 QuickBooks Online. Credit Memo, Bad Debt, Sales Returns. Get ready to start moving on up with QuickBooks Online. We're going to be using the free QuickBooks Online Test Drives, searching in our search engine for QuickBooks Online. Test Drive, choosing the option that has Intuit.com in the URL, Intuit being the owner of QuickBooks. We will be using the United States version of the QuickBooks Online and verifying that we're not a robot. Zooming in by holding down control up on the scroll wheel currently at 1-5% on the zoom in. Noting on the car dropdown that we're in the accountant view as opposed to the business view. We will be toggling back and forth between the two views so you can get a look at both of them. Duplicating some tabs up top to put reports in as we do every time. Right-clicking on the tab. Duplicating it. Right-clicking on the duplicated tab. Duplicating it again. Let's go back to the tab in the middle. Go to the reports on the left-hand side and open up the balance sheet report. As that's thinking, tab to the right and go to the reports on the left-hand side. Open up the profit and loss report. Close up the hamburger. Scrolling up to the top. Changing the ranging. This is the date range from 010122 tab to 123122. That's January 2022 to December 31, 2022. Run it. Refresh it. Update it. Tab to the left. We're going to close the hamburger. Scroll up. Same range up top from 010122 tab to 123122 tab. Run the report. Refresh it. Update it. That's the setup process we do every time. 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. 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. Back to the tab to the left. We're opening up the new button. We've been focusing in on the customer cycle, which represents the cycle where we expect generally to get money into our checking account at the end of the cycle. There's a couple different ways the cycle might work depending on the industry we are in. The easiest kind of customer cycle would be one in which you get in gig work or something, you're getting paid from YouTube, from Amazon or something like that, and you just record the deposit when it clears the bank possibly with the bank feeds. The second easiest process would be that if you have a cash register, you're on a cash-based system, but you can't wait till something clears the bank, you've got to record the sale at the point of time it takes place even though you're receiving money at the same time you do the work such as in a restaurant, a sales receipt form, for example, and then we're going to make the deposit, and then the full accrual process would be we make an invoice because we did the work first, invoicing the client for the work that we did, increasing the accounts receivable, tracking that, and then hopefully receiving money for that outstanding accounts receivable, and then depositing that money into the bank. Now, we could have a glitch in the system of some kind, in which case there's a problem, the customer complains. We have faulty merchandise or something like that, something went wrong, in which case we would have to in essence reverse the sale. That in essence is going to be the credit memo. And many of these items down here will go into some of these, the refund receipt, the delayed credit, the delayed charge. We'll hopefully talk about them as well, but let's first just do the standard item if there's a reversal of the transaction, which is going to be the credit memo. Now to understand this, you've got to first think about the sales transaction and then reverse the sales transaction. So if you're thinking about what accounts are going to be impacted, you want to first think about the normal accounts that are impacted, and then reverse that. So let's just look at a flow chart and just to understand this from a flow chart perspective, this is the desktop flow chart, but I'm just giving an idea of the normal flow if we're going to be invoicing a customer for the work that we did. We did work, we invoice the customer. We received the payment then and then we typically make the deposit. Now, if at the point we invoice, there's a problem before we get paid and we say, okay customer, you're right. There's a problem. Let's just reverse, you know, the sale. Then we would enter a credit memo basically right here in the transaction, meaning we're not going to receive the payment. We're going to not delete the invoice because that's we still want the audit trail. We're going to create a credit memo which will in essence reverse the invoice, but we'll still see what happens. I'll still be able to look in the customer detail and say, yes, we created an invoice and then we made a credit memo for whatever reason. Do we want to do business with this person in the future or what not going forward? It's better to know the audit trail rather than, you know, delete the invoice, but that will basically bring the accounts receivable back down to zero. That's where our focus will be here. Now you could have a situation where they already paid you on the invoice or you made a sale at the cash register and then they come back and say, hey, there's an issue with this and they want to return or get their money back at that point. Well, at that point, you can't just reverse the accounts receivable. They've already paid you. So you might have to issue them, you know, the money back, which would be a transaction of decreasing the checking account. So our major focus will be here, the increase of the invoice or the entering of the invoice and then basically