 QuickBooks Online 2023. Advanced Customer Payment or Unearned Revenue Method Number 2. Get ready to start moving on up with QuickBooks Online 2023. Here we are in our Gig Ray Guitars practice file. We started up in a prior presentation using the 30-day free trial. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. We also have opened the free QuickBooks Online sample company. If you want the two open at the same time, we suggest using Incognito window or another browser. You can open Incognito if using Google Chrome by selecting the three dots in the browser and Incognito window and then typing into the search engine QuickBooks Online Test Drive. We're using the sample company to compare the accounting view, the view get great guitars is in and the business view the one the sample company is in. You can switch between the two by selecting the cog up top and change the view down below. Let's open up a couple tabs like we do every time to put reports in right click in the tab up top duplicating it and then we'll duplicate the process right click and duplicate again. Go back to the duplicated first duplicated one and then go to the reports on the left hand side. We're going to open up one of the phase that being the balance sheet. Where are the reports under the business view? You may ask they are in the business overview section and then the reports tab just so you know. We're going to go then to the tabs the right open up the reports on the left hand side. This time the P to the L the profit to the lost the income statement. Let's close up the hand boogie and the range engines. They are changing 010123 022823 and then we'll hit the drop down. I want to see it on a month by month side by side and run it. So we got Jan. We've got Feb. We've got the total for the year to date. Let's go to the middle tab close up the hamburger and the range engines. They are a changing. You know you didn't say those words right. That's how that's how poetry works. You don't say the real word. You just say the word that sounds good. Any case. I'm not going to do the side by side. I'm just going to run it. And there's where we stand at this point in time. Now last time we were talking about an advanced payment type of situation, an unearned revenue type of situation. And we used a method that works quite well logistically for the bookkeeping side of things, but not perfect for financial reporting side of things. Although I think you could do adjusting entries and I think that method would work quite well. But some people really don't like that because they don't like to have a negative receivable kind of concept. They want the item to go on the books as a liability when you create it. So let's just recap our scenario here. We're thinking about a situation on the customer side of things. The revenue cycle where at the end of the day we typically expect cash to be going up. Remember there's different cycles you might have depending on the industry you're in. If you're in gig work, if you're getting paid by YouTube, you could just record a deposit, possibly with the bank feeds and record the revenue. That would be easy. But if you have a cash register, a food truck, some kind of register situation, then you usually have to use to create sales receipt and then make the deposit. And then if you're in an industry where you have to invoice people, then you're going to have to do the work first like the bookkeeping or the accounting or the law work or the landscaping and then bill someone or send them an invoice, increase in accounts receivable, then receive the payment, then make the deposit. However, some industries are even stranger still, even stranger still where you get paid first before doing the actual work. And that means you're kind of here and you're getting the payment first. What do you do then? Classically in a textbook problem, you're going to increase cash from a journal entry standpoint and the other side is going to go to unearned revenue. Now to do that, you can't really use the receive payment form. That's what we tried to use last time. We did use last time and it worked well. But the problem is it's not connected to unearned revenue. It's going to increase the checking account or cash or undeposited funds or deposits, payments to deposit, whatever you want to call it. And then the other side would decrease accounts receivable. But it was decreasing accounts receivable before there was anything in accounts receivable because it's not attached to an invoice. That's the problem from a financial reporting purposes. It should be going to a liability because you got cash, but you owe it back to somebody or you owe the goods and services. In our case, we got a down payment on a guitar, an expensive piece of inventory we're expecting to be selling. And we either owe them then the guitar to finalize the transaction, making an invoice for it, or we owe them the money back. That's why it's a liability until the point in time that you earn it. So just to see what we did last time and compare it to this time, let's go to the tab to the right, right click on it, duplicate it. And we're going to go into our reports on the left-hand side, close up the hand boogie, and then scroll on down. Let's say, who owes you money? Who owes you? Everybody owes me. Everybody owes me stuff. I'm in the customer balance detail. Let's do the customer balance detail and then scroll up a bit. So last time we ended up with these negative amounts because we have a payment that's not applied to an invoice. So from a financial statement reporting purpose, that's not quite right because we should have a positive liability, not a negative asset account for Eric Music. However, when I create a liability account, it doesn't tie from a bookkeeping standpoint as nicely to the subledger breaking out by customer. The account's receivable is the account that's tied to the customers. That's why this works good logistically from a bookkeeping standpoint, if not exactly perfect from a financial statement standpoint. And we could do adjusting entries at the end of the period, month or year, in order to fix this periodically, like we do with other adjusting entries if we wanted to. However, we might say, no, maybe I would like