Bankers don’t like surprises. When making a loan they want to know how much accounts payable (A/P) you have, how current you are with your creditors, and how well your customers pay you (A/R).
If you are an accrual basis bookkeeper, you book or accrue your A/R and A/P when you deliver goods and services or when you receive raw materials or are given trade credit. You may extend terms to your customers or have trade credit extended to you, but as an accrual basis bookkeeper you still consider the sale to a customer or purchase from a supplier has been made when it occurs. The IRS requires certain types of businesses to be accrual basis bookkeepers. If you maintain substantial inventory you must be an accrual bookkeeper.
On the one hand, many accountants advise those kinds of businesses that can be cash based (meaning that revenue is recognized when it is received) to use this type of bookkeeping.
On the other hand, bankers want to see the entire picture.
If you are a cash basis bookkeeper, when you furnish your financial statements to the bank they may not show the A/R or A/P on the balance sheet. If they don’t then you should print a copy of your current accounts receivable aging and accounts payable aging and provide that at the same time. Ideally these sets of reports will be dated the same date as the balance sheet.
QuickBooks and other accounting software for small business often have the ability to generate a report in an accrual or cash basis format. If you are furnishing this to a bank, make sure you select accrual for the report format. Also make sure your complete A/R and A/P is shown on the aging.
Other surprises you should make sure and avoid when applying for a loan are:
If there is A/R on your A/R aging that you don’t believe you will be paid for, add a separate page indicating which accounts are doubtful and give the reason. An accrual basis bookkeeper should have a separate contra account on the balance sheet indicating the amount of all doubtful accounts.
If you do show A/R and A/P on your balance sheet, make sure it has the same total as on the A/R and A/P aging. This seems basic but I have seen unmatched reports many times.
The problem is if the banker sees one or two errors or balances that don’t match to other reports where they should; they begin to doubt the accuracy of the entire set of accounting books. In today’s tough credit environment, that can be enough to be turned down for credit.
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