 QuickBooks Online 2024 Credit Memo Bad Debt and Sales Returns. Get ready because we're moving on up with QuickBooks Online. First a word from our sponsor. Actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us. 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 online in our browser searching for QuickBooks Online test drive looking for the result that has into it.com and the URL into it being the owner of QuickBooks. Finding the United States version of the software and verifying that we are not a robot. Opening some reports like we do every time going to the reports on the left hand side right clicking on the balance sheet and the favorites opening in a new tab right clicking on the profit and loss open link in a new tab looking at those tabs that have been opened up top closing up the hamburger there's our balance sheet tapping to the right closing up the hamburger there's our profit and loss or income statement. Back to the first tab that's the setup process we do every time data input will be on the left and then on the right we'll see the results on the financial statements and related reports let's look at the drop down we've been looking at the customer cycle remembering that for QuickBooks customers means the people that are paying us for goods and services that we are providing them we could have a very easy cycle or a more complex cycle depending on our industry the easiest cycle being one where we might just use a deposit form possibly from the bank feeds to record the revenue possibly as they go through the bank feed transactions something like gig work if we have a cash based system but a cash register we'll typically have to use the sales receipts and and then record the deposits to the bank and match them using the bank feeds or a bank reconciliation process an undercruel based method will have an invoice and then the receipt of the payment and then the deposit and usually use the bank feeds to match out there now this time we want to go to the credit memo form now usually the credit memo form has to do with the invoice so we would have an accrual system usually where sometimes you might have a credit memo the credit memo often being confusing because it's a reversal transaction it looks kind of unusual to look at it in and of itself because it's kind of backwards all of the accounts are backwards we can think of it as in essence reversing the invoice so let's take a look at a flowchart just quickly this is a desktop flowchart just to get an idea of what we are doing here so we can see the arrows and the flowchart although it's a desktop the forms are basically the same for any kind of accounting system if we have an invoice what happens a accounts receivable goes up the other side is going to be going to then a revenue and we might have inventory that we have to deal with next we expect to receive a payment on on that however if something happens in the middle of that transaction such as they return the merchandise then we're going to have to reverse the invoice how could we do that well you might think the easiest thing to do is just to delete the invoice but we don't want to delete the invoice because then then we don't have an audit trail number one and number two the date that the invoice was created might have been in a prior period and then if we delete it in the current period it's going to mess up our prior period income statement which rolled into retained earnings so what we want to do instead would be to reverse it formally with a form which would be a credit memo which will in essence reverse the transaction so because credit memos are more unusual they don't happen all the time hopefully because usually we expect the invoice to be created we receive the payment we deposit it and everything moves smoothly then it's sometimes a little bit more confusing to think about the credit memo because of that but it's kind of in between this spot if there was like a return of the merchandise or or for whatever reason we don't think we're going to receive payment now you can also use it in a situation where you have accounts receivable outstanding and you're trying to think hey look i'm not getting paid on these accounts receivable i have all the stuff and accounts receivable and i need to remove it somehow without without messing up my prior period balances and without messing up my tracking system within quickbooks so that i can still track the outstanding invoices that are still due so in that case you might be looking at a bad debt type of situation where you might use a similar process to remove the accounts receivable off of off of the books so that's why we could use this for a bad debt situation or a sales return type of situation and if you have an allowance method for bad debt then you we might be dealing with an allowance kind of account as well and so note if they already paid us then we have a different situation because now if they paid us and then they return the merchandise after they paid us well then we have to give them money back or some kind of credit to purchase something else or something like that we'll talk about that possibly in future presentations right now we're looking at the scenario where we have an invoice but they have not yet paid us all right so let's go back on over and let's actually make an invoice and run through the process so let's first start with an invoice that has inventory related to it so i'm going to say let's make one for customer one again customer number one tab and we're going to set that up and let's say that this happened on 010124 and i'm just going to make up a new item again item number one item number one tab and let's create an inventory item i'm just going to call it item one i'm going to put 10 on hand which will make a transaction quickbooks will make the transaction of the purchase i'm not going to put a reorder point inventory asset is the tracking of the inventory account on the balance sheet we're going to sell them for 150 i'll take it 155 155 and it's going to be subject to sales tax we're