 QuickBooks Desktop 2024 customer prepayment overview the problem. Get ready and some coffee because we're locking into some non-stop QuickBooks Desktop 2024. First a word from our sponsor. Yeah actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us but but that's okay whatever because our merchandise is is better than their stupid stuff anyways. Like our trust me I'm an accountant product line. Yeah it's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accounting instruction.thinkific.com. Here we are on our desktop going to be opening up QuickBooks Desktop the enterprise version as opposed to the pro plus version so we can look at the prepayment feature noting that in a prior presentation we set up the sample company file I housed it here in this folder so this is the actual data file I'm going to open it by simply double clicking on the the actual software file rather than the data file which is the typical technique the typical maneuver the typical process and then we'll open up the data file within the software. Now oftentimes it might open up to the prior data file that you were using and this case it's going to give us that intro screen for the trial version here we have it I'm going to scroll down to I want to open an existing company file because we already set up the sample company file before I'm going to the where I located the folder double clicking on that sample company file and it should then open it up it usually opens up the home page when we open this up I will usually adjust this go into the view tab if your view is a little bit different I usually hide the icon bar completely and then I go to the view tab and I look at the open windows list so I have my open windows on the left hand side I can close this screen so I don't need that screen anymore therefore I only have the home tab open now I will often then open up my major financial statement reports no matter what I am doing so that'll be if I go to the reports dropdown in company and financial I'm going to be looking at let's open the balance sheet first the balance sheet and then it's showing as of 1215 26 I'm going to bring it out to 1231 27 because I'm going to start to enter the data in the following year and then I'm going to go to the reports dropdown company file and the profit and loss it's going from 2026 I'm going to go from tab 010127 tab 1231 27 for the year of 2027 so there is nothing in it at this point in time when we start our practice problem now first let's just go to the home page and think about the issue that we have and how we can basically deal with that issue and then we'll talk about it in a step by step process because oftentimes the prepayment process is quite confusing it can take a few different forms and there are different ways that we can basically accommodate or deal with it each of them possibly being appropriate depending on our accounting structure so we're down here let's look at the customer cycle now note that if you're not in the enterprise version and you're in the pro version for example you might not see this icon for the sales order so that first might throw some people off and they see that if you don't have your estimates on for a job cost so that you have estimates turned on which I believe are on by default you won't see the estimates but I think by default you usually have the estimates here and then if you're in the enterprise you've got the the sales order so let's first just look at the think about the normal process which is beautifully laid out here in the home page with the float chart so so let's imagine that we're in a situation where we take an estimate which might not always be the case we might we might be in a situation where we just have sales and we don't take an estimate but let's take the longest version of the cycle we have an estimate now the estimate might be we can imagine someone calling in and basically saying that they might want to make a purchase obviously estimates will be there in a job cost type of system where we have a longer project that we're putting together but that's when we're going to basically lay out how much we think it's going to cost what we're going to be charging and whatnot within the estimate the estimate looking like an invoice but it doesn't actually post anything nothing will actually be posted with the estimate it's an internal document now then if the client accepts the estimate then if you didn't have the sales order you would basically say well then I'm going to go to the invoice over here and I'm going to create the invoice from it so that's how you would have it if you didn't have a sales order but if you have the sales order you can get this added step where you're saying okay the estimate might not be accepted I might have a bunch of estimates depending on the type of industry or company that I'm in that I have created and I might only actually fulfill or have some estimates that are accepted that could be a low percentage of the ones that I make right so the sales order is a nice in-between step that can kind of give you an indication that the estimate has now been accepted now if you're in a job cost kind of system or something like that the work still has not yet been done you've just kind of like finalized the fact that now you're going to begin the job or if you're purchasing inventory for example it might be the situation where they want the inventory some custom prod some custom surfboard or guitar or whatever and now you're going to have to order order that for them and possibly select a deposit at that point in time but let's get to the deposits later so now you have the sales order still an internal type of document not actually recording anything on the financial statements but one that we want to track internally so that we can take action on it now then you can see from here the arrow goes from here if I'm looking at the revenue cycle to the invoice so the next thing that would happen is we might take that sales order and say now we're going to create an invoice now when does the invoice usually happen if you're in a normal kind of system let's say you're selling inventory or something like that or doing some jobs that are not too long in duration you're doing a cleaning service or something