 QuickBooks Desktop 2023 Credit Memo Refund Form and Bad Debt Expense. Let's do it within 2-its, QuickBooks Desktop 2023. 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. Here we are in QuickBooks Desktop sample, raw castle construction practice file provided by QuickBooks going through the setup process we do every time maximizing the home page. Going into the view dropdown, open windows on the left hand side, reports dropdown, opening up that company and financial P&L profit and loss income statement, dates 010124-1231-24 January to December. I'm going to customize the report to change the fonts and numbers up on to 12. Okay. Yes, please. Okay. One more time on the reports dropdown company and financial, the balance sheet, the Big B balance sheet 123124 being the date customized in that report so I could go to the fonts and numbers and change it to 12. Okay. Yes, please. Okay. That's what we do every time. So I'm doing it quite quickly. We're going to go back to the home page here. In prior presentations, we've been looking at the customer cycle, which you can also call the sales cycle, the revenue cycle, the accounts receivable cycle. We've been looking at the flow of that cycle, the forms in the flow of the cycle, the impact of the forms on the financial statements as we create them hoping that at the end of the day this process is going to result in an increase to the checking account for goods and services we've provided to the customer. We're now looking at this item down below refunds and credits. You can say credit memo could be included in that description as well. You can see it's not connected to the normal flow because it's not hopefully part of the normal flow. It's something, it's like a bump in the road on the normal flow, a reversal that happens somewhere along the way before or possibly before the money hit the checking account. And that's one of the questions we have to then consider with regards to a reversal or credit memo for example. So when the invoice goes into place, we know that there's an increase to accounts receivable meaning they owe us money. So we have to track that money and try to collect on that money. The other side goes to sales. We also have inventory potentially involved depending on what it is we sold goods or services. If there's a problem after the invoice and we have to issue a credit memo, then the reversal isn't going to result in us giving the customer cash back. It's going to result, for example, if they gave us inventory back, it's going to result in us taking the inventory back and then reversing the fact that they owed us money if they had not yet paid us at that point in time. However, if they have paid us, meaning we issued the invoice and then they paid us, we received a payment and deposited it or they purchased something like out of cash register we made, they paid us at the same point in time and they come back and return it or say they want their money back or whatever and we have to enter a credit memo at that point in time. That is when it could result in us having to actually give them a refund or a store credit or something like that. So typically when you're going to enter the credit memo, what's going to happen is there's going to be someone's going to come and ask for a credit memo. You could double click or click on this item which would create the credit memo and then choose the customer up top. But usually it's probably going to be easier for us to find the related invoice and then kind of connect that to the credit memo. So for example, it's likely that if there's a question about some kind of problem, they come back and return merchandise that we're going to say, okay, let's go into the customer center, customers, customer center. Let's find that individual and we can say let's search this by people that have balances. Let's say customers with open balances and let's say we pick a customer down here and say, all right, there's some particular invoice. Let's say it's this one right here that there's a problem with. If we double click on that, then we can see the invoice and in essence the credit memo we can think of as reversing the invoice. So if I go back up top here, we can say that we're going to create a credit memo. So let's say refund credit here and that will create a credit memo. So that's the easiest way to think about it. The credit memo can be kind of generated from the invoice in essence reversing the invoice. However, it's not quite that simple because there could be some issues with regards to once again, did we get paid the money yet? We got to make sure that can we apply it to the invoice or is it going to have to we're going to have to give them money back. And there's also an issue with, do I want to reverse directly to the income account or do I want to reverse to like accounts receivable or sales returns and allowances, for example. So let me show you the best way to kind of get an idea of this is to make an invoice and then reverse the invoice. And this is the best way to kind of analyze the transaction to to see what's happening on the financials. This report up top in the reports, transaction journal is a great way to kind of what I can't look at it here, but I think I could look at it on the invoice. I'm going to say no on this one, I'm going to say reports and transaction journal. So there's the invoice that gives me kind of like the accounts that are impacted. You would think the credit memo would basically reverse that, right? So you can you want to look at the invoice and then think about, okay, I'm going to reverse it and then think about any tweaks or changes I need to do within that reversal. This one looks a little bit more confusing possibly because once again, we're in a job cost system, which can add a level of complication in some cases, but even a complex invoice, you can you could