 QuickBooks Online 2024. Advanced Customer Payment or Unearned Revenue Method Number 2. Get ready and some coffee because we're going to be on top 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, trust me, I'm an accountant product line. 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 accountinginstruction.thinkific.com. Here we are in our Get Great Guitars 2024 QuickBooks Online Sample Company file. We set up in a prior presentation opening up the major financial statement reports like we do every time the reports on the left. We're going to be in the favorites right clicking on that balance sheet to open a link in a new tab. Right click on the profit and loss open link in a new tab, the same for the trustee trial balance. Let's tab to the right, close up the hamburger on the balance sheet and then run the date range from 010124 to tab 022824. I want to see it on a month by month breakout. So we'll select that and then run it and then tab to the right hamburger close. And then we're going to say this is going from 010124 tab 022824 tab. We will once again break it out on a month by month side by side refreshing the report tabbing to the right hamburger close. And then once again going from 010124 tab 022824 tab. Let's change it to months and then run it to refresh it. Let's go back to the balance sheet to get an idea of what we will be doing. We're thinking about sales once again, but in a situation where we have the unearned revenue last time having looked at this problem, thinking about one method of dealing with it, which I think is great for internal purposes to be able to track the flow of the receivables, but does result in a temporary negative receivable account. And if we use this method, we can use items to basically record the proper basically liability account as we do the data input instead of waiting until the end of the period to make an adjusting entry. So let's remind ourselves what the situation is by going to the flow chart over here. This is a desktop flow chart, which we're using for online because we just want to look at the flow of the forms, which is basically the same for any type of accounting cycle, noting that if we're on the revenue cycle at the end of the process, we expect money to be coming into the company for goods and services sold. And usually that goes in one direction, right? It might still be an easier process sometimes, possibly because, for example, we just get paid by YouTube, in which case we might just wait until it clears the bank and then record it with the use of the deposit form through the bank feeds. And that would be a nice easy process, or we might have a cash register still on a cash to based system. But this time we want to record the information at the point in sale that we do the work like in a restaurant or in our guitar shop. But we want to record it at the register not wait till it clears the bank so that we have the internal control of recording it at the point of sale and then basically making the deposit. And then the next common way is we have an invoice system, an accrual system then because we have to do the work first like an accounting firm, law firm, landscaping company. We do the work, then we invoice the client for the work done. We have to track the accounts receivable, then receive the payment, then make the deposit. So notice those are all variants of the same flow. The errors are still going the same way. We just start at a different point depending on how easy the system is. But if you get paid first, then it throws things off. Now we've got things going backwards. If I get the payment before I do the work, before I invoice then, then it's backwards. When would that happen? A classic example is the newspapers, for example, with the lame legged legacy media probably doesn't sell as many newspapers. So maybe these days the best example would be the applications, online applications where you basically buy software applications. You pay for it a year in advance. And then when they actually sell you the software, they haven't earned your money because they haven't provided you the software. So technically when they receive the money, they should be putting it on the books as a liability, not as revenue at that point. Another example would be the rental property, where you typically collect the last month's rent or possibly a deposit, which is a similar situation in which case you get cash, but you don't put it in as revenue because you haven't earned it. Or you could have a down payment situation like what we will be looking at here, where we have a large sale of something, but for us to secure that piece of property like a guitar, we want a down payment before we actually deliver the guitar. So that's what we will do here. If we go back to our financial statements, the issue with this is that from a journal entry standpoint, this is easy from a textbook standpoint or not too complex at least, it's still a little confusing. If someone pays us and we didn't do the work, what's going to happen? Well, we would increase cash with a debit or an increase and the other side instead of going to the income statement as revenue should go to a liability account down here called unearned revenue or customer deposit because we owe them the money back or we owe them the work. So that's where it should be housed until we do the work and then when we do the work, we should reduce the liability and record the revenue. That's a common textbook problem. However, in practice, we have an added problem and that is that basically the customer center is tied to the accounts receivable account. So if I create another account called a liability of unearned liability, it's not linked in the same way to my customer center so I can track what is actually happening. So that's why in practice, many times from the bookkeeping standpoint, it's actually easiest to basically record a received payment resulting in a negative receivable on one particular customer because it's clear to see internally and then possibly make an adjusting entry at the end of the period if you need to. So for example, if I go to the tab to the right, right click on it, duplicate it so I can