reversing it with a credit memo. Okay. So to think about that, let's go back on over and let's actually make an invoice. I'm going to go here. I'm going to create an invoice and I'm just going to do our standard thing. I'm going to make it for AA again. So this is just be a generic customer that we're going to be putting together that will show up on top of the customer list. I'm not going to add an email terms net 30 so they're going to pay us in 30 days. The date 12 31 22. It's going to be doing 30 days one 22 23. And then let's put an item down here, which I'm going to make an inventory item because that's the one that carries the most problems with the recording of the transaction and the reversal because that adds a lot of complication to the invoice. Now, if it wasn't inventory and it was just a service item and we don't have sales tax related to it, it would be that much easier and there would be a less complicated transaction. So we'll just do the more complex transaction. And then you can you can see what would happen on the less complex transaction by just subtracting out the inventory component. So I'm going to I'm going to make an inventory item. I'm going to call it inventory one inventory one tab tab tab tab quantity on hand. I'm going to just put 10 on hand. And so this will record a transaction to put the inventory on hand so that we can then sell it, which we're doing here with the invoice. As of the beginning of the month, I'll say reorder point is zero. The inventory asset account, that's what's going to be increasing when we buy the inventory. It's going to increase by these 10 units times the cost when we put this on place. But the invoice that we're going to record will decrease the inventory asset account. And then we're going to say it's going to be a description. Let's say the sales price is just let's just say it's $1,000 to make an even number. The income account will be sales of products. That's what will happen when we record the invoice. And let's say that it's a taxable item. So that looks good. It should apply the tax purchasing description will be inventory one. Let's say we buy them for $750 and the cost of goods sold will be recorded when we create the invoice on the income statement, the expense of us consuming the inventory for purchase for the sale of it. So then we're going to say save it and close it. So now we've got our inventory items. So we've got $1,000. We'll just sell one of them and the taxes is checked off here. So what is this going to do? It's going to be a invoice. So it's going to increase accounts receivable for the full amount, including the sales tax. The other side is going to go to the revenue driven by the item. That's what's telling it which account to go to for $1,000. What we charged the sales tax is going to go to a payable account, basically sales tax payable and inventory is going to go down, not by the 1,000, but by the 750, which isn't on the form, but known by the system due to the inventory item being used and cost of goods sold is going to be going up net impact on net income, 1,000 minus 750. And we're also going to have an impact on the sub ledger for customer. That's going to owe us the $1,000. And we're going to have an impact on the sub ledger for the inventory account by unit tracking the unit of inventory that we sold as well. So a lot going on with the invoice. When we issue the credit memo, we're going to have to reverse that entirely. So we'll talk about that in a second. Let's just verify this first. See if we're right in what this is doing. Let's save and close this. And then go to the, to the forms and run it. I'm going to hold control, scroll up a bit and we've got the AR should have going up. So now I'm going to drill back down from the source document just to verify that this is doing what we thought it should do. And let's scroll back down. There's the, the AA, there's the 1,080. So it went up by the full amount as we would expect, including the sales tax. So it includes the sales tax closing that out, scrolling back up, back to our balance sheet, going to the tab to the right. And then we're going to refresh this one. And this went into the income account for products and service income. So we'll go into that just to verify. There it is. It went up by the 1,000, not by the full 1,080. It did not include sales tax. In other words, the sales tax, if I go back here is back on the balance sheet. And it should have increased the liability account of here. The, I think it's the board of equalization. That's who we pay the sales tax to. So we owe them their tax that they made us collect for them $80. Okay. So then we're going to go back on over and back again. Also the inventory up top is impacted an asset account on the balance sheet. So we're on the balance sheet, asset account inventory, zooming into it and scrolling down. So it was impacted by 750 and amount that's not on the invoice, but known by the system by the item that we created. And then back and one more time. If I go back to the, to the income statement cost of goods sold is impacted as well. Going into the cost of goods sold. There is, hold on a second. What happened there? K-PASO 750. There's the 750, the cost of us using the inventory in order to generate revenue. So now we've got the impact on the income statement was the revenue 1000 minus the cost that gets sold 750, the impact on gross profit and net income. So then we can also say that there should be a sub ledger for the accounts receivable. So the balance sheet