 QuickBooks Online 2024. Advanced customer payment or unearned revenue method number one. Get ready and some coffee because we're going to be like bookkeeping Einstein with QuickBooks Online 2024. First, a word from our sponsor. Actually, we're sponsoring ourselves on this one because apparently the merchandisers, they don't want to be seen with us. But that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our trust me, I'm an accountant product line. Yeah, it's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or 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 hand side in the favorites, right click in the balance sheet to open a link in a new tab, right click in the profit and loss to open link in a new tab, right click in the trial balance to open a link in a new tab. Let's tab to the left, close up that hamburger on the balance sheet and change that range. We're going from 010124 to 022824. We want to see it on a month by month breakout. So we'll select the months, run the report, repeat the process tapping to the right closing the hamburger change in the range 010124 tab 022824 tab, bring it to the month by month breakout and then refresh the report tapping to the right ultra vase. Another time one more round going from 010124 tab 022824 month by month on the breakout and then we will run it once again to refresh it. Let's go back to the balance sheet tab as we discussed the new scenario that being that we're sick and tired of selling our guitars on account and then possibly a customer not paying us basically just stealing our guitar. And so now what we're going to do is we're going to require a down payment on the guitar when they request the guitar and then that will hopefully lock the customer in to complete with the purchase of the guitar. Now this will be an unearned revenue type of situation which we can imagine in multiple scenarios of an organization. There's a couple different ways that we can do this practice problem. Some I think being easier on the bookkeeping side of things, some being more accurate in terms of the bookkeeping side of side of terms of the financial reporting side of things. Although I think both methods work because even if you do the method that's easier on the bookkeeping side of things then you can always do an adjusting entry basically at the end of the period to make the financial statements correct in accordance with say an accrual based method. So I want to jump over to a flow chart just so we can consider what is happening here. This is a desktop homepage flow chart that we're using for online purposes because we're just looking at the flow of the forms and that will be the same for just about every accounting process or system. So we're looking on the revenue cycle where at the end of the cycle we would expect to be receiving money cash coming in for goods and services that we provide. Now normally as we've discussed in the past you have a system which would be the easiest system which might be for example that you wait till something clears the bank say you're just a YouTuber or something you wait till the deposit clears the bank from YouTube and you record it possibly with the help of the bank feeds as revenue with a deposit form that would be the simplest process but you might be at a cash register in which case if we're at the cash register as we could see in a restaurant or in our case in the guitar shop for example and someone brings the guitar up then we're going to ring it up at that point in time and we're going to record the sale at the same point in time we receive the cash but when we get paid it might be by cash we might get a credit card we might get an electronic transfer we might get a check so we typically will then will then have an intermediary step so that we can batch the deposits that we have and then record them in the bank in the same format as will be on the bank statement and then if we have an accrual system that means that we're in some type of industry like a landscaping business a bookkeeping business CPA firm law firm where we typically have to do the books first and then we receive the money at a future time so we enter the invoice when we do the work and then we receive the payment at a future point after we track the accounts receivable and follow up on it and then we can make the deposit that's how most normal processes go and you can see what happens here is that we typically do the work before or at the same time that we get paid however a wrench is thrown into the system if for example we have a system where we're going to get paid before we do the work why is that a problem because if we get paid before we do the work then from a revenue recognition standpoint we haven't yet earned the money right we got paid before we should recognize revenue because we have not yet earned the money so the textbook example of this it would typically be like a newspaper company where they have where they deliver your newspaper these days possibly most newspapers are dead because of one we have the digital digital news these days and two most of the newspaper people are so you know that the the the legacy media is on its last leg and their leg is lame and so if they're on their last leg lame lame leg so people might not be as much buying as much newspapers but a similar kind of process these days would be in online applications for example because that would be a similar kind of subscription model meaning people might be paying for a year's worth of subscription and you're going to be providing the access to to the software in the future another classic example would be something like a entertainment where you're collecting money to have a concert or something like that well you're going to get the money when you sell the tickets upfront and then the concert happens you know at some point in the future you also have situations where you might get an advanced payment in rental situations so oftentimes you might structure a rental situation where you're going to collect the last month's rent or have a deposit which is a security deposit which is kind of another concept of unearned revenue you got paid by a customer but you didn't earn it you