just, you don't want to think about how to reconstruct the credit memo. You want to think about deconstructing the invoice, construct the invoice and reversing the transactions as your baseline when you're trying to understand what's happening with the credit memo. All right, let's close this out and let's just make a credit memo and then reverse it. So I'm going to go, we're going to go into, let's do it from the home page and let's make an invoice first. Let's make an invoice and then reverse it with a credit memo. Okay, so an invoice. Let's make a new customer. Customer, let's say customer number one tab and I'm going to quick add the generic customer. Can't you come up with a better name? No, it's just a generic customer. I'm going to make this as of 0215, which is the next year after the year that has all the stuff in it so that hopefully it'll stand out to us a little bit more easily. And the invoice number, I'll keep that. I'll scroll on down here. Let's make a new item. I'm going to make a new item. This is in, let's say, item, let's say two, item two, very creative names I come up with. I'm quite imaginative. I'm going to make it an inventory item. So an inventory item. So we have to deal with inventory. That'll make it more complex. And we're going to say, all right, let's tab through this thing. And we'll just call it item two. It's called item two in the descriptions. Item two. And the cost is going to be, now we'll talk about how to set up items more in the future, but just notice it's got a cost side and a sales price side. So the cost is going to be, let's say, 8,000. It's going to go to cost to goods sold. We'll say cost to goods sold. Okay. And then on the sales side, we're going to sell it for 10,000. 10,000. There's going to be tax related to it. So we'll keep the tax there. It's going to go to an income account. I think I made one which is income. Let's just call it income. I'll just make up a new account called income to make it very easy, hopefully. I won't even put an account number on it. Okay. So there we have it. So let's go ahead and save that. You don't have sufficient quantity. I don't have any quantity on hand. That's okay. It'll still be okay. So we're going to say then we sold one of these at the 10,000. It's a taxable item. Taxable item. All right. And so there's the transaction. So what's this going to do when I record it? It's going to be an increase. It's an invoice, so it's going to increase accounts receivable. The other side's going to go to, it's going to increase accounts receivable for the full amount, 10,775. The other side's going to go to sales, but only for 10,000. The difference is going to be the sales tax, sales tax payable, 775. And it's also going to record the decrease of the inventory at the 8,000, because that's what I put on the item. And the other side that cost a good sold at the 8,000. So let's save it and close it. Save it and close it and check it out by going to my balance sheet. I'm going to bring the date up to 12,3125. So we can check it out. Let's go into the receivables and hold on a second. I need the beginning date, 010125. So now we've got, there it is, the 10,775. That's the full amount here. Okay. Closing that back out. The other side goes to the P and L profit and loss. Let's make this as of 010125 to 12,3125. And there is the income, 10,000 on the income. The difference is going into the balance sheet in our liability account. We're calling it sales tax payable, sales tax payable, 010125. So there it is, the 775 and inventory is going down. Inventory is going down up top. Where's inventory? Even though I didn't have it on hand, that's going to mess things up. 010125, there's the 8,000 decrease in inventory, which isn't actually on the invoice. Other side on the profit and loss for the 8,000 of inventory. We also have, if I go back to the balance sheet, the inventory report. We have to deal with reports inventory, inventory valuation summary as of 12,3125. And so now we've got this negative item here because I didn't actually have it on hand. The 8,000 inventory is now at 022624, balance sheet 022624. And of course we have that customer itself backing up or supporting the accounts receivable. If we go to the customer center here, customer one owes us now 010775. Now it's useful to kind of write down, I think, what's happening with an invoice. Again, you can do it with this transaction journal and kind of see what is happening to a particular account. I like to actually just physically write it down. I think that's helpful to do. So if you just pull out an Excel sheet, and I'm going to do this kind of generically with debits and credits, I'm going to say accounts receivable that went up by 10. Well, let's just keep that word is for now. The accounts receivable is going to go up. We had sales on the other side or income revenue account. And that went up, I'm going to say with a credit, my credit's going to be a negative 10,000 credit for 10,000. We also have the sales tax. So sales tax payable that's going to be happening at the 7.5, which is I'm going to say this equals this times 0.075, I believe was the rate. And that means the accounts receivable that we're going to try to collect on negative sum is this. So that's just kind of like the journal entry and debit and credit forms. The accounts receivable went up. The sales went up with a credit and then the sales tax payable went up. We also had inventory and cost a good soul. So I usually think about that as a separate entry cost good sold was 8,000. And then the inventory went down with a credit of 8,000. So that's kind of my normal journal entry. So if I create a credit memo, normally I would say, okay, a credit memo, I'm just going to reverse the whole thing. I'm not going to try to read. I'm not going to put the debits on top or anything like that. I'm just going