 zero accounting software credit memo credit form and bad debt get ready to be an office hero with zero here we are in our custom zero home page scrolling in by holding down control and up on the scroll wheel one seven five percent zoom in we're gonna go to the custom demo company but do so by setting the reset item which will reset prior changes to the data and open the demo company at the same time we're gonna be opening up some new tabs after I hide this item and some reports in them as we do each time right clicking on the tab up top to duplicate right clicking again and duplicating again in the middle tab let's go to the accounting drop-down and we want to open the balance sheet report and then in the tab to the right accounting drop-down we want the income statement as has been our custom middle tab let's change the dates on the drop-down if I may may I I believe so 22 and we're gonna say change that on up to 22 okay that's the setup process we do every time back to the first tab and so now we're gonna think of a situation where we have credit memos support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page we also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable so once again click the link below for a free month membership to our website and all the content on it let's first look at a flow chart to think about where the credit memo might fit in so if I go into the flow chart we're focusing in on the revenue cycle and normally we're thinking about an accrual kind of system a business in which we do the work first and then invoice the client like a law firm a bookkeeping firm landscaping or something like that so we imagine the invoice being created and under the normal flow process then we would expect to receive payment on the invoice and deposit that payment into the checking account when the invoice is created the transaction will typically be simply an increase to the accounts receivable tracking who's going to owe us money from there the other side going to revenue that would be for a service type of business if we also had inventory then we would have a decrease to the inventory if tracked on a perpetual inventory system within the zero system and cost of goods sold would go up and then we also might have a tax implication so we know this form could have a lot of implications related to it now then we might have a credit memo type of situation which oftentimes we think about happening possibly before we collect the payment on the accounts receivable so in that case we're going to say okay we're now we want to reduce or reverse the payment that we're going to expect to receive and so we just basically want to reverse the invoice with a credit memo so most of the times when you think about a credit memo that's kind of how you think of it you think okay we have an invoice now we're going to reverse what happened with the invoice with the credit memo and they no longer owe us the full amount or part of the amount of the invoice now if they had already paid us the invoice and we made the deposit then you have a situation where you might say okay do we need to give them cash back for example and and actually issue them a check in terms of any problems with with whatever the transaction was or you might have a situation where you want to give a credit to them and say hey look we'll give you a credit that you can then extend on a future purchase that you might make in the future and so those are our options there so let's let's go back on over and first make an invoice that we're going to then reverse with a credit memo and so let's go back here and we'll do a more complex transaction that has inventory involved in it because that's going to be just more complex if you just have a service item then you can just remove some of the complexity that will be involved with it so i'm going to hit the drop down we'll make an invoice here and say let's make an invoice let's just make a new customer AAA and i'm going to say let's make a new item down below and add inventory to it and we'll also have sales tax just to really complicate things so i'm going to say this is going to be item one i'm just going to copy that and put that here price let's say it was just the standard thousand dollars that we've been doing it's going to be going to the sales on the revenue side of things we're going to say that there's a tax on the sale which would be merient like the sales tax type of situation and we're going to say that we're tracking inventory with it as net as well which i'll have to put on the books so that means inventory is going to be impacted and we're going to say that uh that on the purchase side of things when we buy it we're going to say that we buy it let's say for five hundred dollars let's say six hundred dollars that we purchase it for and then this is going to go to cost of good sold and it's going to be tax on sale tax on sale which i have down here so i'll but i'll put it there i think that would be fine as well okay so i think that's good let's save it and so there we have it so now remember the invoice is still a fairly complex form what's this going to do the data input should be fairly easy once it set up but we know an invoice is going to increase the accounts receivable by the full amount the other side is going to go to sales but only by this thousand dollar amount not including the sales tax and then we're going to have the sales tax increase in a payable account then because we have inventory we also have the the inventory going down by what we put in here not the one thousand but the six hundred that we set it up for and calls to good sold is going up the net impact on net income is going to be the increase