have not yet earned it or possibly you will never earn it because it's just a security deposit that you're supposedly going to give back at the end when they move out but we know that's never going to happen but anyways just kidding so uh so then that's another situation where we have this kind of kind of we got paid without doing work uh type of situation and the other situation that will we will concentrate in on more will be a situation where we have a large custom project that we're going to be putting together or a large thing that we're going to sell so if someone wants to lock down for example a particular guitar that we have in the shop or request a guitar that we can order for them then if we're going to put that guitar on hold or request the guitar then we want to get a security deposit upfront to make sure that they're really committed to fulfilling the purchase now there's also issues that you could have with long jobs like a construction company but then you get into different area because the revenue recognition concept could change all together because if you're if you're talking about long-term jobs that are happening over more than a year long time then the question is should you be recognizing revenue uh at the at the end of when you finish the work which is normally what you do but because it's a long job maybe you should be recognizing revenue basically as the job goes that's usually kind of a different thing that's percentage of completion but it has the same kind of revenue recognition issue so the idea is that now we're going to get paid before before we do the work and that's backwards on the arrow right we got the payment usually we enter the invoice first but no we have to receive payment first so how do we deal with that well from a journal entry standpoint what happens if you do this in a textbook the common textbook scenario would simply be well you're just going to debit cash or increase cash and then the other side is not going to go into revenue because you haven't earned it it's going to go into a liability account of unearned revenue so let's just imagine that on my my financials here so if we got paid from a debit or increase and decrease in an account standpoint we would just simply increase checking account if we got money and then the other side would not be going to the income statement because in theory we have not yet earned the income but rather it's going to go into a liability account over here which we might call unearned revenue if it was revenue that we have not yet earned we got paid for it but we have not yet earned it it's a liability because we owe the work or we owe the money back it might also be called customer deposit in a situation like ours or a like a rental situation where you got advanced payments for something that you're going to be providing in the future like a rental or uh the guitar now that's the tip that's easy to think about from a journal entry although it's still a little bit more complex because a lot of industries don't have that issue right but you can say conceptually that makes that makes sense because I have a liability and then when I earn the revenue what I'm going to do is I'm going to take it out of the liability and then I'm going to put it over here in income when I earn it reducing the liability increasing the income when we actually provide the work when we deliver the newspaper when we throw that that lame legacy media rock through someone's window and we earned our revenue that's when we basically record it right so then so but but so that's the that's the idea but there's a problem when you get into the software and that is that I want if I have unearned revenue down here in the liability side of things then that liability is kind of connected to the customers which isn't normally the case when I'm working with customers the sub ledger that we deal with in the customer center is tied to the accounts receivable account so if you create an unearned revenue account we have an issue tracking it internally if I go back over here in the what I would call the customer center because this whole thing with the customer center is intimately connected to the accounts receivable account so the sub ledgers get messy so so now the question is well how can I make it so it's easy on the bookkeepers because I want to I want to make it so the bookkeepers internally can track what is happening receive obviously the money and then and then facilitate the invoice that's going to happen later well the easiest thing to do internally is to just say well if I got the payment first I'll just enter the receive payment first and then when I invoice the client later so when I when I issue the guitar in our case I'll just record a receive payment and then when I issue the guitar or provide the guitar I'll make an invoice which will tie out to the receive payment that I received in advance and that works really nicely internally but there's kind of a problem with it when there's this timing problem between these two transactions because what does the receive payment form do it decreases accounts receivable but if I don't have an invoice to tie it to there's nothing to decrease so it's going to result in a negative accounts receivable and you'll recall that's not what we want from a debit and credit standpoint we want a positive liability not a negative receivable so the bottom line of the equity section of the income statement of the balance sheet is the same but we end up with this negative receivable instead of a positive liability but from an internal standpoint it works beautifully from the bookkeeper side of things because we're tracking everything with the sub ledger of accounts receivable and the customer center everything ties out properly and we get what we call a credit we can call it a customer credit which from the terms of the customer is usually like a good thing it's us reducing their balance or giving them something to apply to a future purchase it's really just crediting accounts receivable which is an asset that's why we're crediting it which reduces the debit balance account but you know that's what it is so then and then we can make an