 QuickBooks Online 2024, how bank feeds fit into your accounting system. Get ready and some coffee because the accounting team is on hand with QuickBooks Online 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 that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our CPA six pack shirts. A must have for any pool or beach time mixing money with muscle. Always sure to attract attention. Even if you're not a CPA you need this shirt so you can like pull in that iconic CPA six pack stomach muscle vibe man. You know that CPA six pack everyone envisions in their mind when they think CPA. Yeah as a CPA I actually and unusually don't have tremendous abs. However I was blessed with a whole lot of belly hair. Yeah allowing me to sculpt the hair into a nice CPA six pack like shape. Which is highly attractive. Yeah maybe the shirt will help you generate some belly hair too. And if it does make sure to let me know. Maybe I'll try wearing it on my head. And yes I know six pack isn't spelled right. But three letters is more efficient than four so I trimmed it down a bit okay. It's an improvement. If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Here we are in our QuickBooks online bank fee practice file we set up in a prior presentation. Remembering the primary objectives of the accounting department of the bookkeeping process being number one. The creation of the financial statements balance sheet income statement otherwise known as the profit and loss. And related reports typically done with the entering of transactions with the help and use of forms. Forms broken out by cycle customer cycle or revenue cycle vendor cycle or expense cycle and the payroll cycle. And number two communicating with those people that we're doing business with including the customers vendors and the employees which is often helped with the information on the left hand side and the sales center. Otherwise known as the customer center the expenses center or vendors center and the payroll center if we're doing payroll within the QuickBooks system. After we set up our QuickBooks file usually we need to then put in place those foundational items which often can be thought of as the cog up top including the lists. The lists being the chart of accounts as well as the products and the services. Last time we took a look at the chart of accounts which can also be found in the transactions on the left and then into the chart of accounts. And what we did is remove much of the chart of accounts so that we can then create the chart of accounts as we start entering the bank feed information. Now what we would like to do is take a step back and think about how the bank feed system is going to fit into our overarching accounting system. And this is really important to do and something that might be overlooked possibly given the fact that of course the marketing of say QuickBooks software and any kind of online software any accounting software these days that can be connected to the bank advertises as though you could just basically start up the QuickBooks file connect to the bank account and everything will magically work from that point in time. The QuickBooks system has gotten a lot more automated however you have to make sure that you get it set up properly before the automation really will kick in. And it depends on what kind of accounting system you have as to how automated the accounting system can be. So if for example you just transfer a bunch of information into your system with the bank feeds you will end up with a lot of information here which is what I would call Bank Feed Limbo because it's in the QuickBooks system pulled in from the bank but having not enough information to actually be pulled into the QuickBooks system used to create the financial statements and that could be frustrating and tedious. So what we want to do is figure out how the bookkeeping will work and how the bank feeds will fit into it. Okay so to do that let's first just think about what kind of information is going to be pulled in from the bank. Obviously you know if I think about my bank statement we can think about that as in essence the transaction the data that's going to be pulled into the QuickBooks system. So let's take a look at a mock bank statement here and so on a bank statement usually have the beginning balances, the additions, the subtractions and the ending balances. Now note it's useful to actually still look at bank statements even though you have access to online transactions in real time because the bank statement has a static cutoff between the beginning and ending points of the bank statement. That helps you to kind of understand you know where the starting point and where the ending point is. So we still use the bank statements even with the bank feeds and we still possibly will do bank reconciliations I would recommend and you really should do bank reconciliations but they might have a different impact. We'll talk more about that later depending on your accounting structure. So we have two broad categories of transactions that the bank knows about and those could be increases to the checking account and decreases to the checking account. Let's take one at a time. Let's look at the increases to the checking account basically deposits into your checking account. What does the bank know about those transactions that they can tell the QuickBooks system hopefully helping us to create our financial statements with? Well if you just deposited cash into the checking account then the bank knows the dollar amount of the deposit and it