A business owns a 200-unit apartment building. Each apartment tenant receives a monthly invoice (generated on the 8th of the month) for the following month. So for example on November 8th, the rent invoice for the month of December is generated. The invoice requests payment on or before December 1st. The invoice shows the rent amount due for the month of December, utility costs, and other incidentals such as billing for rule violations, special services performed for the tenant by the business, or late fees.
Likewise, on December 8th, an invoice is generated for the month of January.
The problem is that residential tenants are extremely unreliable. Some will pay before the end of December. Some will pay only a portion of the invoice amount. Some will pay during January. Some will never pay and will be evicted at some point.
We need to operate the books using the accrual method for clarity purposes. It is nice to see the accounts receivable (not visible under cash method). But for tax purposes we use the cash method. So, for example, if 137 tenants pay late (in early January) or not at all, there is absolutely no reason to include that income until the following tax year (for tax purposes).
So we need a method to see exactly which invoices still have outstanding balances at midnight on December 31st (which is when the tax year closes). And we need the ability to pick up that precise status as our starting point for the following year’s accounting.
The accrual method assumes reliable, trust-able customers who actually pay their bills. But not every industry works like that.
Since under the accrual method the invoices are recorded as income already earned by the business, there appears to be no way to separate paid balances from unpaid balances on December 31st. Yet this is precisely what we need to accomplish.
Is there some way to establish that cutoff at midnight of December 31st so that we can clearly see which invoice balances are assigned to this tax year and which invoice balances are assigned to the following tax year?