open the sub ledger for the receivable. Review what we did in a prior presentation, reports on the left hand side, hamburger closed, scrolling down. Who owes you? Let's go to the customer balance detail. And then you can see, for example, Eric Music here has a negative accounts receivable. That's not technically right from a financial reporting standpoint because it should be a positive liability. If we owe Eric something, then he's not really, it's not like an asset right now, it's a liability. However, the income statement is still correct. So for doing our financials primarily for tax reporting for schedule C, then we might not have to worry about it too much if it works well for us internally. And if we do have to report external financials on the balance sheet on taxes or possibly to get a loan or for external reporting to owners, then we can make a periodic adjusting entry, increasing the AR account and increasing the liability account. However, we might want to have a different method where when we record this, it turns out to be a liability and we can do that with the use of items, although it's a little bit more complex. If I go to the internal documentation over here and we go into the sales center and we go into the customers, one of these, well, let's go into Eric Music here. So we're going to go into where was Eric Music, boom. So you can see here that the method that we used before, we end up with this negative receivable, but it looks easy to follow internally. I can say, okay, yeah, there's the negative receivable and here's basically an estimate that was made to tie out to that. So an estimate was made and then we got a down payment. If Eric Music came in, we can easily see that there's an outstanding credit that then could be applied to a future payment. Okay, so now we're going to do the new method and we're going to imagine that we're going to use items to try to record it as a liability instead of a negative receivable. So let's start with an estimate again. So someone comes in and they say, I want a guitar and we're like, okay, we'll hold on to it for you or order it, but we need a down payment. So let's first think of the estimate to think about how much that down payment might be. So we're going to go for string music this time. So string music is our customer and we're going to say, so then I'm going to make the date of this, the 022724, tab, tab, tab. And down here, we're going to say, what do you want? We're just going to say it's an EPSP. They want an EPSP. We're going to say one of those and I'll adjust the sales tax to our generic five for our practice problem. So there we have it. So we can say, okay, if you want us to order that custom guitar because you got that crazy color or it needs to be plaid or something, or if you want us to hold on to that particular guitar for you, then we're going to want a down payment. The total that it's going to cost you is 630 and then we can use that as the basis to collect our down payment, say possibly taking 10% of it or 20% or whatever is our policy. So then I can record this. We could send this to them if we wanted to, or I can just say that I want to, I'm just going to record it in our books. So I'm going to say, boom, we've recorded that. That's an internal document. Nothing happened to the financial statements from it. If I go to my all sales here, we can track the estimates by going to the estimates and there's our estimates. And then we have the status of open estimates. There's our open estimate. We can also track it here and the estimates tab status. We want to look at the pending or let's say pending declined accepted. Let's go into, so we'll go into the, we have it in pending. Estimate at this point in time. So, so there we have it. We can also see it on the customers where we said that we have an estimate. So let's say we have two estimates. We can filter over here and now we're looking at Eric music has an estimate. So there it is. Is that the one we just set up? I think we set up string. Let's go back. Sorry. Let's go. Let's filter by the estimate and let's go into string music. That's the one we just set up here. So now we have an estimate for them. This was a prior sales receipt. That one has already been paid and here is our estimate that is pending. Now, if they accept the estimate, then we can move it over to accepted. If we so choose mark as accepted. So we're going to say, all right, now the status is accepted and we could name it. If we, if we want to track the audit trail of it. So there is our estimate. And now the next step would be that we would expect to convert the estimate to an invoice. So it's an accepted status. Okay, so now the next step is we would say we need a down payment. So we're going to base the down payment on on the estimate taking a percentage of the estimate. And last time we just made a receive payment form that wasn't tied to an invoice. But this time we're not going to do it that way. We're going to basically use, we're going to use the sales receipt. Now the sales receipt you will recall is typically the form that you use on a cash based method. When you make a sale at the same point in time you do the work like add a cash register. But we're going to use it differently because we're going to use the sales form because that has the access to the items. And then we will create an item which will record properly to a liability instead of to a negative receivable. So we're kind of tweaking the use of a sales of a sales form. This is where it gets a little bit ugly internally from the bookkeeping side of things. So let's say I say new and I'm going to say that we're going to have a sales receipt. So sales receipt that we're going to create for string music and then tab tab tab tab tab tab. Let's make it 022724 tab tab tab tab and we'll just say it's cash that we're going to receive. And we're going to put it into undeposited funds as has been our custom instead of going into the checking account. This would be like a sale at a cash register kind of situation normally. But instead of us actually selling the guitar right now we're going to use the items to create a new item. So I'm going to make a new item and