invoice when we actually sell the guitar and tie it out to that credit balance so that's I think it's still the easiest way to do it and then when you have this negative accounts receivable you might have to adjust it at the end of the year when you do your your uh adjusting entries and your external reporting or you might not because if you're a small business you might not need to the balance sheet for external reporting because you might just be using the the income statement right and the income statement would be recorded correctly it's just an allocation between the balance sheet accounts of accounts receivable and earned revenue asset versus liability okay let's try it out I'll show you what I mean so we're gonna imagine that that uh someone wants a guitar so I'm gonna say drop down and we're gonna say we've been bitten too many times with with uh giving the guitar on an invoice and then people just steal the guitars ridiculous I'm sick of it I'm sick of it man so what I want now is I want you to give me a deposit if I'm gonna give you the the guitar so what we're gonna do is we're gonna say I want you to give me a down payment and then we'll order the guitar for you I'm not gonna order the guitar this plaid pink plaid guitar that you want uh because I don't want to be stuck with it if you don't if you don't follow through with buying the thing because it's gaudy and I don't want it in my shop okay so then we're gonna say this is gonna be Anderson Mr. Anderson is purchasing it and then it says Anderson guitar's payment doesn't have an open invoice so normally there would be an invoice down here there isn't one so we'll save this payment as a credit meaning we're crediting the accounts receivable related to Anderson which will result in a negative accounts receivable for that particular customer that you can apply to an invoice later since you don't have any open invoices if you want to receive this payment without an invoice uh use the sales receipt so we're not gonna use a sales receipt because that would be then us selling the guitar at this point of time but we're not selling the guitar we're getting the down payment a deposit so 02 25 24 the date and I'm just going to keep on going with cash as the payment method just to just because I want to still put it into the undeposited funds instead of putting it directly into the checking account now normally what what does an account what does a received payment form do the first thing we want to keep in mind when we have a received payment format form is accounts receivable goes down and usually we would tie that to an invoice accounts receivable is still going to go down but we have no invoice to tie it to that's why for this customer we're going to end up with a negative accounts receivable just for that customer total accounts receivable will still be positive because we have other customers but negative accounts receivable for this particular customer and then the other side is going to go into a cash account but for us we're going to put it into that good old undeposited funds let's see what that looks like let's save it and close it and then something's not quite right enter a transaction amount I didn't put the amount in that's helpful three hundred dollars thank you quick books three hundred dollars we're going to say it is all right let's try it again ultra vase another time K in the world Paso it's my spanglish my spanish slash english K in the world Paso a key for crying out loud deals for crying out loud meos let's go to the balance sheet tab and then run the report and so now we have in the payments to deposit if I go into that 300 then we have the 300 boom that looks good if I go back if I go back the other side is in the a to the r accounts receivable the ar pirate account that one went down so that looks correct but if I look at the sub ledger that's when it gets funny let's close let's go back and now I'm going to make the sub ledger go to the tab to the right right click on it duplicate it let's open up another report supporting backing up giving more information about the balance sheet reports are on the left hand side closing the hamburger scrolling down to who is used the ar type reports and we want to go into the customer balance details do that and the range is good I think so now the issue is now for mr. Anderson we have a negative accounts receivable which is weird so that makes sense because if I but it makes sense because if I talk to mr. Anderson and and we have a communication we're going to say oh yeah you have a credit balance a negative accounts receivable in your account that you can then apply to a future invoice when you purchase but from a financial standpoint it makes no sense because you're like wait a negative accounts receivable isn't an asset that's a liability that means you owe mr. Anderson money and you do you either owe him the money back or you owe him the guitar to complete the process so you see the that's where the disconnect is but from an internal standpoint it looks fine right and so the total accounts receivable is nineteen five eleven fifty and if I go over here that should tie up to the accounts receivable here so so so here's where the issue is here so that works from an internal standpoint but not from a financial statement standpoint now when we actually make the invoice when we get the guitar we're going to net these two out and then we'll be okay so it's just a timing difference between the point in time I get the deposit and I complete the transaction what if the end of the year happens and I still have this three hundred dollars as a negative accounts receivable and I have to do external reporting well one if you just need to do taxes then all you really need possibly is the income statement if you're small sole proprietor type business and this again is a transaction that the income statement is is correct right the problem is between the allocation on the balance sheet between asset and liability if you need to do external reporting to the bank or some some some taxes that you have to do a corporate tax return with the balance sheet on it and whatnot then you could do an adjusting entry similar to