knows the date that you made the deposit. Now you still could have some difference between when you deposited it and when the transaction cleared but it should be pretty close in time. If you deposit actual money cash into the account then it's only going to take you know one to three days before the transaction clear. So although this date here might be a little bit later than the date that you actually made the cash deposit it's still going to be pretty close, pretty relevant, pretty helpful to help you determine which transaction that we are talking about. Now if you had a electronic transfer so someone paid you with an electronic transfer then that might also include a memo within the bank feed transaction. The memo could include some information that includes who gave you the money which would be the customer. That would be another useful piece of information however we would have to take it out of the memo and create the customer to help to enter the transaction. Whether it be an electronic transfer or it is just a cash deposit whether we have that customer information or not in other words we don't have an account. We don't know the account that it's going to go to. So we're going to have to assign the account. Now on the deposit side depending on how our system is and we'll talk about that in a second it might be pretty easy to assign an account because we might just be assigning them to revenue if they're deposits for the most part. However we could have a more complex system where we have to deal with invoices and whatnot and then it's going to get a little bit more complex. So we'll talk about that in a little bit here and so then we have the decreases. So when we're talking about the decreases to the checking account what does the bank know on their end? Well if we just went to the ATM and we took money out of the checking account then all the system would know all the bank would know is the money that was withdrawn and the date. The date would be quite relevant in that case because it would be pretty close. It would be exact you would think to the date that you actually withdrew the money. But again you wouldn't have the account in that case because you just drew cash out and you don't know what you spent it on. There's no audit trail for us. If you actually did an electronic transfer which is becoming more and more the case these days you can automate a lot of your transactions. That would be the easiest thing to do. So the decreases are often the easiest area for many businesses to automate their transactions because they can set up their payments with bank transfers or electronic transactions. And then what does the bank know? The bank knows that you have a decrease of the amount. It has the date. Now the date might not be exactly the date that you facilitated the transfer. It might still take one to three days but this date will still be pretty close in time. And then you're most likely going to get a memo again. The memo is possibly going to give you information that could indicate who the vendor is, who it is that you paid. Remember that that still doesn't give you the account that it needs to go to. The general ledger account is not going to be listed by who we paid. If we paid for example office depot then office depot will not be the expense account. I'm not going to make an expense account called office depot expense. I'm going to make an expense account called supplies expense or something like that. So we're still going to have to create the expense account but if we can identify the vendors then I can make a rule. So QuickBooks will start to know and be able to automate that office depot is linked to this particular expense account. So if you're trying to automate everything then what you want to do is typically do as much as you can with electronic transfers as possible. So you get that added memo information allowing you to help create the proper account and then to automate the transaction in the future. Now if you're still writing checks, if you make handwritten checks that you're making then what does the bank know? Well the bank has the date that the check cleared which is going to be a lot less useful because when you have a handwritten check you're going to have to send the check out. The other person's going to have to receive it deposit it in their bank and then your bank will know about it at that point in time when it clears. That means there's going to be a big difference between the date you wrote the check and the date that it clears. Which means you don't want to wait until the check clears the bank because you want to record it on your side so that you know which checks you've written which have cleared which have not cleared. So if someone asks you a question and you're writing physical checks about if a vendor comes back and says we didn't get paid then you want to be able to say okay let me look up the check. You could see the date that you wrote it and then you can also see if it cleared or not. And those are going to be two important questions. If you just wait until the check clears the bank then it's possible you wrote the check but it didn't clear and you'll end up writing another check. And you won't know that the check's stuck in the mail and then you can have two checks. So a lot of people might not be in that area anymore because they're not using physical checks anymore. But if you are then you still want then you can't just rely on the bank feeds. You got to enter the check in first so you can determine the outstanding checks. You will have