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Is past due invoice an liability item under cash basis?

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#1
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I understand under cash basis, there is no account receivable or account payable on the balance sheet as transactions are not recorded until there is a related change in cash.

Let's say the business purchased $5,000 of merchandises in 2018 but it was not paid for by the end of the year. In this case, does the $5,000 go on the 2018 year end balance sheet as an liability item?
 

#2
Chay  
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Looks like you answered your own question before you even asked it.
 

#3
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I understand, as account payable, it will not be on the balance sheet. I was just wondering if it would go onto the balance sheet as another liability item such as a 'loan'.
 

#4
Chay  
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The substance of a transaction doesn't change based on the method of accounting a business uses. If the amount is a loan, then it's a loan under both the cash and the accrual methods.

Based on how you approached the question, it sounds like you already know the amount is an account payable and not a loan. You also know how accounts payable should be handled under the cash method. Thus my observation that you've answered your own question.
 

#5
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How to distinguish between account payable and a loan anyway? In layman's terms, I guess what he owed to the supplier can be called a loan too. But does accounting standards specifically categorize such an outstanding balance as 'account payable'

Or would it be a completely different scenario if he had borrowed from another person to pay the supplier before the end of the year?

Sorry I may be asking dumb questions and I admit I am quite weak in this area.
 

#6
Chay  
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taxtothebest wrote:I guess what he owed to the supplier can be called a loan too.

I don't think it could. If I loan you something, then you have to give it back to me. The taxpayer doesn't have to give back whatever he received from the supplier. Instead, he has to pay money for it. Thus, it isn't a loan.

does accounting standards specifically categorize such an outstanding balance as 'account payable'

Sounds like an interesting question for the "General Accounting" forum.

As far as the tax side is concerned, indebtedness is closely associated with interest. Where one exists, so must the other. And interest is defined as amounts paid for "the use or forbearance of money".

If you acquire an asset in an installment sale, then you are treated as having taken out a loan from the seller. I think that's where the line is for tax purposes. If there's only one installment due, then there's no indebtedness and no interest need be imputed for tax purposes. However, it seems reasonable for loan treatment to apply if the parties specifically agree to a single deferred payment with interest that accrues.
 

#7
novacpa  
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Chay wrote:The substance of a transaction doesn't change based on the method of accounting a business uses. If the amount is a loan, then it's a loan under both the cash and the accrual methods.

Based on how you approached the question, it sounds like you already know the amount is an account payable and not a loan. You also know how accounts payable should be handled under the cash method. Thus my observation that you've answered your own question.


Wrong - if he knew he wouldn't be asking.
Chay - Intermediate Accounting I & II covers this topic, for you, Virginia has many good Universities with the 150-hour Masters in Accounting Program / 30-hour Accounting Curriculum - George Mason University, Virginia Tech, UVA (excellent) - all in your backyard, available to you. Once finished you will be able to apply for a staff accountant position at a CPA Firm, gain the required experience and you will be eligible to sit for the CPA Exam - (it's a hard exam - big failure rates). Then you will better understand - Accounting Methods - good luck.
 

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novacpa wrote:Chay - Intermediate Accounting I & II covers this topic, for you [...] you will be eligible to sit for the CPA Exam [...]Then you will better understand - Accounting Methods - good luck.

Are you saying Chay needs to be a CPA to understand Accounting Methods? Even Intuit Turbotax has CPAs on demand, so are they really that special? :lol:
 

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cp_acwt  
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taxtothebest wrote:I understand under cash basis, there is no account receivable or account payable on the balance sheet as transactions are not recorded until there is a related change in cash.

Let's say the business purchased $5,000 of merchandises in 2018 but it was not paid for by the end of the year. In this case, does the $5,000 go on the 2018 year end balance sheet as an liability item?


The definition of the cash basis of accounting is that you record revenue when cash is received, you record expenses when cash is paid. Receivables, payables, loans and depreciation are ignored. In your example, if the merchandise is not paid for until 2019 the expense is not recorded until 2019.
 

#10
novacpa  
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makbo wrote:
novacpa wrote:Chay - Intermediate Accounting I & II covers this topic, for you [...] you will be eligible to sit for the CPA Exam [...]Then you will better understand - Accounting Methods - good luck.

Are you saying Chay needs to be a CPA to understand Accounting Methods? Even Intuit Turbotax has CPAs on demand, so are they really that special? :lol:


Predictably mal-bo questions the value of a formal accounting education; I support the educational requirement of having to complete a formal accounting curriculum of at least 30-college semester hours, and a 150-hour business related course curriculum, plus 1 or 2-years of Public Accounting training at a CPA Firm, in order to qualify to sit for the CPA Exam.
When you complete that training you are far better equipped to opine about acceptable "Accounting Methods".
Intuit's attempt to produce "CPAs on demand" falls far short of it's marketing promise, since non-CPAs are deceptively included in the program.
mal-bo (dripping with jealousy) asks, "are they (CPAs) really that special" - I would say "Yes we are". So go get yours, Cal-Berkeley has a good Accounting program, if they will take you?
 