accounts receivable sub ledger for AR by customer. So let's look at that because we're going to have to reverse this whole thing with the credit memo. So I'm going to duplicate this tab and notice again, if you're going to reverse something, the best way to look at it is to, is to first think about how the original thing was recorded and then reverse it, not trying to construct the reverse transaction, the credit memo in your mind first, right? It's easier to construct something that's a normal business transaction and then reverse it. So then we're going to go and save reports on the left hand side and then scroll down. Who owes you money? Let's take a look at the customer balance detail report, let's say, and we'll show all dates. Okay. And then there's the invoice. There's the invoice here. The point being that this is broken out by customer now instead of just by date. And it ties out that 636152 to what is on the balance sheet, the 636152. And the inventory has a sub ledger because we're tracking it on a perpetual inventory method. So let's look at that sub ledger going to the tab to the right, right clicking on it, duplicating it. And then we're going to go into the reports on the left hand side. I'm going to close up the hamburger and type up top. I'm just going to type it in inventory, inventory valuation summary. And here we've got the nine units. We should run it for 1231, 123122. Run it. I was running. So here's the 750. So we had nine units we put on the books when we added it for the beginning balances and then we sold one. So the point is the total down here adds up to 734625. And we have a sub ledger telling us the units and the types of inventories we have that 734625 should tie out to the balance sheet over here. So a lot going on with that invoice. Let's see what happens on the customer side. Let's imagine the customer comes in and says, Hey, something's wrong. I want to reverse this. I want to return the inventory or whatever. So now we would go, okay, let's go into their on this side onto the sales area, which you could call the customer center sales cycle revenue cycle. And we could look at it by invoice here to pull up the invoices and say it has not yet been paid or I let's start with all transactions. I could go to all transactions and I can do my sorting up top for the open invoices and say, Okay, there's open invoices that have not yet been paid. I see it right there. I can also sort my invoices this way open overdue and so on this way. I could find it in my invoices tab up top and be searching in essence for the, the, there's the overdue invoices, not due invoices and the, and this would be the category we're in. So let's go ahead and change the date. So, so there's our a a a right there, or we most likely if the customer came in would search under their customer tab, and then we still could sort by the open invoices, which is kind of neat. Or we'd probably just clear everything and find a a a. Okay. Who are you a a a. Okay. So there we see the, the invoice that we're expecting to receive payment on, but no, they're saying that they're not going to pay us because they're kind of return the merchandise. So now we're going to say, all right, so I'm going to make a credit memo with it. So what I'd like to do from just a journal entry standpoint, I'm going to, I'm going to duplicate this tab, right click and duplicate this tab. And I would typically say, okay, what I'm going to do is create a credit memo, which basically mirrors this invoice. So if I open up this invoice, for example, I could then pull this on a on a separate screen, right. And then use it to populate the credit memo, which, which would just mirror, which would look just like the invoice, except it would be the mirror opposite, the reversal. But you kind of want to understand what the invoice is doing because you might want to tweak the credit memo a little. So in other words, if I was going to start the credit memo, I can go back on over here and say, okay, let's hit the plus button up top. And now I'm going to make a credit memo because they these people aren't happy and they want to reverse the sale. And I don't want to, I don't want them to give me a bad Yelp review or something on the internet. So we're going to say I have enough problems. People yelling at me over there all the time. I didn't do anything. I swear. Any case, we're going to say 1223. They want to reverse it or they're going to give me a bad Yelp review, whatever. So now we're going to say this is going to be inventory. We're just going to mirror what we did inventory. And there's inventory one. And so the whole thing is mirrored. It looks just like the invoice, except it's a credit memo. And this will reverse it exactly. And then we're also, once it's been reversed, you might say, well, it's got to be connected to the invoice or the invoice is still going to be open. Then we can, it'll do it generally automatically. But if it doesn't do it automatically, then we can kind of connect it with the, with the receive payment form. So we'll, we'll take a look at how that works. But notice if this reverses it automatically, we still might have an issue because it's going to actually reverse the income line item. So I'm going to get in the weeds a little bit on the transaction and see if we want to kind of tweak this a bit. So first I would think about, okay, what did the invoice do? I'm just going to write this out in a journal entry and then reverse it. This might be going too far, but I think it's kind of useful