Lawyer Bookkeeping: Unapplied Cash Payment Income/Expense

 Let me paint the picture. You are doing your accounting records for your law firm. You send the tax professionals the financial documents that they requested. The tax professional contacts you and says, "No, I need these records on a cash basis as that is how we process the tax return. "

You go into QuickBooks and produce a new set of financial documents with the "cash basis" radio button.

Reviewing the profit and loss statement shows many transactions in the unapplied cash payment income account and many items in the unapplied cash bill payment expense account.

You examine the two reports and see that it's not on the accrual-based financial records.

Why? And what is this account?

The unapplied cash payment income account is an account that QuickBooks creates when switching methods on your basis. These two reasons typically cause "unapplied cash payment income" transactions:

Unapplied Cash payment income

You have payments recorded on invoices that pre-date the date of the invoice. The correction here is to change the invoice date to be the payment date. I will caution you on changing invoice dates if you pay sales tax on legal services in your jurisdiction. Not many states have sales tax on legal services, but you must be careful when changing any dates in a closed accounting period.  

The second reason is that those customer payments are entered without an invoice. I have seen this many times. Or perhaps the client has a credit balance. QuickBooks doesn't know what to do with this type of transaction because it's negative AR or contra to the accounts receivable. As you know, on a cash basis books, there are no accounts receivable. Hence this account.

Unapplied cash bill payment expense

The flipside of unapplied cash payment income is the unapplied cash bill payment expense. Of course, this has to do with vendors. And it aligns with the reasons above:

We typically see this if a bill payment is pre-dating the bill. How can you pay a bill if you haven't received it? So this is a dating issue, and you need to correct the dates on the bill or the bill payment.

I have also seen this transaction if someone has deleted the bill, and the bill payment is just hanging. Again you'll need to enter the bill and apply it.

With both situations above, you will see it if the payment hasn't been applied and the unapplied payment to a bill where the bill payments are entered in the building center, but they're not connected. Also, with an invoice, you'll see that as a hanging credit. If you run an AR aging report, unapplied invoices and payments are easily viewed. You will see the bill and the bill payment, but they are not connected. How do you join them? Go to open the customer payment and click the invoice and the payment boxes on the left side of the screen.

This article ends the series on cleaning up your clients or your books for tax processing.