another piece of information to help you determine the proper amounts as they go through the bank feeds and that will be the check number. So you can have a check number which is a useful for the checks. So that's basically what the system knows. That's what's going to pull into what I would call bank feed limbo. So notice in the first month of operations all that information is going to pull in here and I call it bank feed limbo because it doesn't have the information. It doesn't have that last thing it needs in order to be pushed into the promised land of helping to create the financial statements. And the minimum that we still are going to need will be the accounts. We need to assign an account to it. And we also are most likely going to want to although it might not be required record the customer for those increases and record the vendors for the decreases. Okay so now let's get into a flow chart. Now this is a QuickBooks desktop flow chart that I'm using for online purposes here because I just want to look at the flow of the forms which will be basically the same in any accounting system. And then think about how the bank feeds will fit into the flow of the forms. So you will recall that the accounting cycle can be think of as a cyclical process. So it's going to repeat itself in essence and so it has a yearly cycle and then it has a monthly cycle that repeats. And then within the monthly cycles we can break down the cycles by the vendor cycle the customer cycle and the employee cycle. Otherwise known as the you might call it the purchases cycle or the accounts payable cycle or the expense cycle. The customer cycle which could also be called the accounts receivable cycle the sale cycle the revenue cycle the income cycle and the payroll cycle or employees cycle. So the general notion would be that the closer we are to a cashed based system the easier it will be for us to just get to a point where we can automate our books directly with the bank feeds just take the bank feed information and create the financial statements from the bank feeds. The more we have to deviate from a cashed based system to an accrual system the more that we're going to have to do a little bit more work on our side and try to integrate the bank feeds into the system. The bank feeds in that case not always used to create the financial statements but rather helping us to match to transactions we have entered helping us in essence with the bank reconciliation process. Now whether we can be on a cash basis or accrual basis system is not something we have to think of as the accounting system as a whole. We usually think oh well your accounting system is either cash or accrual basis but we can really think about each of the different segments or each of the different cycles and see whether or not that cycle is in essence on a cash basis or accrual basis. I also want to point one other little technicality out here and that is that when on certain transactions you can say that the basis doesn't really matter because the point in time that you earn the revenue or the point in time that you incur the expense is happening at the same time that you got the cash or paid the cash and therefore there is no difference between whether you call it a cash basis or accrual based method. But in those circumstances we're going to say we're on a cash based method because that's kind of the easier thing. For example if I'm at a cash register and I'm at a food truck and I get paid at the same point in time that I give the food then I would say that's a cash based system for the point of our purposes here because we're getting paid at the point in time that we provided the food and that's when the revenue would be recorded but you can also say that you would be on an accrual based system and the transaction would be exactly the same because you would still record the transaction at that point in time just for different reasons. On a cash based system you would say it's because I got the cash at that point in time on an accrual based system you would say it's because I did the work I provided the food at that point in time. It's only when those two timings are different that you have a difference between the methods. In other words if I had an invoice over here that means I did the work when I gave the invoice typically but I'm not going to get paid until the future. So then there's a timing difference between when I did the work and when I got paid and therefore on a cash based system or on an accrual based system you would record the revenue when you created the invoice. But if you're on a cash based system you would enter the invoice you wouldn't record the revenue until you've received the payment. That's a technicality we're basically going to say though it's a cash based system if the two things happen at the same time. All right let's first take a look at the vendor side of things the expenses cycle and this is the one where many small businesses will be able to really utilize the electronic transfers and the bank feeds to create their books most of the time because most small businesses are going to set up their payments to electronically pay most of the time rather than using accounts payable possibly. Oftentimes when businesses get larger it becomes more and more important to really get into the details of your time management of the money for the payables. In other words if for example I was to pay my utility bill when it becomes due and I can pay it today or I can pay it 15 days from today. If I'm a small business and I'm paying