to record it in some way where this doesn't happen. I don't get this negative amount. So let's try another method over here that you could use and you could pick which method would be best for you. It might depend on what industry you're in. For example, are you in an industry where all of your sales are going to be prepayments because you sell subscription model stuff or do you only have some of them that are going to be prepayments like a down payment like we're talking about here on a guitar or something like that. All right, so let's say that we're going to say that we have, let's first pretend that someone called in and they're going to say, hey, I want some guitar. So we'll make an estimate. They're calling in and they're like, I want to buy some guitars and let's say we'll tell you how much it costs. So let's say it's string music and we're just going to make an estimate to see what they're talking about. And we'll put it on 227, let's say. So if I tap through this, I'm going to say, okay, let's say that they want an EPST, an Epiphone Standard Pro. And we're going to say, okay, and they just want one of those. So I'm going to say, all right, we got one of those here on the estimate. That would be the 600. And then if I could apply the sales tax, I'm going to do the generic thing with the sales tax and just take the 5% for our example problem. So we could tell them, okay, it would be 630. And then we could say, okay, whatever our policy is, we want to get some portion of that down as a down payment so that we can hold on to the guitar for you because like that's a super popular guitar, especially that plaid one that you want. And that one, I had someone come in just like five seconds ago wanting that. So if you want me to hold on to that, then you're going to have to give me like a down payment. I can use this to kind of calculate the down payment. So then we could say, okay, let's save that. Let's save and close it. And then the question is, well, how am I going to collect the down payment? I could last time we used the receive payment form that's usually the second step after the invoice. This time we're going to use a sales receipt, which is kind of an unnatural form to use because we're not actually completing the sale here. We're recording a deposit, money that we're getting before we did the work. So it's a little bit wonky to use it, but it still makes sense because we're getting money from the customer. Okay, so then I'm going to type in here string music, string music for the customer. And I'm going to go down and everything looks good. The payment, I'll just do the cash. Again, it's going to go into the payments to deposit instead of directly into the checking account, standard practice thus far. And then the key is down here. I'm not going to put the actual guitar that they are purchasing, but instead I'm going to basically make a new item to record the down payment or the deposit that they're going to make. So I'm going to hit the dropdown. I'm going to add an item and it's not going to be an inventory item. Possibly I could use a non-inventory. I'm just going to call it like a service item though. And then I'm going to call it customer deposit. Customer deposit, no SKU, no category. I'll put that in the description. I'm not going to put the actual sales price because I want to populate that in the sales receipt myself. It's not going to go to a service income though because it's not income. That's the point. I want to put it into a liability account of unearned revenue or customer deposit or whatever we want to call it. That's the point. So I have to create a new account because we don't have one of those set up here yet. So I'll just add a new account as we go. New account. It's going to be another current liability account and deferred revenue. I'll keep it there. I'm going to call it unearned revenue. That's like the textbook typical calculation but you might call it customer deposit or something or whatever makes sense to you. The key is it's going to be a liability account. So we'll say save it and there shouldn't be any tax on it so I'm not going to make it a taxable thing here. Non-taxable. And there it is. So now I could say save it, close it and then there's our customer deposit and I could put in the rate and let's just say it's $100. I'm just going to say $100 and that's how much we're going to receive and that would be based on the estimate that we made. I'm just going to make up the $100 for our practice problem purposes. No sales tax applied to it. So the sales receipt looks like a sales kind of document. That's what the form is usually a sales form but we use the form to drive it to unearned revenue. We're receiving money from the customer which is like a sale kind of thing but we didn't actually provide the goods or services yet which is usually when you use the sales receipt form when the goods and services are provided. What's this going to do? Well it's going to increase the payments to be deposited. That's what the sales receipt form does and the other side is going to be driven by the item but the item is not driving it to an income account like it normally does but instead a liability account unearned revenue. So now we're going to say save it and close it and if I go then to my balance sheet I now have the payments to deposit has the $100 in it so I can then deposit that like normal and the other side didn't make a negative receivable but instead created this liability of $100 which is proper from a financial statement standpoint. So if I was a textbook accountant looking at it an auditor or something I'd say yeah that looks great from a textbook standpoint as opposed to this if I was looking at it as from an auditor or textbook standpoint I don't like that so much that don't look right I'll have to adjust it at the end of the year or whatever but from the internal standpoint let's take a look at it this way if I go down to my sales tab and I go into my customers which by the way if you're in the bookkeeping view by the way or the book view is that what it's called? Business view it's in the get paid and paid area and then the customers. Okay that's out of the way. So from this side of things Anderson I did the old way where we