I'm going to call it then a to hold on a second. It didn't give me that let me do that again. I'm going to say a new item. OK. Let's add the item. It's going to be a customer deposit deposit. So it's not actually an item. It's going to be a deposit than the item type. We could make it service or non inventory. The point is we're not tracking inventory. I'm just going to keep it at service. I'm not going to put it into a category. The sales name will be customer deposit. I'm not going to put a sales price because we will populate the sales price as we do the data input. The income account needs to be changed because this is where I'm going to be able to assign where I want it to go. It's a pre payment. So we're going to put it into the liability account. So I'm going to go up top. We don't have one yet. So I'm going to add an account and I'm going to say it's going to be an other current liability to do other current liability and deferred revenue. That's good. We could call it that the classic name to me textbook name would be unearned revenue. I think I spelled that wrong. If it was a deposit situation here, you might call it customer deposit, which is actually a liability, right? They give you a down payment, a deposit on the purchase. That would be something used and like a rental situation, you might call it that or in this situation with a guitar. If you have the lame legacy media newspapers that you use as rocks for people to pay you to throw through their window, then you could call it unearned revenue would be the more appropriate name oftentimes. So there it is. We're going to say there it is. Let's save it and close it and boom. And then we're not going to have any purchasing side of it. So I'm going to close that out and then we will say, oh man, I should have made it non taxable. I'll just undo the tax. I should have taken the tax off, but we're going to say that's for $100. I got all upset there. It's not that big a deal, but we can change it to take the tax off. So what's this going to do now? Well, it's a sales receipt and the sales receipt. When you think about the sales receipt, what it's going to do is it's going to usually increase the revenue is usually for a sale, right? And we receive something as going to be cash or go into the payments to deposit. But this time, instead of it being driven by the item to the sales line, we used it so that it drives the item to that unearned revenue. So nothing's going to happen on the income statement for the $100 calculation. Let's save it and close it. We'll check it out. So if I check that out, we can go to the balance sheet and run it. And so now we've got this amount that went into the prepayment to the payment to deposit. So this is our clearing account that we're then going to go to the bank with. And so there's that and send them the other side instead of going to the income statement because we didn't actually sell anything yet. We're going to sell it in the future. We put it into a liability account, which we called where did they put unearned revenue? There it is in unearned revenue, $100. So it went in here instead of if we used the sales receipt, what would have happened? It would have gone into receivables here and then shown as a negative receivable. Now, so that's great. So we're like, okay, that's proper now from a financial reporting standpoint because now I have $100 that are in the unearned and a liability instead of having that customer account as a negative receivable. But the problem is this isn't going to show up on my sub ledger because if I go to my sub ledger over here breaking out the information by customer and I run it, this sub ledger is tied to the accounts receivable. And that might be fine because you might say, well, it shouldn't be in here because this is tied to the accounts receivable, not to the liability. But the problem is that it doesn't show like I want a report that shows everything related to the customer information. And now we have a customer that has detail in it outside of the accounts receivable, which means the sub ledger isn't capturing everything related to our customers. So but it's not a big deal here because we can still see it basically internally. This still ties out to our accounts receivable. Our liability is is properly recorded. We didn't record income. And if I look at the internal documentation, I can go inside here and I can go to my customers and look at string string music. Is that what I was working on? I think it was. So there it is string string music. I just lost it again. I had it and then I lost it. Where did it where did string music go? It's at the bottom. Here it is. Can't you don't you know the alphabet? It's an alphabet. Okay. Anyways, if we go into here, we see now notice internally, it doesn't look quite as clean though. So I still have this sales receipt, the hundred the hundred dollars, the payment that we have received, but it doesn't show as like a negative credit. It looks like it's already it's been paid. It looks like a sale that we made basically internally, but I but I can see that it's on the financial statements that it's part of that liability account. So you can see from an internal standpoint from the customer, from the bookkeeping standpoint, this isn't quite as clean as if I go back to say Eric music up top. And I can see clearly what has happened here because there's this negative amount in the receivables and I can see it was a payment that's not been applied to something over here with when I use this method. You can see it looks like we made a sale a sale when I just look on the screen. Although if I go into it and I edit it, then I can see that it was actually using this customer deposit account, which of course is the indication that it's actually a a unearned revenue situation. So I'm going to close that out. All right, so now let's imagine that that we need to create the invoice and basically tie out this $100 to the invoice. So if someone came in, they're like, OK, string music comes in. They're like, we had we have an invoice that we need to be applied out. We're like, OK, there's the estimate that was made. And we can say, OK, there's the sales receipt