Invoices Paid in Following Year

I use Quicken H&B to create my invoices and track payments. When I run a tax schedule report for last year, it only shows the invoices that were paid last year -- it does *not* include invoices created last year but not paid until this year (or never paid). Are you seeing something different???

BTW -- I'm a cash (not accrual) method tax payer.

In that case, you treat the payment as income when you receive it, not when you billed for it.

Hi, Dascalargo.

You left out the most critical bit of information: Are you on the Cash Method or Accrual Method for income tax purposes?

This is not a trivial question. It's fundamental to every year's reporting. You MUST make the choice when filing your return for the first year in which it would make a difference, then stick with that choice for that business forever (unless you apply for and get permission from the IRS Commissioner to make a change). And, since you make the election simply by filing that first return, you may already have locked yourself into one method or the other without even realizing it, if this is not the first year for that business. If you have multiple businesses, you may elect different methods for each of them.

If you are on the Accrual Method, you report income when you earn it, not when you collect it. So an invoice for work done in December 2005 is income on the 2005 return, even if you don't get paid until 2006 (or 2007).

On the Cash Method, you report income when you receive it, no matter when the work was done.

Quicken can't make this choice (cash or accrual?) for you. Once you have made the choice, you should use Quicken in a way that will let you report the proper numbers on your Schedule C.

You might be surprised to learn that many business "keep two sets of books" quite legally. They report to their bank (and to themselves as managers) on the Accrual Method because they want to see actual sales and income for the year "in accordance with Generally Accepted Accounting Principles". But they elect to use the Cash Method on their income tax returns so that they don't have to pay tax on the revenue they haven't yet collected. There are trade-offs, of course: A Cash Method taxpayer also cannot deduct expenses until they are paid, while an Accrual Method taxpayer can deduct them when they occur, even if not paid by year-end.

If you are dealing in merchandise, rather than services, then you are required to use the Accrual Method, at least for sales and cost of sales, and you must take inventory each year and make adjustments if necessary to be sure that those figures stay in line.

In some businesses, it's not hard to adjust from Cash to Accrual numbers, or vice-versa. Just add the difference between this year's and last year's balances in receivables and payables. Other businesses are much more complicated and there's no easy way to make the adjustments; they have to actually keep the two sets of books.

So it would help us help you if you tell us at least (a) generally what kind of business is it (selling merchandise or performing a service or some other kind) and (b) whether you will be filing your tax return on the Cash or Accrual method. And since there are several varieties of Quicken, please tell us the year and version that you are using: Quicken Basic? Quicken Home & Business? QuickBooks is a separate application and you will want to visit the separate newsgroup for its users.

RC

Thanks, all, for the feedback. I hadn't even printed the reports, was just assuming the entry would show when the invoice was generated (since that was when I chose a category). I could find no mention in the help files and online knowledgebase regarding what the reports would reflect.

This is and isn't a new business. I've been working off-and-on as a

1099ed consultant for years. In 2005 I actually started working under a registered business name and Federal ID number, rather than my own SSN. Until 2005, this was never an issue; this is the first year when I have a significant amount of work done (and thus invoiced) in one year, yet paid in the next.

There is no inventory, just my services, so I think I'll likely go with the cash accounting method (though I'll go back and double check what I did last year first).

I am using Quicken H&B, though I'm sure not to its full extent.

I have another situation I've been pondering which I need advice on, but which I'm unsure about whether I can describe sufficiently. I'll try:

I generally receive deposits ahead of time. I have set up an AR account into which I enter these deposits. I then enter in that same account the invoice, post dated, and apply the deposit to it, thus allowing me to generate an unpaid invoices report.

So, I'm fine up until now.

Here's where I start to get confused: I have someone consulting with me on this job. The agreement is that he gets paid after the client pays me. I'd like to track the AP to this consultant along with the AR due from the client.

What I've done is set up a payables account to him into which I enter a post dated bill to a consulting category. When the payment comes in, I will effectively pay that bill.

Is there a way to combine the above entries into one. In other words, right now I enter information into my general AR account to reflect the deposit and the invoce to the client, and then do a separate entry in the consultant's AP account to reflect what I owe him. I think what I'm doing is sound, even if it's not the best way to do it.

Now, let's make it even more complicated: I also do work for this consultant. In other words, I have both payables to him and receivables from him. I use an account which tracks only his receivables, rather than the general receivables account. In general, I pay him more than I bill him.

Said consultant -- whose accounting practices are questionable at best

-- would rather I deduct my receivables from the payables, issue a check for the balance, and thus reduce the amount on the 1099 he'll eventually get from me. Is this sound accounting? If it's OK, how would I accomplish it in QB? If I make a transfer from the consultant's payables account into his receivables account, that amount will still be reflected on his 1099 and will show as income for me (since it's used to pay the receivables account).

OK, I've confused myself. If anyone can decipher that and point me in the right direction, I'd appreciate it.