going to say that the purchase of them was just for 100 therefore the net profits will be 55 dollars per sale let's save it and we're going to say did did did okay so there we have that and sales tax has been applied what's this going to do it's going to increase the accounts receivable by 16740 the other side's going to be going to revenue by 155 the difference of the sales tax 1240 is going to be increased to a liability account and then inventory is going to be going down by the 100 dollars that's not on the form but known by the system accounts receivables going to i mean cost to goods sold is going to go up by 100 net income impacted 55 increase let's see that in a journal entry this will be an invoice and we're going to say the invoice increases the AR and we said it was for 155 actually hold on a sec then sales is going to increase and we're charging negative 155 but then there's sales tax sales tax payable which was 8 percent this times 0.08 so that means negative sum we're going to be receiving AR of 167 is that right 16740 sales tax payable is going to be 1240 and income is going to be 155 and then we also have the cost of goods sold going down and we have the inventory i'm sorry cost goods so going up and inventory going down of 100 so cost to goods sold and inventory nothing's in inventory right now so it's going to be negative let's put something in inventory let's say inventory was was 20,000 and let's put the negative 20,000 in equity so now we have net income impacted by that that 55 difference and now we have the accounts receivable here and we're going to have to pay the sales tax and so on so let's go on over and record that save it and close it and let's go to the balance sheet and run it and just check that so if I go into the A to the R close in this out oh hold on back back range change it first so i'm going to go from i'm not giving 01, 01, 2, 4, tap, 12, 31, 2, 4, run it to refresh it and then accounts receivable and there's the 167 the full amount including sales tax back income statement range change 01, 01, 2, 4, tap, 12, 31, 2, 4, run it there's just the amount of how much we charged back to the tab to the left the difference in the liability account of a sales tax payable there's the 1240 back inventory is going down up top so if I go into inventory we can see that it is going down by 100 back we can see if I go to the tab to the right that we have the cost of good sold of 100 net impact on net income 55 back to the tab to the left the accounts receivable sub ledger also affected let's look at the report tab to the right right click on it duplicate that tab and then I'm going to go to the reports on the left and look at the accounts receivable who owes you money and we want the customer balance detail report closing the hamburger there it is right there the total of this report 544-544-892 ties out over here 544-892 and we have the inventory sub ledger we have to deal with let's go to the tab to the right right click on it duplicate it check out that sub ledger by going to the reports on the left I'll just type in inventory valuation summary close a hamburger and we put 10 let's change the range 1231-24 run it so we put 10 on hand one was sold nine or left total balance at 149625 ties out to the 149625 if I go to the first tab and then go into my sales I can track the invoice here here or in the customer let's look at the customer close on the hamburger customer there's there's the invoice now let's say they come in they say I don't like this that your product is broken I don't want it I'm going to give you a bad yelp review and we're like no not don't hurt me on the interwebs again for goodness gracious so we say we'll give you your money back or we won't charge you or anything just don't hurt us on the interwebs so it's useful to have this one open so I'm going to go ahead and edit it so I can open it up and then I'm going to duplicate the tab I'm going to right click on the tab and duplicate it I'm going to pull this tab to the left and then close up this one and I'm going to create our credit memo now so I'm going to be I'm in this particular let's go back into that particular customer sales tab we're in the customers we're on customer number one and then if I say new then I want to create a credit memo so I can create the credit memo here or I can hit the drop down over here and create the credit memo either way let's go here it'll populate for us I'll say credit memo and so there's customer number one has been populated email we would need if we're sending that out in email let's say the credit memo happened on let's say this the next month so 020124 so a month later credit memo happened and then what I'm going to do is I'm just going to match the same item so it's going to be item one item number one and so there it is and so it looks basically the same right 16740 16740 but the credit memo is going to do the reversal of it now notice this let's first think about what this will do and then we might want to tweak it or change it a little bit from here so let's if I go over and I say okay now let's say that we're going to have the credit memo that happens I'm going to copy let's copy this whole thing over and I'll put that over here and let's say that this whole amount rules into so I'm going to I'm going to copy this side and say paste 123 and then delete this and so and then equity should be I'm going to say equity is 30,055 negative 30,055 so now I just basically took the ending balances and I made them like my beginning balances for the next month let's say and then so now if I'm going to reverse this transaction the easiest way to think about it is credit memo I'm just going to do the exact opposite so I can keep the accounts basically the same but I'm just simply going to reverse them so now this is going to be a credit and now this is going to be a debit and now this is going to be a debit and this is going to be a credit and this is going to be a debit notice I'm keeping it even the same order I'm not trying to put the debits on top I'm