other adjusting entries except there's not an income statement component to it you would just increase the accounts receivable by 300 put the other side into the unearned revenue and then reverse it the next day and that is actually a pretty good system to use because now you're making things as easy on the bookkeeper as possible while still being able to periodically adjust the financial statements to make the financial statements correct as of the reporting date which is a concept we use all the time for things like payroll and whatnot you have similar kind of concepts right I don't want to mess up the bookkeeper payroll is too complicated and when you have a lot of unearned revenue it's too complicated let the system do whatever is easiest on the bookkeeper side of things and then make a periodic adjustment that's that's my spiel on it that everyone agrees so so I'm going to go to the first tab over here and then if I go into the if I go into the customer now let's go into the customer and look up Mr. Anderson Mr. Anderson so now we have this item that has been paid so notice it says paid and it says unapplied it's beautiful right it's I can see exactly what has happened here right all these other ones are done if Mr. Anderson contacts me if someone else goes into the QuickBooks file and Anderson's trying to explain what happened because oh yeah you have a credit balance you have a negative balance here yeah that applies to the next purchase I see what is happening right and then we can make the invoice at a future time now let's do the same thing for another customer just to see a couple other ones so we can play with these in future presentations a little bit more I'm going to do the same thing invoice no I'm going to skip that receive payment Mr. Anderson the word got out that we could do we'll order custom guitars and now Sam the guitar man wants a custom crazy looking guitar and we're like all right but you know you talk to Mr. Anderson and you know how it is we want a down payment so 0 to 25 to 4 we're going to say we'll just say cash is the method now note that he has an invoice to tie it to but we're not going to tie it to the invoice because we're going to imagine this payment is for a down payment not paying off this invoice we're going to say you still owe us $970 you know but now we're going to apply this one to a credit not to the invoice so we might not want to do that in practice we might say hey give me the 930 and then order the guitars what I'd probably say especially given our past experience around here with it but for practice purposes I just want to show that you could have an invoice down here and not a tie it out and still have a deposit with a credit balance right so this would be 250 let's say so let's do that again so I'm just going to say save and close wait I'm going to uncheck this all right then I can save and close I don't want it to go to that so it's going to be decrease me accounts receivable but not tied out to that invoice so you didn't select an invoice we'll save the payment as a credit to your customer since you didn't select an invoice if you want to record a payment without an invoice and it's like okay cool and then let's go to the balance sheet and run it and then the AR accounts receivable we have another decrease to the accounts receivable 250 is that what I did I did it on the 28th before I thought anyways and then the other side is going into not revenue but it's going to go into the payments to deposit so there's our payments to deposit for Sam the guitar man let's go back let's go to the first tab and let's go into the customers for Sam the guitar man and so here we have it so now we had an invoice but we didn't apply notice this payment to the invoice so this this is we still have a credit outstanding and they owe us to 3 the 930 we decided not to link those two together because this 250 we're going to say will be for another another purchase so again you can kind of see what's going on pretty clearly from the internal bookkeeping side of things all right let's do one more I'm going to do one more so again invoice I know we're going to go right to the receive payment so another person came in and it's like dude I thought I heard you were had some super cool guitars that you can order with some crazy color and we're like yeah but we need a down payment I don't know and so this is going to be Eric music we're going to say on 225 let's do the same date and we're going to say cash down so going to deposit payment to deposit that customer doesn't have anything to put the credit to so we're going to end up with a negative receivable and we're like that's cool I see how this is working now let's save it and close it and this is going to go uh something's wrong because I didn't put the amount in again 200 let's say 200 dollars by the way you might ask how am I going to know what the down payment is well you the first step on this you might then is create an estimate which is something I possibly would have been nice to start off with you could say let's save and close this and once again it's going to apply that out and before I forget the name let's go into Eric music let's go into uh Eric music so if someone if someone came in and said I want to order this particular guitar you might hit the plus button and you could try to make a mock invoice to get an idea of what it would cost and then possibly collect a 10 down payment or a 20 down payment or whatever you want but it might be even better to make an estimate so you could enter an estimate and you could say okay I'm going to if you want an ESP guitar then then oh hold on a second and and if you want an ELP guitar we could say okay that's going to cost 500 plus 4750 and then you can use that to think about what your down payment should be maybe you'll take 10 percent of that or 20 percent of that or whatever whatever you think would be the appropriate down payment based on this and then you can actually create the estimate and and if I did that let's make this for Eric music I'll show you just if we made an estimate I might change it in a future presentation but this will not record anything this is an internal