had this negative payment amount which applied out quite nicely to the invoice that I made later or you can look at it this way where we had I think Garcia, Sam the guitar man I think we did one for we have this this 250 right here close up the boogie 250 unapplied which just stands out very clearly from the bookkeeping side that oh yeah next time I make an invoice that's going to apply out to it whereas if I go to the the new one I made here for string music it doesn't really stand it doesn't really pop so much I see the sales I see the sales receipt which looks like kind of like I just made us like a normal sale right see if I can expand this a bit it won't let me get in there so it kind of just looks like a normal sale so it doesn't let's do it this way so it doesn't really pop saying hey this thing is unapplied at this point so from the bookkeeping standpoint it's not quite as clear but from the financial reporting standpoint I've got that nice unearned revenue which is what I want in my opinion I would normally would want to make things as easy on the bookkeeping side of things so the bookkeeping side doesn't make errors and then if I know what's happening as long as I know what's happening from the financial side of things so that I can make a periodic adjustment at the end of the year or the month if needed then that's a pretty easy thing to do so I would rather not confuse the accounting department especially since there's more turnover often time and what not in an accounting department and stuff so more confusion can happen and just fix it periodically but you might prefer either method so now let's say the customer comes in and they say okay I want to complete the purchase now I still have the estimate over here that I can create the invoice with but I don't have that negative sales item here that's going to automatically apply the credit amount in the same way that we saw last time with the other method so I could still I could say okay I'm going to create the invoice let's go ahead and create the invoice from the estimate if I didn't make an estimate then I could just make the invoice and then I can go down here and say alright that's on 227 and so on and it populated this item and then we already received the $100 so in the prior method I would have had that outstanding credit or payment which means I would have to save it and close it and then the system would automatically apply out the payment then I can open the invoice again and it should have been applied out here that's not going to happen because I used a sales receipt what I need to do then is recognize the fact that I did that and then I can just add it to my invoice as what did I call it undeposited no I called it unearned what did I call it I know I called it customer customer deposit customer deposit that makes sense I couldn't remember that makes perfect sense that's exactly what you should have called it so then I'm going to put a negative 100 and that's going to clear it out so what's this going to do then this one of course is going to do the normal stuff driven by that item this one the item is going to unearned revenue so because I put a negative amount in here it's going to take the $100 out of the unearned revenue and notice the invoice looks a little bit different in format as well because the last method once we completed the whole process would have calculated the invoice calculation and then it ended up with that little note at the bottom to show the credit that was applied but here we've got the calculation up top so we've got the $600 minus the $100 that gives us to the $500 and then I got the 5% tax notice that the tax is only being applied to the taxable item which isn't this deposit area it's the $600 so it's going to be the 5% in this case of the $600 which is the $30 and then that gives us our total of $530 so what's this going to do when we record it well it's an invoice that means the accounts receivable is going to go up by the $530 the other side usually goes to a revenue account for the $500 driven by the items but the items are a little bit different this time the first one is an inventory item and it's going to drive it to an income account so the $600 should go to an income account but this customer deposit we set up this item specifically to be going to a liability account and it's a negative so that means it's going to be taking down that liability account that's one of the major differences that we're going to see the sales tax being calculated only on the inventory item will be increasing the payable which is the sales tax payable account like normal inventory is also going to be going down this is the only one that has any inventory related to it the customer deposit does not that means the inventory account is going to go down and cost of goods sold is going to go up by that amount as well not for the $600 but for whatever is in there for the cost and of course the inventory in terms of units is also going to go down the sub ledger and the accounts receivable sub ledger for the string music will be impacted as well let's save it close it check it out save it and close it and let's go to the balance sheet and I'm going to run the balance sheet we'll just double check that everything happened the way we thought it might go into the accounts receivable scrolling down we're going to say then we've got the string music and there's the invoice it's increasing for the 530 that includes the sales tax so that's the whole thing here closing that back out scrolling back up and back to our balance sheet the other side usually is on the income statement let's run that to refresh it that most of it would go into the sales of product but this case only the portion related to the actual sale item when in there that's the $600 the $100 deduction reduction is not included so the $600 went there where did the $100 negative $100 go it went to the liability account of unearned revenue so unearned revenue has now been earned so that means that the unearned revenue account should go back down to zero it's a clearing account in essence that's good so even though the unearned revenue doesn't have a sub ledger account tracking the customer information we can just use it as kind of that