of the sales price minus the cost to good sold one thousand minus six hundred and the sub ledgers for accounts receivable will then be tracking who owes us the money aaa and the uh sub ledgers for the inventory will track the fact that we lowered the quantity of inventory and give us something that'll tie out to what's on the balance sheet now before i can record the inventory i'm gonna have to add some inventory to the system so i'm going to right click on the tab up top duplicate it let's just put some inventory on the books so i'm going to go up top and say accounting let's go to business and products and services and then i'm just going to add some inventory i'm going to say hide this and we've had this item one so i'm going to go into item one i'm going to say adjust it and we're just going to increase it let's say by two units that cost what did i say six hundred dollars so there it is the adjustments just going to go to cost to good sold which might make it look funny but it's going to make a journal entry and this is going to be the beginning balance and so there we have it so here's the transaction inventory will increase cost good sold just to put some inventory on the books okay so there it is i'm going to close this tab back to the first tab i can record it now let's record it approved and then check out what happens on the balance sheet we're going to say balance sheet update we got the a to the r going into the ar accounts receivable and we're going to scroll on down and say all the way down down let's just my scroll in it's too much scrolling i gotta hit the thing there it is it's on the books for the full amount that includes the sales tax the 109 2 looks good let's go back let's go back again tab to the right update income statement also increasing on the sales side of things i'm not going to scroll down i'm just going to pull the thing down this time that's a faster way to go so there's the 1000 here does not include the sales tax let's go back and then go back to the middle tab which is the balance sheet and look at where the sales tax is at which is going to be right there sales tax liability has increased so if i scroll down and say okay now we've got the sales tax boom that has been impacted back to the balance sheet also we're not done yet people the inventory went down so if i go into the inventory there's the inventory so if i go into that and we say okay let's scroll down on that one we we increased it with that adjustment and then we decreased it with the invoice that we made back and then tab to the right and the cost of good sold also is the other side of that inventory process so a lot of action happening with that transaction so back then also we've got the sub ledger for the accounts receivable tracking by who owes us the money which we can see over here on the first tab i won't run a report with it because we've done that in the past but oftentimes we'll track that in the open invoices business open invoices and we got aaa here and we can also track that in the contacts and go to the customers and we see aaa here with that open invoice and we also have the sub ledger for the inventory tracking by item so i'm gonna right click on this tab to the right duplicate it so i can open up another report let's go to the accounting drop down reports and let's do the inventory inventory item list let's say i think that'll be okay and just to note and let's change the date up top change it change it up to the date and so now we've got this information on the inventory and here is our our items that we put on there where's the where's the one that we put on there these are the untracked items the tracked items there's the there's the item we still have one left here now these beginning balances weren't put on there because i think when they updated their stuff so that 600 is currently what's on the balance sheet we'll track that more in the future but that's it now and if i do the credit memo now we're going to reverse it we're going to say okay there was a problem with the goods and services i got to reverse that whole thing so let's first just to understand it let's write out what happened with that journal entry we've got ar went up by uh by the full amount which was what was it for it went up by let's go back on over here and say it went up by 109250 so we'll say okay 1092.50 and then we had the sales let's add some decimals here and then we had the sales went up by 1000 and then we had the sales tax payable went up by the difference of that i'm going to say this is the credits are negative for me and then i'm going to say that we also had cost of goods sold which i think was 600 and then we also had the inventory which was credit to 600 now if you don't understand the debits and credits that's okay it's but you can think of it as ups and downs but because there's a lot going on the debits and credits are actually easier to work with here now if i was going to reverse this i would just reverse it exactly right i'm not going to try to rearrange debits on tops credits on top i'm going to say okay what's going to happen on the reversal well i'm just going to say accounts receivable i'll copy this whole thing down i'll delete this and i'm just going to reverse the debits and credits i'm going to say well this is going to be a credit and then i'm going to debit this and debit this and then over here i'm going to credit this and debit this right because you don't want to really construct the credit memo in your mind in terms of what's happening from the ground up you want to think of the invoice and then reverse it because the credit memo is not natural it's like unusual transaction it's the opposite it's the undoing of