document and we're going to say okay Eric music had this let's change the sales tax to the generic five so we say sales taxes we'll just make it the generic five okay and then and then we might use this to create the estimate I'm sorry to create the amount that we expect for the down payment so if I was to save this let's save and close it will not record anything this is an internal document we'll talk more about it in future presentations but just to see the process here if I go then into the sales area and we go into the customers for the ones that have an estimate I can filter by the estimates now and I can see then we have Eric music going into Eric music we then have the estimate in place and we have the payment so when Eric comes in and says okay I I I'm going to pick up the guitar that you purchased for me I already put a $200 down payment on it then we can clearly see oh yeah you have a credit of the 200 and then you have the 525 is what you requested which hopefully we have received now because we purchased it and then we can create an invoice from the estimate so we could for example go into the estimate edit the estimate and then and then basically I could select the drop down and convert to an invoice so I'm going to close that back out and so we'll take a look at that in future presentations but the idea being look at the internal representation it's pretty easy to see internally even if someone else was the one that recorded the initial transactions here and then and then a different person was in place when they're actually going to be giving the guitar you can look in here and pretty clearly see what is going on if I go to the balance sheet then we can run the balance sheet and we can see of course that we had a transaction to the AR accounts receivable account and then we're going to say okay there it is hopefully our accounts receivable our customers are not pirates and they're going to actually pay us but we're going to collect the down payment because we're going to trust but verify payments to deposit and we're going to go into here and we're going to say okay so there's our payments and then nothing's on the income statement and then on the accounts receivable we've got those two amounts that have the negative payments in it we also had a negative payment on another one but so here this one has a a negative balance a negative and then we've got a negative down here so now we're going to have to so now in the future presentations we'll create invoices which will which will net out against those which will make then will be good again in terms of our timing difference and we'll also at the end of the months of transactions in a future course or section talk about the adjusting entry you might do if you still had a negative outstanding balance and you were trying to do external reporting in which case this should be a positive liability and we could we could do basically adjusting entry for now before we close up here though let's just deposit this amount this amount in the undeposited funds let's just put this into the bank now so we got 750 dollars we want to get that into the bank because you know we've apparently our customers are also pirates and so we want to don't want to have too much money on hand so we're going to then go into the drop down and we're going to go into the bank deposit and we're going to imagine we deposit all of these at one time on let's say 0 225 24 and then I'm just going to select all of them they're all we're going to imagine cash but if they were credit cards then we might have a fee that we have to deal with we can put the fee down below but we're going to deposit them as one lump sum 750 showing up on the cash account which will match what is going to be showing up on the bank statement match what's on the bank reconciliation and bank feeds so let's save and close that and then check it out if I go to the balance sheet and run it again and dive into the checking account with a click dive in into it we see that we have the deposit now in the system I think we did it on on 225 yeah the 750 I think that was it and then if we go back to the undeposited funds undeposited funds is back down to zero the clearing account doing its job going up and then back down to zero not at the end of the period as a temporary account would like income statement accounts but at the end of a shorter cycle after it serves its function all right let's stop it here we're going long so this is where we stand here this is where this is our profit and loss nothing happened on the profit loss because although we could we select we got money but we didn't earn it yet we haven't earned it you have to earn the money before you record at least on an accrual based method all right so this is where we stand on the trial balance if your numbers match out to these numbers great if not try changing the date range see if it's a date issue we have the balance sheet on top of the income statement balance sheet accounts include assets cash as an asset accounts receivable inventory investments prepayments accumulated depreciation the contra asset which is linked to the property plants and equipment or furniture and fixture that's what the company owns what the company then or who has claimed to the ownership the other side of the coin liabilities and equity so that's the liabilities start with the accounts payable visa is a liability the sales tax payable liability the bank loan payable liability payroll tax liabilities this was the sales tax liability up top payroll tax liabilities and then our claim to the assets starting with the equity section our investments our owner's equity similar to retained earnings if it was a corporation and then the income statement which should be able to be condensed to one number credits income minus debits expenses credits winning and that credit if you have net income rather than a loss and that credit will then roll into the owner's equity which is like the retained earnings which we can see if we bring it up one more period oh one oh one two five oh one oh one two five run it to refresh it we now see that the owner's equity is at eighty seven three fifty nine eighty five