just going to take this exact thing and then reverse it exactly that's how the first way you might want to think about what is happening I'm not trying to make it look nice with the debits on top or anything like that I'm just trying to understand what is happening and the easiest way to do that is just to exactly reverse what's happening with the invoice because that's what we're basically you know doing over here so so note also when we do that everything works out fine except this income account might not be where we want it to go we might rather that it goes into like a sales returns so for example if I recorded this one what's it going to do it's going to do what we expect it's going to decrease the accounts receivable the other side and then we have the income is going to be reversed that's the weird one right it would have reversed it exactly over here but sometimes I don't want income to go down I'd rather it go to a sales returns and allowances or you might use a similar technique to write off bad debt or sometimes you might even want it to go to an allowance account if you're using an allowance method so then the so we'll talk more about that in a second sales tax is going to go down and so that makes sense so that that's back down and then the cost to goods sold this looks weird as well you get a negative a cost to goods sold right so now this is actually a negative result income went down and cost to goods sold went down the difference being a decrease of 55 here and then the inventory is uh inventory is going to go back up now inventory is also an issue because if you've returned the inventory the question is should I increase the inventory again or is it a damaged good which I'm not actually going to increase the inventory in which case you might not have this second transaction because you still would have incurred the expense and the inventory is no longer good or returned so that's another question that you put in place so this is the first the easy like the most straightforward credit memo would just exactly reverse the invoice so let's first look at that and then we'll change it a little bit on the next one let's say save and close and check it out so let's close the invoice now and I'm going to go to the balance sheet run the balance sheet if I go into uh and can I run it month by month uh let's see if I can I can say well it doesn't really matter on the balance sheet let's go into the balance sheet AR and there we have the credit memo reversed it that makes sense and then let's go to the income statement and let's run this one month by month uh totals only months so now if I look at uh January we had uh the 500 and then it reversed out in February exactly right and then if I go back to the balance sheet the other side is going to the differences in the sales tax so that's in here board of equalization so it reversed that back out that makes sense and then the cost and then the inventory inventory if I go into the inventory it's been reversed that makes sense going back if I go to my caught my profit and loss the cost to good solds reversed so you can see it had a 55 increase in January 55 decrease in February when we reversed it the sub ledgers if I go back on over to the accounts receivable sub ledger which is over here and I run that then the no longer have an outstanding invoice here which is good and the total ties out 528152 uh 518152 and on the inventory the inventory back up to 10 it was at 9 before total inventory at 159625 uh 159625 if I go internally here notice what happened an added step kind of magically appeared here you'll note because we had the invoice the next step would be to receive a payment but we didn't get a payment instead we entered a credit memo so we usually need an added step to link those two together which uh they created a payment form you can see here it says created by QuickBooks online to link credits to charges so we have the settings on that it does it automatically here if you didn't have that setting on then you have to make a payment form to link up it would look like this if I go into the payment form and we edit it we can see that we had the customer uh up top and we've got two things linked up we didn't get a payment up top but instead we have the invoice that is now linked up against the credit memo and the two tie out so we have a received payment form usually the form used to get money cash from the customer to reduce account receivable but instead of getting cash it's linking it up to the credit memo and so that's that interim uh kind of form let's do it again but this time we'll change we'll change that one account to sales returns and allowances so let's do it again let's go okay let's go invoice and we're going to say this time it's going to be customer number two tab and we'll go boom and say this happened on let's say 030124 and we're going to say that the product was item number one again and 155 so that looks good and then I'm going to say let's record it this will do the same thing save it and close it if I go to the balance sheet run this one we once again have an increase to the AR for another 167 let's go back the revenue if I run it is increased by 155 increase to the 100 cost to get sold net impact 55 the difference is going to the sales tax over here we also have the impact for the inventory and the sub ledgers I won't go into them in detail because it's the exact same thing as we did last time let's go to the first tab sales customer number two and now let's imagine same thing they come back and they have they want a credit memo I'm going to open it up edit it I'll duplicate this thing right click and duplicate it so I can have it side by side if I had two screens I would put them on two separate screens to make sure I'm doing the data input properly I'm going to close this one back out hit the new button and credit memo so we'll have a credit memo and this one's going to be for customer two tab tab tab let's say this happened on 0401 to four and I'm just going to put item one again so it's going to