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cp_acwt wrote:The definition of the cash basis of accounting is that you record revenue when cash is received, you record expenses when cash is paid. Receivables, payables, loans and depreciation are ignored.


Can I take what you say to mean that we always report the original cost basis of an equipment on a cash basis balance sheet without deducting the prior depreciation claimed?

Let's say there is a piece of equipment that has been fully depreciated and therefore with zero tax basis now, is it still reported on a cash basis balance sheet with its original cost?
 

#12
cp_acwt  
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"Let's say there is a piece of equipment that has been fully depreciated and therefore with zero tax basis now, is it still reported on a cash basis balance sheet with its original cost?"

Yes, The depreciation entry [dr depreciation expense, cr accumulated depreciation (accumulated depreciation is a contra-asset)] has an effect on your net income but has no effect on cash. Depreciation expense does not fit the definition of cash basis accounting. You could change your definition to "modified cash basis", then you might include loans payable/receivable and depreciation of fixed assets.
 

#13
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So is a business free to use 'cash basis' or 'modified cash basis' to file the Schedule L balance sheet on a business tax return?

And is there anywhere on the tax return to specify it?
 

#14
makbo  
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taxtothebest wrote:And is there anywhere on the tax return to specify it?

Schedule B Line 1c for Form 1120S.
Line H(3) for Form 1065.

You might also want to check the IRS pub linked in this other thread response, see section labeled "Special Methods", for example, which points you to where to read more about depreciation accounting.

viewtopic.php?p=141209#p141209
 

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taxtothebest wrote:So is a business free to use 'cash basis' or 'modified cash basis' to file the Schedule L balance sheet on a business tax return?

And is there anywhere on the tax return to specify it?


A business is free to present its balance sheet on whatever basis it prefers. Generally, I present the balance sheet (Sch L) on the accrual basis or whatever basis the client provides me information.
The basis on which taxable income is presented may be cash, modified cash, accrual, or a hybrid method. I will identify that method on the appropriate line (Sch B, Line 1c for 1120S- as Makbo points out). This presentation and identification does not dictate any accounting method for Sch L.
~Captcook
 

#16
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So if a S-corp client tells you they keep their book on 'cash basis' but they also report fixed assets and depreciation in the tax return, then we will have to put 'modified cash basis' on Sch B, Line 1c for 1120S. Have I understood it correctly?
 

#17
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No. cash basis for tax purposes allows (requires) Fixed Assets, accumulated depreciation, loans, payroll withholding liability, sales tax liability.
 

#18
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sjrcpa wrote:No. cash basis for tax purposes allows (requires) Fixed Assets, accumulated depreciation, loans, payroll withholding liability, sales tax liability.


Lets say if they also reports inventory. Would that make 'modified cash basis' go on Sch B, Line 1c for 1120S?
 

#19
makbo  
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For method "Other", in those cases where I didn't use cash or accrual, I've always described it as "Hybrid", especially if it involves inventory. I was taught this in my basic tax class before I ever prepared a return for pay.
 

#20
cp_acwt  
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"I understand under cash basis, there is no account receivable or account payable on the balance sheet as transactions are not recorded until there is a related change in cash.

Let's say the business purchased $5,000 of merchandises in 2018 but it was not paid for by the end of the year. In this case, does the $5,000 go on the 2018 year end balance sheet as an liability item?"

The quote above was the original question by taxtothebest, the question started as an accounting theory one and turned into balance sheet presentation on the income tax return. I think you could have received a more direct and more complete answer to your question if you would have included some background and/or reasons you are asking, or what you are trying to solve or accomplish.
 

#21
makbo  
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cp_acwt wrote:The definition of the cash basis of accounting is that you record revenue when cash is received, you record expenses when cash is paid. [...] In your example, if the merchandise is not paid for until 2019 the expense is not recorded until 2019.

But, we have the matching principle: "The matching principle is related to the concept of revenue recognition. The matching principle states that both the revenue and the expense related to the same transaction should appear together in the same accounting period. For example, if a business sells a product, the cost of goods sold related to that product should be recognized in the same accounting period in which the revenue is recognized." [CE material]

cp_acwt wrote:the question started as an accounting theory one and turned into balance sheet presentation on the income tax return.

With the full cooperation and encouragement of the OP.

The practical question might be, how to record the receipt of the "merchandises" in the double-entry books. If they were paid for via credit card, I think we all know the credit card liability would be recorded along with the asset. If not, maybe we look to the "freight on board" rules and all the other stuff about when title to the property actually changes hands.

But there is nothing wrong with recording the transaction in 2018 on the company books, and then showing it as "Expenses recorded on the books not deducted on the return" for tax purposes, and then showing it as a 2019 transaction for tax -- if, as noted above, there was no revenue recognized from the asset in 2018.
 


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