for some, a lot of people, right? So we're going to say, what happened when we did the invoice? Well, accounts receivable went up. The accounts receivable went up by 1,080, including the sales tax. And then we had the sales, it only went up. This is a credit. I'm going to put the credits on the left hands on the right. And then I'm going to say it went up by negative. I'm going to make them negative, which also represents a credit to me a thousand. And then we had the sales tax payable, which was I'm going to say negative sum, the plug of $80. And then we also had the cost of goods sold, which was for $750. And the inventory went down. If I misspell any of this, I apologize. That's the transaction that really took place. I'm going to pull this up to the top of my worksheet for some reason. I'm down there. And then I'm going to close this up. So if I reverse this, the easiest thing to do, I'm not going to try to say, just if I'm thinking about this in my mind, I'm not going to try to like put the debits on top or anything. I'm just going to write the same thing and reverse it. What's the credit memo going to do? Well, I'm just going to take the same thing and just reverse the whole thing if I'm doing it in debits and credits. I'm just going to say, all right, well, that means AR is going to be credited. It's going to go back down and the sales is going to be debited. The sales tax is going to be debited. The cost of goods sold is going to be credited. And the inventory is going to be debited. It's going to be the reverse. If you look at this from a debit and credit standpoint or just an increase and decrease standpoint, it should look funny because you don't normally do this. It's backwards, right? That's why you want to think about this first, what happens in the end, and then this. Now, this is fine. Like the accounts receivable going down. Yeah, of course, that's what we want to happen. But the sales going down, that's weird because normally we only like sales going up, right? So the fact that it's going down, sometimes we might want to record this into instead like a sales returns and allowances account or maybe like a bad debt account instead of decreasing sales. So that's where the issue comes in. The sales tax payable going down. That's good that we need that to happen because the sale didn't really happen and it might go down in a future period. So we're not going to go and fix the prior period and undo what we did last time. We're not going to delete the invoice because the sales tax would get messed up and we might have already paid it or something. We're going to reverse the sales tax with a credit memo this way, which will fix it in the future and then we'll go forward from there. The cost of goods sold. The cost of goods sold looks funny because cost of goods sold being an expense account usually only goes up and now we're reversing it. But that's typically what we do. So every once in a while cost of goods sold goes down if there's like a reversal here and we're going to say, okay, that's fine. And then the inventory, if we got the inventory, it's going to go back up. Now this is another issue because did I get the inventory back? Is the inventory broken? Was that the problem? Did we get a return of inventory or not? So the question here is, do I record this side of the transaction or not? Or is the inventory not a functioning matter? If I'm going to get the inventory back and use it as inventory, then you would think I'd have this reversal. So let's reverse it exactly and then talk about specifically how we might fix kind of this item. So let's go back on over and say, okay, I'm just going to record the reversal like this and it should reverse. Let's do this in the next period actually. Let's do it on 010123 so that we can see it the month after and it'll be in its own place. So I'm going to say save and close. So there we have it. So now what we have is the credit memo and notice what it did. It created a payment area. We didn't have to connect it because you might then say, what about this original invoice? If I go into this invoice now, it says it's paid, but I didn't get paid. I made a credit memo and then the system made this payment form. It basically see how it says created by QuickBooks Online. So in order to connect the credit memo to the invoice to show the invoice having been paid, QuickBooks did it automatically making this payment item. And the payment item is usually the next step we do with an invoice. You have an invoice and then we've received the payment. So we would say AAA. We normally click off that we've received a payment, but there's no received payment amount. Why? Because down below we have this credits item that we matched out to the credit. So QuickBooks did that automatically, but that link is important. Otherwise, you would have an open invoice still and the invoice and then the credit memo not linked to anything. So QuickBooks kind of makes that connection generally for us, but it's useful to know that that's payment thing has been generated right there and is a linking step within the process. Okay, let's see what happened by going to the balance sheet and let's run it. We got to change the date because I did it in the next period. So let's go from 010123 to 123123 and run it. And so now we're going to say that there was a decrease to the accounts receivable. So if I go into the accounts receivable, there's the decrease. It's reversed exactly. You know, if I change this to the prior period to 22 and run it and scroll down