction Types," and include "Invoice, Credit Memo and Payment." Click OK.

If the total balance is zero, then the problem was not caused by a customer transaction. But if the total balance is the out of balance amount, locate the customer who has a non-zero subtotal as it means that there is a damaged transaction for that customer. If the total balance is non-zero but not the discrepancy on the balance sheet, include other transaction types such as "Journal Entry."

When needed, proceed by re-customizing the report for vendors. Follow the same steps as above, but make sure to set "Total by to Vendor" and the "Multiple Transactions Types to Bill," "Bill Credit," and "Bill Payment." Check the total balance as the same idea applies as with the customer report.

Once the damaged transaction is identified, the easiest way to fix it is to delete and recreate the transaction. If the software won't allow it, standard and advanced data damage troubleshooting steps may be required.

Other Transactions

As mentioned, there are other transactions that can cause the balance sheet to be out of balance in cash basis. Make sure that these transactions are correctly entered.

Inventory return and discount applied on an invoice:

The invoice should include the sale and the discount. A credit memo must be created for the returned inventory and that the credit memo is supposed to be linked to the invoice when receiving payments.

Journal entry linked to a credit memo:

A journal entry was created to offset an existing credit memo and that the GJE is linked to the credit memo. If this transaction causes the discrepancy, edit the journal entry, making sure that the A/R account is the source or the first line. Check that the GJE is still linked to the credit memo.

Balance sheet account was used as a discount offset:

When using the Discounts & Credits button in customer payments, one must select an offset account where the discount will be recorded. Accidentally selecting a balance sheet account will make the balance sheet to be out of balance in cash basis. Make sure to change the offset account to either an income or expense account, but ideally, an expense account as it is you who is giving a discount to a customer.

  Avoid Year-End Bookkeeping

Topics: QuickBooks, QuickBooks Tips, Balance Sheet