you know $100 it doesn't really matter if I pay it today or 100 days from today the time value of money is not going to make a significant difference to me. So I'll just pay it when it becomes due and make an electronic transfer that will happen automatically basically. But if you were a large business with thousands of transactions for $100 or a bunch of transactions for thousands of dollars rather than hundreds of dollars that 15 days becomes more important for money management purposes because of the time value of money. And that's when larger businesses are going to have whole departments that are just trying to manage the accounts payable attempting to pay them basically as late as possible. So again a lot of businesses probably when you're talking about the outflow of payments are going to be more reliant on the bank feeds that would be the easiest system to use. So you would use an expense type form which would be kind of like a check type form as something clears the bank. So what would happen you're going to set up an electronic transfer with a telephone company. And then instead of instead of recording the transaction on our end when when the electron transfer takes place which would be a full service bookkeeping system we're not going to record it because we're more reliant on the bank feeds. We're going to wait till it clears the bank and then comes through the bank feeds so we're getting the information actually from the bank to record in our QuickBooks system. We can do that because we're a lot more reliant on on the transactions the electronic transactions we have more faith in those these days because the point in time that the transaction happens and that it clears the bank is closer in time these days. That makes it basically easier to do so so that's going to be the general process for a lot of small businesses and then we could just record the expense account as it clears the bank account. Now if you were writing checks by contrast and this is what used to happen we couldn't really do that kind of automation even if we had the the ability of the bank feeds to give us the information from the bank. Because if you're writing a physical check like I say you have to track the actual outstanding check. So if you're writing a check for the utility bill then you want to record the transaction when you write the check because because there's going to be a significant time lag between when you write the check and when the check clears the bank. Therefore you have to do a full service accounting system in that we're going to do the bookkeeping on our end. Enter it into QuickBooks when we write the check and then when the check clears the bank feeds the bank feed data is no longer being used for us to record the check but rather is just being used to make sure that the check cleared. In other words it's being used to help us with the bank reconciliation. That's actually more of a full service accounting type of system and you kind of have to do it that way if you write checks because if someone if the telephone company comes back and says you didn't pay us. If I don't enter the check into the system when I wrote it then I'm not going to know that I wrote the check. What I want to have is the check in the system when I wrote it and then be able to determine if it was cleared or not cleared if there's a problem with it. So for small businesses that want to automate you probably want to move away from writing checks to entering electronic transfers so that the electronic transfers have a shorter time distance allowing you to basically rely on the bank more. To record the transactions as they come through with the bank feeds. Now if you were to put in like an accrual thing to it in other words you enter a bill. So instead of just paying the checks when I get the checks I'm going to get the bill and then I'm going to enter it into my system as a bill. Noting that a bill form within QuickBooks has a more restrictive far more restrictive meaning than bill form used in normal language. Like I can use bill form and invoice interchangeably in normal language. So if the telephone company billed me the telephone company invoiced me it's kind of the same thing right. But when I enter the bill into QuickBooks I mean that I got I got the bill from the vendor and I entered into the system as a bill form the bill form increases accounts payable. So an accounts payable is an accrual account. So if you're dealing with accounts payable then that's going to complicate the system right. I'm going to have to increase the accounts payable and then I'm going to have to pay off the bill. There's no cash transaction happening when I enter the bill into the system. I'm increasing the accounts payable the other side's going to an expense. Therefore that transaction cannot be recorded simply with the bank feeds. Then when you pay off the bill you might be able to connect the payment coming through the bank feeds to the bill. But likely you're going to be paying off the bill and then checking the payment off to the bank feeds using the bank feeds as an internal control. So we'll go over each of these steps when we look at the bank feeds we'll construct our books using the simplest method a cash based method. And then we'll introduce these deviations from it to show you what I mean as as to why it would be more complex. Then obviously on other types of things if you purchase like inventory then that could potentially cause problems as well. Because typically you have to put the inventory on the books as an asset