mirror the invoice we do the exact we have the exact same thing but now the question is well look I don't want it but I don't want it to be going to the decreasing the revenue account I want it to be going to like returns and allowances so I'm going to say all right well then how can I do that I could say that I'm going to make another item called possibly called sales returns and allowances allowances oh my goodness sales returns and allowances all right I think I got it I'm going to add that and so it's going to be this one I'm going to say it will be I'll make it a service item so I'm not going to be tracking inventory allowance sales returns and allowances did I call that for the description I'm not going to put an amount because I'll just populate the amount and I'll try to use this account every time for it and I'm going to make a new account though and I'm going to say it's a new account and I'm going to say it'll be an income we can make it an income type of account but I'm going to name it sales returns and allowances so it'll be kind of a contra income account it'll be a negative income account so I'm going to say save it and close it and so there it is I will keep it subject to sales tax because it's going to be matched up to an item that has the sales tax and we don't need to have any purchasing items so I'm going to say okay save and close and so then I'm just going to populate the amount down here at 155 matching the amount that I had up top and then what I'm going to do up top is remove the amount up top so now you can see that the bottom line is the same as what the invoice was 167 but and it's still subject to sales tax and whatnot so it should reverse the sales tax but I'm not going to delete the first line because the first line is still going to take care of the inventory impact meaning there's going to be return of the inventory which is driven by this first line for the hundred dollars that will be reversed but then this line will then be picking up where the actual income account is going to go which will not be going to the revenue account it's going to be instead be driven by the sales returns and allowances which we put into a contra revenue account this time so if I looked at it over here if I copy this over again I'm just going to copy this over here boom and the difference is instead of this reversing to income I'm going to make a new account and format paint it boom boom it's going to sales returns and allow allowances okay and then so this account here has now changed to here and this and all that's happening is this number is now going into this account so that we don't decrease the income same impact on the financial statements as before except hold on it's backwards here let me just this should be the same numbers that we had before due to there I'm going to copy that and paste oh no that's not right paste values on oh wait I can't do that uh I want to paste just the formulas paste the formulas okay so now we have the same thing happening over here but it just didn't go to the income account it's going to the sales returns and allowances so let's check that out so we're going to say save and close I'll close the invoice here if I go into my balance sheet I'm going to say okay the accounts receivable has now gone up and down again if I go to the profit and loss and run it we can see now we had same kind of thing that had been before but now instead of decreasing the revenue account we put it into sales returns and allowances so that's a nice little trick that gets us to the same bottom line and it still handles everything properly but it puts it into this sales returns and allowances account now you could do a similar thing for like like if you had a bad debt type of issue so so for example if you go into your your accounts receivable aging and you notice that you have a lot of stuff that you're not going to be collecting on and you want to be writing off those items from a journal entry standpoint what would typically happen is you'd say okay well let's copy this over again and say and let's just delete all of this stuff and I'm just going to delete this and we'll say format paint that here so so normally if if I had a bunch of stuff in accounts receivable let's say I had twenty thousand in accounts receivable and so say negative twenty thousand uh in accounts receivable let's just say this is negative four nine eight eight seven point six and then I'm going to say well five thousand of it you know isn't good or or I'm not going to be collecting uh on you know like five five thousand of it or something like that then that from a journal entry standpoint if it was a if it was a direct write-off method it would be fairly clear that you would have the expense down here which would be called bad debt expense and you could say okay I'm just going to do a journal entry that's going to be saying I'm just going to expense it and the current time frame and I'm going to take it out of the accounts receivable let's say it was five hundred dollars or five I said five five hundred dollars decrease accounts receivable bad debt now the problem with doing that though is that if you use the journal entry that's not going to work in quickbooks because quickbooks has the sub ledger it needs to track and the journal entries not going to tie out to all the internal kind of documentation uh within the system so you typically don't want to have to do it with a journal entry you'd like to be able to to decrease it some other way and possibly you can use in some cases like a credit memo kind of situation for that so for example if I had if I go back on over and I said that I had let's say an invoice let's make an easy invoice this one for customer customer customer number three tab and we're going to say that this happened on 060124 and let's just say we have a service item this time service item tab and we'll just make a new service item it's going to be a description let's make this two hundred dollars not subject to sales tax we'll remove the sales tax this time and