the natural thing which is the invoice now after you do that you could have a couple problems here which is going to be the fact that usually we don't like to decrease the sales account so because we might want to put it into like another account like bad debt or returns and allowances so so we've got that added wrinkle that we could that we could deal with and of course we've got to have the sales tax that might be something that would be involved and then the question on the inventory is are we getting the inventory back or not on the inventory so do we need to reverse the inventory and increase the inventory or not so those are some issues that we kind of have so let's let's go back on over and say okay if that's the case let's make a credit memo i'm going to hit the i'm going to go back to the first tab and let's go into the invoices and one way we can do the credit memo is i can actually go into aaa and say say let's hit the drop down and say that we want to add a credit note to it so add a credit note and so it basically makes the invoice with a credit note so this will basically reverse it exactly now if i go through this everything looks good basically reverses it exactly if there was some dollar amount other than this full amount here i can change the dollar amount if i if i'm only if i'm still expecting to collect a portion of it i can change that after the fact right here but i'm going to reverse the whole thing now the problem here is that it's gonna i believe reverse it exactly which means that i'm going to decrease the sales account which might not be ideal so i'll first do this and then we'll try another example where we adjust that component so let's try it we're going to say let's approve it and see if it does what we would expect we're going to go balance sheet and then update the balance sheet and then in the ar clicking on the ar we're going to go down and say down and so there's the credit uh where's the credit where's the credit there it is so here it goes in and out for the full amount that makes sense and then the other sides on the income statement income statement update and the sales account and we're going to go into that and just scroll down just to check it out and so there it goes in and out here now this is where the issue is because oftentimes we don't like to decrease sales but rather to record the returns and allowances or bad debt in another account so maybe we'll touch on how we might be able to do that but there it is it reverses it if that's not a problem then you can do that and then we've got the the sales tax also an issue because we don't want to be overpaying the sales tax taxes of course always complicate the whole system so now we've got the increase and decrease on the sales tax we've got the inventory that's going to be impacted and that's going to be here so now we brought the inventory back in again that could be an issue if we if we if the inventory is damaged or something like that but we're assuming that we reversed everything exactly here and then we've got the cost of good sold on the income statement side of things which is reversed out so we've got an exact an exact reversal happening boom but now let's say that we want to make us a bit of an adjustment to it and say well what if I don't want to go into that sales account so okay let's try it again I'm going to hit the drop down make another invoice and let's say this is going to go to BBB same date and we're going to use item item item one again we have one left so that's perfect same starting transaction but this time for BBBB so I won't go check it all out I'm going to assume it reports the same thing balance sheet income statement which in essence mirrors this journal entry but then when I reverse it I don't want it to reverse sales I want it to reverse it let's go to bad debt or you could say sales returns and allowances either method we're going to same kind of thing here so instead of instead of instead of decreasing a revenue account I want it to either increase an expense of bad debt or I wanted to have a contra revenue account which is breaking out the revenue in like sales returns and allowances all right so we're going to say all right well then let's go into the invoices and see how can we do that I'm going to go back into it and say okay let's check it out and then let's do the same thing and say okay I'm going to make a credit memo a credit note but this time I want it reversing to the sales account now you can actually just change the account right here so which is nice so I'm going to say okay I got the same item I'm going to just say it's going to go to let's call it I'm just going to make a bad debt let's make a new account and I'm just going to say that it's going to be an expense you can also make it again sales returns and allowances would be applicable sometimes but I'm going to say that this is going to be an expense I'm going to call it I don't know 641 and I'm going to say bad debt expense if it was sales returns and allowances I would make it an income type of account I'm going to say that the tax exempt tax exempt for the account I'm going to say save it and then so there we have it so now it should do the same thing but now it won't reverse the the item in the sales account but rather record it to bad debt presumably let's go to the balance sheet and check it out so if I go to the balance sheet and go into the receive the a r a to the r and scroll down we're going to scroll down and say there it is so now we've got b is here so we've got this one so I believe it's netting out here between this this this and this and then I'm going to go back and then go to the income statement and we're going to scroll