Key takeaway: Accounts receivable and accounts payable help explain collections and obligations, but neither is a bank balance. Review the customer and vendor detail alongside available cash, other liabilities and a dated cash forecast before deciding what the business can pay.
A profitable month can end with little cash if customers have not paid. A large bank balance can also coexist with unpaid payroll, taxes or vendors. The useful question is when amounts will be collected or paid, how reliable those estimates are, and whether the books record the underlying transactions correctly.
Identify the balance and the reporting basis
Accounts receivable, or AR, generally records amounts customers owe the business. Accounts payable, or AP, generally records invoiced amounts owed to vendors. Ordinary trade balances are usually current assets and current liabilities, respectively, but timing and the applicable presentation rules matter. Amounts due beyond the normal operating cycle or year need separate classification review.
The examples below assume accrual accounting. A cash-basis report can display income, expenses and balances differently. Intuit explains how to select cash or accrual reporting in QuickBooks Online. That software setting does not by itself establish correct revenue recognition or authorize a tax-accounting-method change.
An invoice is not the revenue-recognition rule
Under accrual accounting, recognize revenue under the applicable accounting framework when the relevant earning or performance requirements are met. For customer contracts within Topic 606, FASB’s revenue-recognition guidance focuses on transferring promised goods or services and the consideration expected in exchange. Sending an invoice is not a universal trigger.
For example, completed work billed on credit may create revenue and AR. An enforceable advance billing for future work may instead create AR and a contract liability until the required performance occurs. A refundable customer deposit is not automatically earned revenue. Review the contract and delivery or performance evidence before relying on the posting.
A vendor bill also requires classification. A bill for services already consumed may create an expense and AP. A bill for inventory, equipment or a prepaid service may create an asset and AP, with expense recognition occurring under the relevant later rules. Receiving the bill does not make every purchase an immediate operating expense.
Follow the transaction without inventing cash movement
| Illustrative accrual transaction | Accounting effect | Cash effect at that moment |
|---|---|---|
| Earn $1,000 of service revenue on credit | Increase AR $1,000 and revenue $1,000. | None. |
| Collect that invoice | Increase cash $1,000 and reduce AR $1,000. | $1,000 inflow; no second revenue entry. |
| Incur a $400 operating-service expense on account | Increase expense $400 and AP $400. | None. |
| Pay that vendor bill | Reduce AP $400 and cash $400. | $400 outflow; no second expense entry. |
The SEC’s financial-statement guide explains the indirect operating-cash-flow reconciliation. It starts with net income and adjusts noncash items and operating assets and liabilities. For the unpaid $1,000 earned sale, the AR increase offsets the $1,000 revenue included in income, leaving zero cash from that transaction. It does not mean issuing the invoice caused a $1,000 cash outflow.
Similarly, adding back the unpaid $400 operating expense through the AP adjustment prevents an expense without payment from being mistaken for a cash outflow. Classify the underlying transaction before making the adjustment. An unpaid equipment acquisition is a noncash investing transaction when acquired; its payable should not automatically be treated like an ordinary operating vendor balance. Later payments require the applicable cash-flow classification.
Reconcile the balances with a rollforward
A rollforward explains how the opening balance became the closing balance. Use formulas that leave room for credits and other adjustments:
- Ending AR = beginning AR + new receivables − applied customer receipts − credits and write-offs ± other reconciling adjustments.
- Ending AP = beginning AP + new vendor obligations − applied payments − vendor credits ± other reconciling adjustments.
The following hypothetical month assumes all $50,000 of credit sales were earned, all $30,000 of vendor charges were current operating expenses, and there were no cash-only sales or expenses, sales taxes, credits, write-offs, currency effects, depreciation or other adjustments.
| Rollforward | AR | AP |
|---|---|---|
| Beginning balance | $20,000 | $12,000 |
| New transactions | $50,000 | $30,000 |
| Payments applied | ($42,000) | ($25,000) |
| Ending balance | $28,000 | $17,000 |
Income from the assumed activity is $50,000 − $30,000 = $20,000. The indirect operating-cash-flow reconciliation is $20,000 − the $8,000 AR increase + the $5,000 AP increase = $17,000. The direct cash calculation agrees: $42,000 collected − $25,000 paid = $17,000.
Those are period flows, not the ending bank balance. Add beginning cash and other operating, investing and financing flows to determine ending cash. A loan deposit, for example, increases cash without creating sales revenue.
AR minus AP does not establish spendable cash
Ending AR of $28,000 less AP of $17,000 is $11,000, but that difference is not a cash balance or complete working capital. Working capital is current assets minus current liabilities. It can include cash, inventory, prepaids, taxes and payroll payable, and current debt in addition to AR and AP.
Collection timing and quality also matter. A disputed $20,000 receivable due next month does not pay a vendor bill due tomorrow. Build a forecast using expected collection dates, confidence in payment, vendor due dates, payroll, taxes, debt service and planned asset purchases. Consider whether some cash is restricted or already committed.
Check open items and net balances in QuickBooks
Enter supported transactions in the correct period and accounts, then apply receipts and payments to the intended invoices and bills. Avoid entering a bank-feed deposit as new revenue when it merely settles an existing receivable, or recording a bill payment as a second expense.
An unapplied customer payment may leave the invoice open while an offsetting credit exists on the customer’s account. Total net AR is not necessarily overstated. Inspect both the open invoice and the complete customer balance. Intuit’s guide to paid invoices or bills appearing open addresses application issues. Confirm the history before deleting or duplicating anything.
Reconcile the aging schedules to their general-ledger control accounts at the same date and reporting basis. Investigate direct journal entries, duplicates, credits, cutoff differences and old unsupported balances. Bank reconciliation checks recorded cash against the statement; it does not independently prove that every receivable is collectible or every liability is complete.
Use one monthly review list
- Compare invoice ages with contractual payment terms and document disputes or collection plans.
- Review vendor due dates, duplicates, credits and missing bills or accruals.
- Resolve unapplied amounts by examining the net customer or vendor account.
- Reconcile AR, AP, bank accounts and the period rollforwards.
- Update the cash forecast and assign responsibility for unresolved items.
Match professional support to the deliverable
Bookkeeping support maintains records and reconciliations. Management-report analysis interprets balances and trends. A formal financial-statement review is a separate professional engagement providing limited assurance; it is not simply a CPA looking over QuickBooks reports. AICPA explains the distinctions among compilation, review and audit. Confirm the required report and service availability before promising a lender that a particular assurance engagement is included.
For assistance, contact CPA Firm South Florida with the periods, reports and unresolved balances. The firm’s pricing page states that return-preparation cleanup is included in the quoted preparation fee, with record condition affecting the quote. Ongoing bookkeeping, broader accounting projects and other separately requested services need an agreed scope and fee.
Frequently asked questions
Does sending an invoice always create revenue?
No. Under accrual accounting, revenue recognition depends on the applicable rules and performance, not just the invoice date. Advance billings can create receivables and contract liabilities; cash-basis reporting follows a different approach.
Does an increase in receivables mean cash left the bank?
No. An unpaid credit sale does not itself move cash. Under the indirect cash-flow method, an operating receivables adjustment removes the noncash portion of revenue from net income to reconcile to cash flow.
Is accounts receivable minus accounts payable working capital?
It is only part of working capital. Working capital is current assets minus current liabilities. Assess cash, inventory, other current assets, payroll and taxes payable, current debt and the timing and collectibility of balances.
Does an unapplied payment always overstate total receivables?
No. An invoice may remain open while an offsetting payment or credit is recorded in the customer account. Inspect both the invoice and net customer balance before correcting the application or contacting the customer.