like that then you're going to do the work or you'll provide the product and you will then charge them at that point in time the work having been completed therefore under revenue recognition principle you record the revenue at the point in time that you completed it which would be the point in time that you send the invoice so the invoice is the one that actually records something you can create it from either the estimate or the sales order in this case possibly it might be more appropriate to take the sales order then to create the invoice and the invoice is going to increase accounts receivable meaning they owe us money and the other side is going to go to revenue and if there's any kind of inventory that's going to be dealt with here it will also record the decrease in inventory and the related cost of goods sold and then on the customer side of things when we have the invoice the next thing is we have to receive payment on the invoice so we send out the invoice we track it and then we're going to get a payment on it and usually we record then a receive payment the receive payment could be an increase to cash or you might put it into a clearing account called undeposited funds which is a whole other kind of issue that's not really where our focus is right now but it might go into the undeposited funds and then the other side is going to decrease accounts receivable that's our point right now it's decreasing accounts receivable when we receive the payment and then of course we could record the deposit which might take it out of undeposited funds and record it into the bank account if we used undeposited funds here which we might do in the situation where we have multiple deposits that we're going to be combining together that will hit the bank account and one lump sum often the case if we're using like credit cards or we have cash sales for example so that's going to be the normal kind of process now also note that the sales order you'll see that it goes up top here to a purchase order as well why does that happen why am i going up here to the purchase order well yeah i mean if we got say a sales order we made an estimate we got a sales order let's say that we make custom surfboards or something or custom guitars or something like that well then we're going to have to actually order the guitar and the custom color or whatever they want so if we don't have the the product on hand then we're going to have to order it or we're going to have to make it if it was a job cost system in which case we might make a purchase order which would then mean i'm going to use the sales order to create the purchase order to request the inventory from my vendor so i can get the inventory and then turn around and sell it with the invoice so then i go to the purchase order and then we get the inventory so the inventory adds another layer of complexity now that's going to be the normal process now a couple wrinkles in the normal process one is that if you use an estimate and you have a job cost system one in which the job takes a fairly long amount of time so it's not like you're doing you know you're not going to you it's not like you're going to do the job first and then invoice the client because the job is taking an extended period of time then you might not be using a normal revenue recognition principle but a percentage of completion type of thing meaning you're going to recognize revenue as you start doing the job if you constructed an entire house or something like that or had a large project within constructing a house then you might be trying to you might be appropriate then to recognize revenue not when the job is done but as you do the job so now you have a revenue recognition issue that's kind of a whole another type of accounting that we could that is interesting field good place to specialize in but that's another kind of wrinkle in the situation and then the wrinkle that we're really focused in on here is the idea well what if i i get paid before i do the work so so now i'm going to say i'm still going to recognize the revenue possibly when the work is done but i'm going to collect some revenue before i do the work because for multiple different reasons right one i might be selling inventory if i sell inventory and i have a custom inventory that i need to go to my vendor and purchase you want a custom surfboard or guitar or whatever that has a certain color to it or so i don't know then i have to order it from the vendor and i'm only going to order that custom thing if you're locked into the sale well how do i lock someone into the sale we collect a down payment we collect a deposit so when we collect the deposit we got paid before we did the work that's where the issue comes about in that situation you have a similar situation with rental property if you rent rental property you might collect this the last month's rent at the beginning as a way of locking people in in the event that they kind of left or something like that in which case again you got paid before you actually gave them the property therefore you didn't earn it and so you have this kind of the situation the you also might have the security deposit which works basically the same kind of idea meaning i'm going to collect a security deposit which i'm going to give back to you if the property is in order when you leave again you have this money that you haven't really earned in that kind of situation the other way that this often comes about is that you might be in an industry where you are in a subscription model so it used to be newspapers magazines classic industry where you get paid before you do the work because they're on a subscription model and you have to give me the money before i start giving you the newspapers or magazines nowadays computer applications of course are running this way so this is quite common if you're in that kind of industry we have computer applications someone's going to give you money upfront and then you didn't actually do the work you're doing the work over the next year if it's a yearly subscription for example so that's these are all areas where we have this situation where instead of me invoicing and then getting paid what's going to happen is we're going to get paid and then we're going to invoice