to say, well, at my starting point on a credit memo would be just to take these same accounts and reverse the order of the transactions. I think that's the easiest way to think about it. So I'm going to keep it like that. And then I'm just going to say, okay, this is going to be a credit now. And this is going to be a debit now. And this is going to be a debit. And this is going to be a credit. And this is going to be a debit. So that's my first starting point. If I was to reverse it, that's what I would expect to happen. Now, now notice that this number right here is kind of a concern to me because I might not want to reverse sales. Oftentimes, we want to put it into another account. Like, like if it was uncollectible, like a bad debt account, or we might want to put it into like sales returns and allowances. So that's that's going to cause a bit of an issue. And this inventory thing causes a bit of an issue because if they return the inventory, the question is, did they return the inventory? And if they did, do I should I be, should I be increasing the inventory or is it or is it defaulted inventory? Is it broken, right? It's not worth anything or anything at that point. So, so let's go back on over and consider those two. If I go, okay, let's, let's open this invoice and imagine now, where did I open this? So there it is. Let's open it up and say, okay, now they want a credit memo. They want their money back. So I'm going to say, all right, let's open the invoice. Let's go to the main page. And let's say we say we're going to have a refund or credit. And so I'm just going to say, all right, so the open balance is here. So notice it's open balance. They haven't paid us yet. So I'm not going to give them any money. Even if I, even if I reverse this, I'm just going to say they don't owe us any money any, any more because they had not yet paid us. If they had paid us, then we got to deal with actually giving them money back. So it's a credit memo. Let's say this happened on, let's say, 0 to 20 to five. And then so it's got the item here in the credit memo. And so that looks good. It looks like everything should reverse exactly because we have the item here. The sales tax should be, should be reversing, which is good because we don't, you know, if we were charged sales tax, we want to make sure that we adjust the fact that that we didn't actually collect the sales tax, right? And so everything should reversed exactly, meaning what's going to happen. Well, if it was an invoice, the invoice increases accounts receivable. So this is going to decrease accounts receivable for the 10,000, seven, seven, five. The invoice usually increases sales by the sales amount. This is going to decrease sales. That's kind of the issue. The other side would typically increase the accounts payable or sales tax payable. This is going to decrease the sales tax payable. And this would normally decrease inventory. So this is going to increase inventory. It normally would increase cost of good sold. So this is going to decrease cost of good sold, right? So I'm going to save it and close it. Check it out. Now this now is giving us the option. And it's, and these are the three kinds of scenarios we might have. One, we might, as we have here, apply it to an invoice because the invoice had not yet been paid. And therefore this credit memo is going to just simply decrease the accounts receivable on the books, lowering it back down for this customer to zero. Or they could have paid us already. If that were the case, then we could give them a refund, which means this would basically check us to a check type of field where we're actually going to give them a payment of some kind. Or we could issue them a credit so that we're basically giving them money that they can purchase something in the future from. So we're not going to give you a payment. We might say, but we'll give you a credit so you can buy something in the future from us because they had not yet paid us. We're going to choose apply to an invoice. Okay. And then it picks the appropriate invoice that looks correct. So we're going to say, okay, done. And now this invoice has been paid. If I close this back out and I go to my customer center for that particular customer, and we look at all of the dates, that's not the right customer. Is it? Which customer, where's my customer? Number one, I'm looking for customer. Oh, it's because they don't have an open balance anymore. Let's go to all customers. Customer number one, there it is. So there's the invoice and there's the credit memo. So that looks correct. If I go to my balance sheet now, I can double click on the accounts receivable, which we saw the activity in in the customer center 010125. And so there it is. It goes up and it goes back down or it goes up and down. So then so the invoice and the credit memo, I entered the credit memo in a date before the invoice. That's weird. Let's make this 229 on the date. The date formatting is incorrect. There's only 28 days in February. Okay, 28. I thought it was leap year. Give me a break. So there it is. So now we got, so that looks more appropriate. Let's close this back out. And so there's the accounts receivable. The other side's going to sales. So if I go to the P and L profit and loss on the sales side, double click on it, we can see it went up and it reverse it. Now that's kind of an issue because normally we don't like sales going down. We often create another account called sales returns and allowances or bad debt expense, depending on what the issue is. And then we can go to the balance sheet again. The difference going to the liability account of the sales tax payable and 010125. So there's that reversal there and then the cost of goods sold. So the cost of goods sold and the inventory. So inventory first since we're here. Inventory double clicking the inventory. 