so we'll make it a little bit faster because we're running way long on time two hundred dollars this is going to increase the accounts receivable and the other side's going to go to revenue so let's save it and close it balance sheet and we're going to say run it accounts receivable is going up back on over income statement running it we have two hundred dollars in revenue now if I go to my sub ledger here and I and I say if I run my report that's the wrong sub ledger and I'm saying okay I've tracked I've been I've been tracking these accounts receivables a lot of times people have a something will get messed up on the accounts receivables and you have all these invoices in here that you don't think you're going to collect on and it's like well how can I get that out of here I'd like I can't really do it with a journal entry because if I do the journal entry won't link up to the invoice and this report will show both an invoice and a journal entry which is kind of messy so what what you might be able to do is like use a credit memo to try to remove that to the proper account but then we want it to be going to bad debt right we'd like so we can use a similar type of method and say okay well what if I went back on over here and I went into my sales and I go this is customer number three and I'm going to edit that one so I can see it and then I'm going to right click and duplicate a tab and so let's go back in here again and see if I can make okay close this out plus button credit memo and do a similar kind of idea here so we're going to say credit memo and we'll say this is for customer number three and this say this happened on seven one the next time period and I'm going to say this is for service item one service item there's the $200 that we have here now if I do that once again it will reverse exactly it'll do everything that we kind of want but it'll make a negative income instead of a positive what we want this time is like a bad debt account so I can do a similar kind of thing here I could say well let's say that I make a bad debt item I'm going to copy it tab I'll call it bad debt this time it's going to be a service item bad debt description I'll leave the price alone but the income account I don't want it going to an income account instead I want it going to a expense an expense account this time which I'm going to call bad bad debts bad debts boom they might have one already set up so maybe not okay so there it is so now it's going to go there so what I'm going to do is again I'm going to remove the 200 up top and put it down here 200 down here remove it up top it should have not been taxable so I'll remove the tax now here you might just put it directly in a bad debt this first line item isn't really doing anything right now as it was when there was inventory because there's no inventory this time although it might give you a little bit more description of what is happening so it might still be useful to keep it there so you can see the service item that was charged and the bad debt that is being reversed on it also note that if you were in a situation where you did have inventory and the inventory wasn't coming back you didn't want the inventory there because it was damaged or whatever then then you would you could remove this first line item which would be recording the inventory right you could you could take that out so it wouldn't record the inventory if you want to but here service item we're not dealing with inventory let's just record this one and save it and close it and check it out I'll close out the invoice and then let's run it and so what should happen in my accounts receivable I should have it going in and out that makes sense and then on my profit and loss it should be reversed in the current time period so so that makes sense so here's the expense and the current time period so I'm recording it as an expense instead of a contra revenue account as we might do in a sales returns or allowance but same concept and then in my sub ledger it's been removed from my sub ledger and I don't have like an invoice and then a journal entry that's all messy and then if I go into my internal documentation and I go into my sales down here then we have our our customer number three and once again it has made the invoice that has now basically saying it's been paid like if I go into the if I go into these items how come I can't see let's close the hamburger and that'll make it easier so if I edit this one I could see what has happened it's been paid it's linked to the payment and then it created this payment form once again created by QuickBooks online to link the credit memo to the payment and everything lines up it's all nice and tidy internally and I've got that accounts receivable off the books hopefully without messing any prior period transactions right I reversed it on the current period and I don't have all this mess of journal entries and invoices that haven't been like linked up and tied together from an internal perspective now I won't go into it in detail because we're running way long on time here but note that you might also have an allowance method in which case you try to estimate how much of the accounts receivable is going to be not paid you know and and record that as a journal entry and then when when things become bad bad debt because you realize that you're not going to be able to collect on something instead of writing it off to bad debt at that time you might write it off to the allowance account but it's a similar process you can do basically the same thing so you might not you might have a like an allowance account up here if you're and that would usually be for larger businesses right smaller businesses probably aren't going to might not spend the time to do the allowance account for external reporting you need the allowance account for a cruel accounting so in that case you might have a similar process but you'd be posting it to the allowance account and then doing your periodic allowance adjusting entries you know at the end of the year or month