that actually I can see by the item is a deposit. We can create an invoice from the estimate. So I'll say let's make that estimate into an invoice and then I'll close this out and close this out. And that happened as of 227. That's good. And then down here it pulls in the amount properly. But now it's now the question is, well, how do I deal with that deposit? Because there wasn't a negative receivable. So in the prior method, I would have recorded this and then matched out the payment to the deposit and it would show on the bottom of the invoice. Under this method, I'm going to create another thing down here that says customer deposit again. And I'm going to just say that it's going to be the negative $100 so that it basically nets the two out. Let's say, well, I put a negative one as the quantity and then $100 at the rate to give us the negative $100. So now you can see that basically it's pulling it out, but it's doing it at the top of the invoice instead of underneath the invoice. And that's required because what we need to do is be shifting that and this, by the way, should not be taxable. I should have had the item so it doesn't show a taxable line there. And then let's also edit the sales tax for the generic five. Okay, that's actually pulled in properly from the estimate. So that looks good. So what's this going to do? What's going to be the journal entry? Well, it's an invoice so the accounts receivable is going to go up. The accounts receivable is going to go up by the $530 so it's already been decreased by this $100. Whereas the last method, we would have had the accounts receivable impacted by the full sales price. And that's because the last method had the negative receivable in there that would net out. In this case, instead of having a negative receivable, it's in the liability. So I have to take it out of the liability, reducing the liability. And so that results then in that $100 difference in where it would be the $600 plus the sales tax to what it is now at the $530. And to me, again, I don't like that as much because I'd like the invoice to show the full amount of the invoice and then have the payments applied to it. And in this method, what we get is an invoice that we never get the invoice that shows the full amount because the line item is in the top line of the invoice. To me, again, that's a little bit less good from the bookkeeping standpoint side of things and from an audit trail standpoint side of things, although it properly records the liability basically as we go. So it's going to be increasing the accounts receivable by the $530. It's going to be decreasing the unearned revenue by the $100, bringing it back down to zero. It's going to be recording revenue, not for the $500 like you would normally expect, but for the $600 because it's driven by the item up here. And this item is going somewhere else. It's going to the liability account. And then the sales tax payable is going to go up by the $30. There will also be an impact on the inventory, inventory going down by the cost of this line item, not the $600, but the cost driven by the item, the cost to goods sold expense related to the sale of the inventory will be going up by the same amount. Net impact on net income will be the sales price, $600, not the $500 minus the cost of goods sold driven by this item. And we'll have the accounts receivable sub ledger impacted for string music as well. And we'll have the sub ledger for the inventory impacted. And this invoice is of course something that we can send out to the client without having to record it and then apply out the and then apply out the prepayment, which is one of the what I think is very the limited good aspects from the bookkeeper side of things. I don't have to close it and then apply out the payment in order to send it out. So I'm going to go ahead and save this one and check it out. So if we save and close that, we can take a look at it. So let's go to the balance sheet and then run it. So we run that one and we can see that the accounts receivable should have going up. So if we go into the accounts receivable, we can see the string music invoice for the $530. So if I go into the $530 into the invoice, we can see that that that went up for the net or total amount down below closing that back going back the other side to the income statement. Let's refresh the income statement and go into the sale of products. And so that then is impacted here for the invoice, but for the 600, right, the 600. So it's not the bottom line. And it's because it doesn't include the sales tax, but it's not this line either. It's that line. Well, where's the other $100 then? Well, let's close that out and go back. That went to decrease the liability because now we didn't have it net out in in accounts receivable. It went into this liability of unearned revenue. So unearned revenue has now gone back down from a journal entry standpoint. That looks beautiful like a textbook problem, right? It went up and then it went back down, although the use of the sales receipt in this regard is weird, right? And then let's go back and then we can see also that the inventory. If I go into the inventory, it will be going down driven by the cost of the thing that we sold as normal. And then back and the cost to goods sold on the balance sheet will also be impacted. So we have that. That's normal. Let's go back. And then of course the sub ledgers for the inventory will be impacted, but I won't deal with that because that's basically normal. The accounts receivable sub ledger by customer impacted. If I go to the accounts receivable by customer and I run it, then string music is here. We just have this invoice now outstanding for the 530. Now, again, the thing I don't like as much about it is that the invoice is on there. Never is on there for the full amount and then showing the payment tied out to it. It just shows the invoice for the amount after we already applied out the deposit, which to me is not exactly proper. If I go internally and we were going to track, let's see what happened internally on the customer side. If string music had a question, right? So what we have now is we've got the estimate that was made. That