so in the deposit situation if i i'm going to get paid the security deposit on the surfboard the guitar the rental property and then i'm going to invoice in the future for the money i already got but that's reversed right so that messes up the normal flow which messes up my whole tracking process within kind of like the customer center up top so so that's going to be the issue or you're going to get paid in a subscription model a year's worth of subscription and then we're basically going to invoice or we're going to recognize the revenue on a monthly basis let's say right for the for the 12 months out of the year after we did the work after we actually gave someone access to the software or whatever that that we are providing so so then of course the question is well you might have a similar process where someone's going to take a job we have an estimate let's say the custom surfboard situation we're going to say okay they want a custom surfboard here's how much it would cost they commit to it so we're going to create the sales order but then at the time that we create the sales order we also are going to receive a payment at that point in time now the old way that we used to do this in quick books is when we receive the payment i would just record the receive of a payment and it would record it basically as an increase to cash or unearned revenue and the other side would go into a negative accounts receivable which isn't exactly right because from a debits and credit standpoint if you if you took accounting in school you had the unearned revenue problem it should go into unearned revenue a liability account so it shouldn't be a negative accounts receivable it should be a positive liability easy from a debit and credit standpoint but from a bookkeeping standpoint it makes sense kind of to have a negative receivable because we're not just dealing with a debit and credit we're also having to go up to my customer center here and i have to track this information by customer you know and and so what i want to have is everything happening in one account which is then supported by the customer center so when you throw a liability account into the mix it messes up my tracking in the sub ledger in essence from uh that that would be easier more easily tracked if i had everything that was tied to one account so from an internal accounting perspective we have a negative asset versus a positive liability which isn't right for reporting purposes but actually kind of makes sense is is easier from an internal accounting standpoint a bookkeeping type of standpoint and then we did adjusting entries kind of like at the end of the year so that it would be correct for reporting purposes and you can still do the internal kind of uh bookkeeping so that would be that's how we kind of used to delve the work around or that's basically what we kind of did but now they have the system where we can say create the sales order and if we turn on the prepayment settings then we can we can it'll create another account which is going to be the owner and revenue account or some kind of liability account we can name it whatever we want which is cool and then we can we can properly record this into a liability account instead of a negative accounts receivable account we'll still be able to track it in the customer center which is great but we'll also see that it's not like perfect because when i look at the reports for example the detailed reports by customer then for for one customer it might not have the information for the liability accounts going to have the information related to the accounts receivable because now again we have two accounts that are related to the customers that i kind of want to see together when i'm trying to analyze what's going on with any particular customer so that's the that's the new thing it's really nice uh and and we'll test it out in a couple different ways when we make the sales order we'll then record the the receive payment in essence in such a way that it'll be recorded to a liability account instead of a negative receivable account we'll test out how it shows up over here uh in the customer center and then we'll then we'll go through and and make the invoice for it and follow through the whole process and we'll run a few different scenarios now again some questions might come up in terms of well do i need to like move up from to like the enterprise version of this of accounting because i'm in say a subscription model or one where i have deposits and i need to track that maybe not i don't you know because you might you might be fine with the negative receivable method right and so that might not be a problem if you do adjusting entries and you're aware of how the accounting process goes uh and you might even if you have the ability to do this process in some ways it's still kind of easier sometimes to have the negative receivable so if you don't have that many deposits happening you might not want to turn on the future the feature where you're going to have that negative that that prepayment account because you'd rather not add the complexity to the to the software and just and just do the normal kind of process if you only have the deposits coming up from time to time so those are kind of questions that that i think you can only really get to by running scenarios so what we'll do is we'll run a scenario for the normal process and i'll actually kind of post it out in excel as well so you can see what's happening with the debits and credits as we go and then we'll run the old version of a negative receivable so that you can see what happened before and why it was done that way and what are the pros and cons of it and then we'll run some scenarios with the new method so we can compare and contrast the pros and the cons the the pros being properly recorded from a financial reporting perspective as as we go the cons being the bookkeeping is a little bit more complex from the reporting perspective we add a clearing account which is kind of weird because now we have to monitor the clearing account that's going to be going up and down and should it always be a zero balance and um and so but it'll it'll save us an adjusting entry basically at the end uh of of the year so that's what we'll get into