and you might need to be able to track inventory within the system. There's different ways to track inventory we'll talk more about that in the future. And then if I go into the customer cycle the easiest customer cycle that you can put into place and this will be dependent on the industry you were in. If you are in an industry like you just do YouTube videos or something and you get paid by YouTube and you're tracking that. Well then that would be the system that would be easiest to do because you can get an electronic transfer from YouTube. And you're probably just going to wait till it clears the bank. And once it clears the bank you'll see it come in the bank feeds and then you can use the deposit form which is the form generated when you have increases from the bank feed to record the revenue of it. That would be the easiest thing to do. Notice again you're relying on the bank feeds to do that and you're losing some detail such as the customer information and and the and the items. Meaning you know it came from YouTube but you're not actually entering a sales form which is typically a sales receipt and an invoice. And so you might be losing some detailed reports but you probably it's worth it to do it that way because that would be the easiest thing to do in that situation. And then a bit more complex situation would be one where you're at like the food truck or you're at the restaurant and you are collecting money at a cash register at the same point in time that you do the work. In that kind of situation you're still on a cash based method but I can't wait till the money clears the bank in order to record it because I want to be able to double check the money that came into my cash register. So you might be getting multiple types of payment at the cash register cash checks debit cards and whatnot. And you're going to have to you have this grouping problem in those situations because that money is not going directly into your checking account with an electronic transfer. So it's not like I can wait till it clears the bank and just say oh it came from this customer and I'm going to record it from this you know I can't see that. If I got a cash payment then what's going to happen is I'm going to take all the money at the end of the day out of the check out of the out of the cash register go to the bank and deposit it. And when I deposit it into the bank it's going to be in a lump sum format. So so then what I would like to do is make sure that whatever deposit I put into the bank ties out to what clears the bank. So therefore you usually have a clearing account. In other words I'm at the cash register. I need to be able to count the cash and therefore I have an internal control that I need to be putting in place so I can't just wait till it clears the bank. So I need to put it into a clearing account so that I can then I can then group my deposit in the same format in our system as we'll clear the bank. So that when the cash goes through the bank feed the amount that clears the bank feed will match what our system has. In other words for example this deposit right here. If I deposited that in our QuickBooks system as a bunch of $100 deposits and then it clears the bank as $3,000 it's going to be difficult for me to reconcile those two. So what I want to be able to do is get the grouping on our end to match what's on the QuickBooks side and that adds complication. If you're getting money from a credit card or any intermediary type of financial institution that could add complications because again they're going to put the money into our account in a grouping that might be different than the actual individual sales transactions number one and number two I'm not going to be able to see the actual customers that gave me the transactions because the credit card company it's just going to say that it came from the credit card company right. So then I'm going to have to go to the credit card statement to see the actual transactions so that can add a level of difficulty. We'll talk a little bit about that later and then we have an invoice situation. So now we're on an accrual system which we know will complicate our whole bookkeeping process because an invoice means that we did the work first. And you can't really choose whether you're on a cash based system or not right because if I'm getting money from YouTube it's like well yeah I chose to be on a cash based system. It's like yeah no you're getting paid by YouTube that's why you have the ability to do that. If you're in a bookkeeping if you're a bookkeeper you can't just say you're going to be on a cash based system generally. I mean you could try but the industry standard is that you're going to have to do the work and then build the client which means you have to deal with the accounts receivable because now I'm going to enter an invoice which is an accrual transaction which means I did the work. I build the client but I haven't gotten paid on it so I'm going to have to track the accounts receivable. I can't of course enter the invoice from the bank feeds because there's no cash related to this transaction. So if I have to deal with invoices then it's going to complicate my whole bookkeeping system to the point where I can't just make my books from the bank feeds. I'm going to have to track the accounts receivable then I'm going to have to receive the payment and possibly I could use the bank feeds to tie out to the invoice. We'll talk about these options but it's likely that I'm going to receive the payment and then record the deposit and then