down and say okay the other side went to sales this is where the change happened so if I go into sales we're going to say okay let's scroll all the way down for b so now it didn't reverse the sales the sales is still there back but I made the other account reverse out as an expense type of account which is down here which we said I called it bad debt expense there's the thousand in bad debt expense so it reversed out to another account so bad debt you might use or in some cases you might make a contra sales account to try to do that which would be up in here but it would be a negative thousand underneath to net out the total income so you got sales always increasing and any returns would be sales returns and allowances so you can use that kind of method the inventory worked out the same as well as the and so so just also note that if you if you didn't receive the inventory back then you know you could adjust the inventory component as well so that's so you have to adjust the inventory but I won't get into that now let's go let's do the one other kind of scenario let's say that you're applying a credit I'm going to go to the business drop down invoices and you just you're saying that someone came to you and said you know there's an issue and we're going to say okay we're going to give you business credit we're just we're not going to apply it to an invoice that you currently owe us money for we're going to issue you a credit meaning that if you make a purchase in the future you can apply out the credit to it for example so let's say we just make a that would be here I could just say okay I'm just going to give you a credit then that you can apply out I'm not going to write you a check we're just going to give you a credit so let's say that this is going to be I'm just going to say ddd on this one and then we're going to say credit and I'm just going to put the amount here which is going to be let's say you know $400 or whatever and then the account that it's going to go to we're going to say let's make another account let's just show that sales returns and allowances just so you could see what that might look like so we're going to say income let's make it an income type of account revenue revenue I'll put it for sales type of account and then I'm going to say this was I forgot what their numbers 5 1 1 let's say and then this is going to be name sales returns and allowances if I says allowances s and okay and so that looks good I'm going to say tax exempt let's save it so now this is going to apply the credit so if I say approve on that one then we can say there's an error for the following description cannot be empty so I'll just say credit there does that make you does that make you happy let's save it and then I'm going to approve it so I'm going to approve it now okay so now I'm going to go back into the business drop down invoices and so now we've got this item here for the credit and it's going to be the and it's going to be here in a waiting payment right okay so now let's go back to the balance sheet I'm going to update the balance sheet and in accounts receivable I'm going to have that credit and note when we think about these debits and credits it gets a little bit confusing because we start to apply meaning to them that's a little different than meaning debits and credits just being left and right side of the ledger but you know for accounts receivable that means that they owe us money so the debits are actually good because that means people owe us more money for the client side type of thing the credits are good because that lowers the amount that they owe us for example generally now this one has a credit but it's not being applied to any any particular invoice that's why it's yellow in that other window so I'm going to go back on over and then the other side if I go to the income statement we put it to sales returns and allowances I just wanted to show that that's a contra a contra revenue account now so I didn't decrease revenue we got the sales minus the returns to give us this this net down below so now if I go back to the first tab we see that credit here and if I go to the contacts drop down customers we also see we should see a credit in customer ddd that we can apply out and this is kind of like now we kind of have like a a negative receivable in essence that we owe you know the customer money we keep it in the receivable area here because that's useful for us to then tie out to any invoice that we might make say in the future so if I made an invoice for example now and I said that we want this going to ddd customer picking that up and tabbing on over we may then be able to apply the credit when I record this so let's say this is going to be service let's make it let's make this a service item let's just make a new item I'm going to say service item and we'll say that's the item name hundred dollars and it's going to go to the sales account tax exempt okay and then I'm going to say okay let's record it approving it and then we have this ddd has 400 in outstanding credit which we can then allocate right to a future invoice and so now we have this allocation product outstanding amount amount to to credit 100 we're going to say allocate the credit so now we've applied some of the credit out to like a future purchase that would be another format of that so that's the general idea with the credit memos remember when you think about what's going to happen to the financial statements first think about the the accounts that are impacted from the invoice and then reverse them and make any adjustments that need to be made and think about how you can use the forms to make that adjustment within the accounting system within zero