looks pretty clean. It's been converted, meaning the estimate is done. If I go into the estimate, you can see it's been created an invoice from it. If I was to edit the estimate, we can see the estimate has been closed in here. So I'm going to close this back out and then we created then a sales receipt from the estimate, which says paid, which is a little deceiving because it's going to say paid before we apply it to the invoice. So that's kind of the issue with that one. But if I go into it, I kind of have to dig into it to see the fact that, oh, yeah, this was for a customer deposit driven by that item rather than just having a negative or unapplied payment, which would be easier to see on this screen. And then we have the invoice that that payment was applied out to with the use of the item. So if I go into the invoice instead of having a payment applied to it, if I say I want to edit this one, we don't have a payment that's linked to it, but instead we applied the payment out with the use of the item. Let's compare that to Anderson quickly. If I go back, the other method we use was for Anderson. Internally, we said, OK, if we had an estimate here, we made the estimate, and then we collected, we imagine we collect the payment, which was $300 from the estimate. In this case, we used a payment form. When we did that, we have a negative $300, but it wasn't tied out to anything. And therefore you can see clearly from the face of the page that you have a payment that is a credit that's not being tied out. To me, that's easier from the internal side of things. And then when they came in to allocate the payment to the invoice, if I go into the invoice, I can see the invoice, by the way, is linked to the payment. And if I go into the invoice, then we can see that it's been partially paid, which again, that partially paid doesn't really show up in the other method, even though it's been partially paid because we paid it instead of with a payment with the use of the items. So you can see down here, I think it more properly shows the amount of the invoice. So we get to see the total amount that was charged on the invoice, and then down below we get to see the payment that's been applied to it. So to me, from an internal standpoint, as a bookkeeper, I would like this method a lot more if I'm doing this all the time, although it does take one added step in that I have to make sure that I apply out the credit to the invoice before issuing the invoice after the payment has taken place. But so there's pros and cons to each one of them. I don't really think one is better than the other. The question is, do you want a method that's going to be showing your financials between accounts receivable and the liability exactly correctly from an accrual standpoint on every transaction, or do you think it would be easier or better to try to make your bookkeeper's life easier to use the method that would be simplest for the bookkeeper and then do the adjusting process if needed, which you might not even need if you're just a small business and have a schedule C for taxes because it's a balance sheet issue in terms of the reporting and then do an adjusting entry at the end of the period and a reversing entry at the end of the period, which we'll talk about more, how to do in a future section or course. All right, let's take a look at the trial balance to see where we stand as of this point in time. We're going to run it. This is where we're at. If your number is tied to these numbers, great. If not, try changing the range. See if it's a date issue. We got the assets, liabilities, equity, income and expenses. Assets include cash, accounts receivable, inventory, investments, payments to deposit, prepaid insurance, accumulated depreciation, a contra asset, and the furniture and equipment. This is the stuff that we own. We have claimed to measure not in units but in dollars and in the flip side of the coin. Who has claimed to those particular assets or those assets? We have liabilities accounts receivable, visa, the government for sales tax, the bank because we took out a loan, the government for payroll taxes. And then we have our portion of our assets and that the company basically owes to us. If we were to liquidate the company, what would happen? We would sell all these assets and get that amount of money. Although we might, it wouldn't be exact because notice we don't have the cash. We have it sunk into all of these assets. We'd have to liquidate the company, sell the assets and then pay off the liability who we owe. And then the net would be ours equity section, assets minus liabilities equals equity, investment of the owner, the owner's equity, which would be similar to retained earnings if it were a corporation, and then the income statement showing the current year of information, revenue, credit side, expenses, debit side, credits minus the debits on the income statement would be net income. And if we rolled that into the balance sheet, it would go into the owner's equity, otherwise known as the retained earnings. If it was a corporation account, the retained earnings then representing basically the earnings over the life of the company, which have not been distributed to the owners in the form of dividends. If a sole proprietorship or partnership or I'm sorry, draws if a sole proprietor or partnership and dividends. If it were a corporation, let's change the year up top to the next year. So we can see that 01, 01, 2, 5, 01, 01, 2, 5, run it. And you can see that it squishes it down to one number. This is where we would stand as of a point in time, just the balance sheet accounts instead of having the timing accounts broken out to give us the activity of where we went from the period before that to get to the current period that we're current at, represented by what you can think of as the bottom line of the balance sheet, adjusting the accounting equation from assets equal liabilities plus equity, two sides of the coin, to assets minus liability equals equity, the book value of the company, the value in theory that you would get if you were to liquidate the company selling the assets, getting the cash, paying off the liabilities.