possibly use the bank feeds to match out to what I recorded on our side. Again there might be some different methods we can use to integrate the bank feeds to kind of tie into the invoice or the receipt payment. We'll talk about that later but that's that. Then you have inventory. Inventory is going to mess things up because you have to purchase the inventory. You possibly have to track the inventory which you could do in QuickBooks but aren't required to. You might track inventory elsewhere in Excel or something like that but if you're tracking it within QuickBooks then when you make the sales side of things you're going to have to typically use the invoice forms and the sales receipts if you want to track the inventory within QuickBooks because those are the forms designed to do so neither of which are created through the bank feeds. When the money goes to the bank feeds you're going to have the deposit form which isn't designed to track the inventory. So inventory if you're on a perpetual inventory system could complicate things. Also taxes complicate things. So if you're in a situation where you have to deal with sales tax then that can complicate things in multiple ways because when you have your revenue transactions again you're typically going to need to use an invoice or sales receipt if you want to calculate the sales tax using QuickBooks normal sales tax calculation form rather than using the deposit form. So you could work around that. You could try to come up with some manual method to deal with your sales tax obligations which is a usage tax which we might talk about a little bit but there's just to point that out sales tax will mess things up. And then there's payroll. Now payroll will differ from location to location. I'm talking US payroll typically here other countries will have their own tax laws. Remember that the accounting system is the same. The double entry accounting system is the same everywhere. It's math. It's a universal thing but it's just the currencies that will differ. Laws that impact the accounting process are unique to locations right. So any law that has a tax implication to it is going to have an impact on and complicate the transactions typically. And the United States we have a very complex income tax system which requires withholdings and whatnot for payroll which results in payroll being basically its own industry these days due to the complexity not from one individual tax but from the fact that we have these combinations of taxes compiled with the human resources needs and whatnot. So that gets gets kind of messy over time. So the question with the payroll then is going to be do you want to do payroll within QuickBooks or do you want to have a third party provider doing payroll. Note that if you do payroll within QuickBooks then you by definite you're going to have to deviate of course from just creating your books from the bank feeds because payroll when we enter the payroll transaction it's going to create an accrual account. You got to track the payroll liabilities that those are the withholdings that are taken out and we'll talk more about this in the future. Now if you're a bookkeeper and you're trying to automate everything then you could come up with a system where you have a a good payroll provider and you have yourself as the bookkeeper and you have a good accountant. And in that's in that system you might say hey look I'm just going to wait till the payroll clears the bank and just record everything on a cash based system to payroll expense. I'm going to let the payroll provider like an ADP or a paychecks those are just I'm not recommending them those are just the big ones. I'm going to let them actually process the payroll deal with the payroll stubs deal with the human resources and all that kind of stuff. And then I'm going to let my accountant at the end of the year do an adjusting entry based on the payroll reports provided by the payroll provider to adjust my cash based system to whatever accrual base is needed. In order to do whatever we need to do at your end which would be in the United States tax preparation as well as the the any external reporting you might need to do for bank loans or for investors and whatnot. So it is possible to do that but you but if you were to do that if you were trying to automate everything and you want to make it as easy as possible then you could be on a cash based system. In essence and still have payroll by again having the third party provider help you to handle the in the specialized needs of payroll. So we'll talk more about that in the future. But those that's the general idea. So when you're thinking about your accounting system how do the bank feeds fit into it. Most likely it'll fit well or you can make your books most easily for many businesses from the vendor side of things when you're the money going out. The customer side of things the revenue side might still be easy but could be more complex depending on the industry you're in as to whether you can wait till something clears the bank or if you are in a cash register situation. Or if you have to enter an invoice and then again the payroll system if you're within QuickBooks you're going to have to pay more to process the payroll within QuickBooks. That's going to complicate the bank feeds for the payroll because you won't be able to just record on a cash based system with payroll. But you could try to be in a cash based system even if you have payroll if you work with a third party provider possibly and a good accountant or tax preparer.