CUSTOMER PREPAYMENTS AND DEPOSITS IN QUICKBOOKS ONLINE.pptx

how to treat customer prepayments on quickbooks

1. CUSTOMER PREPAYMENTS AND DEPOSITS IN QUICKBOOKS ONLINE

2. Table of Contents Introduction Overview of the various methods of recording and tracking retainers Using the deposit feature Creating a credit balance in Account receivables The unearned income method

3. Introduction Customer prepayments refer to payments made by a customer to a business or service provider in advance of receiving goods or services. These prepayments are made before the actual delivery of the product or completion of the service. Upfront payments are also called retainers, deposits, down payments

4. Overview of the various methods QuickBooks Online offers three ways to record retainers. To determine which method is best for a particular case, consider the following factors: Whether financial statements are needed (for example, for investors) How often the client receives retainers and how much they are How much time will pass between receiving the deposit and the work being done or products delivered The total value of combined deposits at year-end

5. Using the deposit feature The Deposit feature in QuickBooks Online allows clients to enter the deposit on an invoice. The body of the invoice lists the goods or services to be sold, and the deposit received is subtracted from it. This means that revenue is posted as of the date of the invoice, even though there likely hasn’t been an exchange of goods or services. Note that this method doesn’t conform to Generally Accepted Accounting Principles (GAAP) because it doesn’t use an unearned income liability account. This method is best when clients only receive retainers occasionally. They can also use this method if there’s a short time between the receipt of the deposit and the delivery of goods and services.

6. Using the deposit feature (Cont.) Start by turning the Deposit feature on. To do this: Go to Account and Settings and select the Sales tab Select anywhere in the Sales form content section to enable editing Use the Deposit slider to turn the feature on Select Save and then Done This adds a Deposit field to invoices, so your clients can subtract a customer deposit from the total to calculate the balance due.

7. Using the deposit feature (Cont.) Now let’s record a retainer or prepayment using this method. Create an invoice (Note that the invoice now has a Deposit field between the Total and Balance due amounts.) Populate the invoice with the necessary details and leave the sales price as nontaxable In the Deposit field, enter the amount of the deposit (QuickBooks Online calculates how much needs to be invoiced, taking into account the deposit and tax, if applicable) When a deposit is added to an invoice, QuickBooks Online adds a Deposit to dropdown above the Product/Service grid. Choose Undeposited Funds Finally, select Save

8. Using the deposit feature (Cont.) To see the details of the transaction, select More and then Transaction journal. The income is recorded based on the products and services entered in the grid of the invoice, and the retainer is posted to Undeposited Funds. Any remaining balance due on the invoice is posted to accounts receivable.

9. Creating a credit balance in Account receivables Clients can use the Receive Payment screen to enter a deposit without applying it to an invoice because the related invoice is not yet created. The result is a negative A/R balance. Ensure that your client’s state doesn't require sales tax to be collected on the retainer. This option may work for jobs that are going to be finished quickly and within the same reporting period or when the total retainers are negligible. It may also be used for businesses that only use reports for management purposes (rather than sending then to a third party). Additionally, this might be the easiest method for clients who enter their own transactions rather than having their accountant or bookkeeper do it. However, be aware that this method doesn’t conform to generally accepted accounting principles because it doesn’t involve an unearned income liability account.

10. Creating a credit balance in AR (Cont.) With this method, it’s best to turn off the Automatically apply credits option so that credits aren’t applied to the wrong invoice. The first step is to record the retainer via a Receive payment, creating a credit in the customer’s account (in other words, a negative amount in accounts receivable). Select + New, then Receive payment Select the customer Note that QuickBooks Online shows an alert that the customer doesn’t have an open invoice. This Receive payment transaction shouldn’t be applied against any open invoices, even if there are some that exist already. If the customer has any open invoices, don’t select any of them, because this deposit is for a new job not yet invoiced.

11. Creating a credit balance in AR (Cont.) Enter the details of the retainer as you’d normally do Then select Save and close Because no invoice was selected, a pop-up appears saying that the payment will be saved as a credit. Confirm this by selecting Save as credit The retainer is now recorded.

12. Creating a credit balance in AR (Cont.) Let’s see how to apply this retainer to an invoice later. Create an invoice Populate the invoice with the necessary details When done, select Save Once saved, select Receive payment from the invoice On the Receive Payment screen, the invoice and the unapplied payment are both checked. To apply the retainer to the open invoice, change the amount in the Amount received field to zero, then enter the amount of the retainer to the Payment column of the invoice row Finally, select Save and close

13. Creating a credit balance in AR (Cont.) At period end, create a journal entry to reclassify the credit balance for retainers from accounts receivable to an unearned income liability account. To do this: Create a journal entry Enter Accounts Receivable for the Account Add the amount of the retainers as Debits Add a description and a name to the journal entry Because it’s necessary to assign a customer when using accounts receivable in a journal entry, you may want to set up a customer called A/R Adjustment and use that on the journal entry rather than entering a line for each retainer. In this case, we add the customer.

14. Creating a credit balance in AR (Cont.) To offset the retainer, in the next line choose an Unearned Income for the Account column Assign the same customer in the Name column Then select Save and close

15. The unearned income method This method tracks retainers through a Customer Deposits or Client Retainers (unearned income) liability account. This option is recommended for clients who need to provide financial statements to outside parties or for whom retainers are a normal course of business or a material amount. This method especially suits clients with large deposits held for extended periods (months or even years), cutting across several financial reporting periods. Automatically apply credits should be turned off

16. The unearned income method (Cont.) Create a new liability account Open the Chart of Accounts and select New Select Other Current Liabilities for both the Account Type and the Detail Type Enter a name. In this case, it’s Client Retainers Select Save and Close

17. The unearned income method (Cont.) Create a new service item Go to the Products and Services list Select New and choose Service Enter the name. In this case, it’s Client Retainers From the Income account dropdown, select the Client Retainers liability account In the Sales tax category dropdown, select Nontaxable Typically, retainers are nontaxable but check with your state. Then, select Save and close

18. The unearned income method (Cont.) Create a sales receipt to record customer payment of the retainer Create a Sales receipt For the Product/Service column, enter Client Retainers Enter 1 as the QTY and add the amount of the retainer in the Rate column In the Message displayed on statement box, enter the reason for the retainer Then, select Save

19. The unearned income method (Cont.) Create an invoice for the services carried out Create an invoice Populate the invoice with the necessary fields and enter the total value of the service before tax To add clarity to the customer statement, enter a description of the services carried out in the Message on statement box Then select Save

20. The unearned income method (Cont.) Create a credit memo for the amount of the retainer to apply Create a Credit memo Make sure the Credit Memo Date is the same date as the invoice For the Product/Service column, enter Client Retainers Enter 1 as the QTY and add the amount of the retainer in the Rate column In the Message displayed on statement box, enter a note about the retainer Then select Save and close

21. The unearned income method (Cont.) Apply the credit memo to the invoice Select + New, then Receive payment Enter the customer and make sure the Payment date is the same as the date on the invoice and the credit memo Note that QuickBooks Online automatically checks the credit memo and applies the value of the credit memo against the open invoice. Select Save and close

22. The unearned income method (Cont.) Create a statement for the customer For the Statement Type, select Balance Forward Typically, statements are sent out at the end of the month, so enter the statement date and the start and end date Make sure only to select the relevant customer from the list of Recipients Select Print or Preview to see the finished statement

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