clearing account as we get the deposits if you want to use this method and then we've got the income up top the inventory went down like it normally would and so there's so there's that happening and I won't get into detail on the sub ledger for inventory because that's not really our focus and we've seen it before but the cost of goods sold no real difference on the cost of goods sold it's impacted by the one line item that dealt with the inventory and the impact on the income statement is the increase in revenue minus the cost of goods sold and then if I go to my sub ledger for the accounts receivable and run that now the string music was it string music where are you there they are there's the string music has the 530 now it still looks a little bit different so if I go let's let's compare the full method now that it's been completed between the two methods here so if I go back to my customers I'm in string music here and so if we if we look at we made an estimate and then we made a sales receipt and so when we made the sales receipt we got the $100 which usually would show up as something that would be unapplied automatically applied to the invoice then but in this case we use the sales receipt and applied it to unearned revenue so that wasn't exactly the same and then we created the invoice and the invoice had to take into consideration within the invoice this payment that was made in the past so it got applied out a little bit differently than the other method so for so when I go into this invoice you can see that it got applied out up here instead of having it down here kind of in the note down below so again from a bookkeeping standpoint I don't think that is as nice as seeing the invoice being fully charged for the full invoice and then applying a payment to it as opposed to that unearned revenue so this linkage between the forms to me is not as good an audit trail and it's a little bit more confusing from the bookkeeping standpoint but from a financial reporting standpoint it records the unearned revenue the way I would like to see it as we go and then if I look at the if I compare that to the other customer Eric let's go to Anderson up top and see this is the method we used last time we made an estimate we actually made and then we made the payment based on the estimate and we ended up with this negative 300 payment which until we applied it out was showing as a credit just like it would if I was at that point I could see another example of a customer just so we can see it sales customers the other customer that we did this to was Sam the guitar man I think it was and if I scroll down here you've got this unapplied credit that's quite conspicuous and easy to see from the bookkeeping standpoint and a little bit more easy to see from that side back to the customers let's go back to Anderson and then back to Anderson here we had the 300 now notice that the 300 because it was in there as a payment it automatically applied to the invoice so notice that the invoice here then is showing the total amount of the invoice which was partially paid and again I like that better from just an audit trail standpoint so if I look at the invoice I can see what was actually charged for the invoice and the amount of the invoice was recorded like a normal invoice transaction would and then the payment was applied to it down below so I didn't have this kind of meshing together within the invoice the customer deposit in the heart of the invoice so that means when I look at the invoice I can say okay yeah this is the total of the invoice and then we applied out a payment to the invoice which again if we just compare that to the other one here which was string music string music and I look at this we got the 100 we've got the 100 dollars paid but it's not going to automatically apply to the invoice I got to take it out of basically the unearned revenues so that means when I look at the actual invoice I don't get to see the full amount of the invoice minus the payment that was applied to it like I'd like to see from an internal kind of audit trail standpoint but rather I just kind of got to know that if I go in here I can see it clearly that that deposit was applied out and but I can't really see that as clearly if I was just looking at it here I got a sales receipt I could put in the memo hey look this was a sales receipt it was a customer deposit but it's a little bit less clear to see the link between these two so from my opinion this method that we're looking at here works better from a financial statement perspective to record your transactions on an accrual basis correctly as you record them and it might work on some kind of industries I'm thinking maybe that would be better to do if you're in like a service like company where you get all your money from a subscription model or something like that all of your revenue is prepaid or something and then you have to make periodic adjustments to it maybe that would be a better way to go but I think in this at least in this example to me when you're looking at like a deposit for a one-time deposit thing I feel like the negative amounts in here have a better internal bookkeeping process are easier on the bookkeeper and can easily be adjusted for periodically with adjusting entries for financial reporting purposes but it might change from company to company and that's just my opinion alright so let's go and open up the trial balance and see where we stand at this point I'm going to go down to the reports on the left hand side and type in trial balance and let's do the range change go from 010123 to let's say 022823 I'm going to run it on a month by month side by side this is where we stand if you're standing in the same place that we're standing on these four legs your four legs are standing here for the then that's good at least we're in the same spot and I'm not saying it's completely correct spot maybe some quicksand under us but at least we'll sync together which will be nice we can hold hands while we sync and if anything's wrong you can extend the date range and see if there's any issues with that and then we'll be doing a transaction detail report after doing the second month of data input to further drill down on any differences