010125. So there's the inventory. And if I go to my sub ledger for inventory, inventory valuation. Now the eight thousands back on the books were tied out 30,624.52 to the balance sheet. 30,624.32. If I go to the profit and loss that look at the cost of goods sold, it's been netted back out here as well. Okay, so I'm going to close this back out and say, all right, that's great. But what if I want to change this account on the sales side to like bad debt, bad debt or sales returns and allowances would be the same kind of concept either way. I don't want to decrease the sales account. I want to put it into some other account. So then I can say, okay, let's double click on the income. And let's go into that credit memo again. And let's see how we can do that. So I've got my item here in my credit memo. I'm going to change I'm going to add another item here and I'm going to set it up. They might have it already, but I'm going to set it up again so you can see it. It's going to be bad debt. So they have that. So I'm going to call it bad debt to just so you can see it's set up because it might not be set up in your company file if you weren't using the sample file. So it's not I'm not going to put it a service or inventory item. I'm just going to call it an other charge for a generic item. Bad debt will be the description. So I'll put that here. I'll put that here. I'll pick bad debt to it's a sequel, the bad debt sequel. And then I'm going to say the code. Is it a taxable item? And we're going to say, yeah, let's keep it the taxable and the account then is going to be bad debt. So we'll put it to the bad debt account. They already have one set up. If they don't have one set up, you could set one up as an expense account. And again, you could do the same process if you wanted to charge it to sales returns and allowances, which you might then put up here as an as an other as an income or other income type of account, depending on, because that's a contra sales account typically, but same kind of idea. So I'm going to say, okay. And this item is associated with an expense account. Do you want to continue? I'm going to say yes. And then we're going to say on the bad debt, I'm going to put the full amount down here, 10,000, not 100,000, 10,000, 10,000. It's only one more zero. Okay. So notice, and then I'm going to take this one up top and I'm going to put it at zero. So now we still have the same end result here, meaning it looks, it looks pretty much the same in terms of the end result, but it should be different in that it's going to now apply this out according to the second item to the bad debt expense. So you might say, why do I have this first item still on there? Because I still want the inventory impacted because we're still saying that we're going to receive the inventory. So I still want this first item on there to drive that part of the transaction. And this will drive the second part. So in other words, if I analyze this transaction, what's it's going to do? Well, it's a credit memo. That means it's still going to be basically the invoice would have increased accounts receivable. This is still going to decrease accounts receivable. The other side, the invoice typically goes to the sales for the 10,000, but this isn't going to go to sales, but instead it's going to be driven by the bad debt and it's going to be going to the the bad debt expense instead. So we'll have an expense going up instead of the sales going down. That's the difference. And then the sales tax will still be reversed. So that looks good because that's still there. And then on the inventory side of things, the invoice usually decreases inventory. This is still going to reverse that increase inventory driven by this item, which you can't see on the invoice. We can never see the cost on the invoice, but it's still being driven by the fact that we set the cost up with that item. And then the other side is going to be reversing to the cost of goods sold because of this item we left on there. So let's save it and close it, save it and close it and check it out. So once again, everything looks pretty much the same, except that if we go to the income statement, we now have the income at the $10,000. It's still there. We didn't reverse the income. But the other side, we did reverse it in terms of another account being the bad debt expense. So now we've got the income netting out against the bad debt expense that way instead of decreasing the income account. Because again, a lot of times the income account is usually something that only goes one way. It goes up. And if there's a return of inventory, we might create a contra income account, for example, similar kind of thing, which would be called sales returns and allowances. So that it would be up here and kind of kind of net out the sales that were returned. Or if there was a situation where we had a bad debt kind of situation, then we can have an expense account called, you know, a bad debt expense down here depending on your circumstances or needs. And you could see how the process goes to set that up. So once, just to recap, you typically want to think of an invoice, I would map out the invoice and then think about reversing them exactly. And then think about which kind of tweaks you want to make such as sales returns and allowances or bad debt. And then also think about whether or not you receive the inventory back or not. If you didn't receive the inventory back, then you don't really need the second component, right? If I went back in here, and I said, okay, I'm going to issue the credit memo, but I didn't get the inventory back. Then if I go into the credit memo, then you wouldn't need this item up top, right? Because the inventory is still is still gone. Right? So that's so you could think about whether or not you got the inventory back would be the next item to consider.