to the bottom. So now we've got it reversed out exactly, right? And then I'm scrolling back up top. And then if I go to the income statement on the right and we run that for 010123 to 123123, run it. We now have a thousand dollars in the sales. Once again, it reversed it exactly because if I take this back to 2022 and run it, you can see here that 1000 got reversed with the credit memo back. The other sides on the sales returns. So sales returns back to the balance sheet. I'm sorry, the sales tax payable. So it's in the board of the equalization going into that. So there's that reversal. If I change the date again to 2022, boom, run it. So now we have that got reversed out and it happened in the next month. So even if I paid the sales tax in the prior month, it's going to reverse out in the following month. If that didn't happen and I already paid the sales tax, then it's going to get all messy. So then we're going to say the next item is inventory. So inventory up top. We have inventory being reversed, meaning it went up, which again, is the inventory actually worse something anymore? Or is that the reason they returned it? Because it's worthless. That's why they want to give me a bad Yelp review. I'll take it back. I'll reverse it. I'll reverse it. Just don't harm me on the interwebs. And then if we go back to the income statement, we then have the 750 cost of goods sold right there on this side. So we've got the 1000 and the 750 on the reversal. So it reversed it exactly like we would expect. And if I go back to the first page and we looked at the accounts receivable, we thought we saw that the accounts receivable will net out still. So if I look at this aging, the accounts receivable by customer and refresh it, there's no more AAA. The total still ties out, which is 528152, which ties out to what's on the balance sheet, 528152. And we should have an adjustment to our inventory. So if I refresh this, it should go back up to 10 here. So I'm going to run it. So the inventory is back. Hold on a sec. As of 23 now, I got to bring it up a notch. So now we have the inventory has gone up to 10. We're at the 9625. So the 809625. Okay, so now let's say that I want to change this account to either sales returns and allowances possibly or like bad debt. We could do either one instead of reversing the revenue account. So we're going to say, hey, look, I don't want on the income statement to reverse revenue because I want revenue always to go up. I want to put my sales returns on another line or just call it bad debt, which would be an expense. So same kind of concept conceptually to kind of figure that out. So if I go back to the first tab and I go into my credit memo and say, okay, how can I tweak this now in order to do that? Well, one thing I can do is I can say that I'm going to make another item here that's going to be driving to record something to bad debt instead of the reversing of the sale. I'm going to say drop down and I'm going to say this is going to be I'm just going to call it a service item and I'm going to I'm just going to call it bad debt. I'm going to copy that copy and then I'm going to put that in the description and the sales price. I'm not going to put anything and then instead of going to an income account, I wanted to go to bad debt, which I might not have an account here for. If I didn't have an account, I would just set one up. I'm going to say it's going to be an expense account. Now I'm going to do it to bad debt here. You could do the same things for an allowance account, which would be a contra sales, which we might take a look at as well. Here I'm just going to put other for now other business expense and I'm going to call it bad debt expense. And then there it is. So let's save it and their attacks taxes. I'm not going to put actually no, I do want to have it taxable because I wanted to mirror the same thing here. So we'll make that a taxable item. So I'm going to say save it. If it wasn't taxable, then you can then you'd have to mirror whether the thing's going to be taxable or not. And then I'm going to say one and I'm just going to put the thousand dollars here. And then it's going to be a taxable item. Then I'm going to remove the amount up top. So now this is what it looks like. So we still have the same amount down here, but now because this second item is going to be driving it to bad debt. So what's this going to do? Well, it's still going to going to reverse the accounts receivable by the full amount of the 1,080 because it is a credit memo. The other side is not going to go to sales though because this item is zero. That's the one that drives to sales. It's instead going to go to this one, which is which is driving it to the bad debt account in this example. And that's only going to be for the 1,000 and then it's still going to reverse the sales tax because we have the same amount here. And it's calculating the sales tax, which will still give us a nice reversal of the sales tax. And then the inventory is still going to go down because it's going to be driven by this item. That's why we still need this item here because this item, although zero, that means it's not going to have an impact on the revenue account. It's still going to be decreasing the inventory or in this case increasing the inventory because we're putting the inventory back on the books. And it's going to be bringing it's going to be reversing the cost of goods sold as well. So the cost of goods sold went up with the invoice. Now the cost of goods sold is going to go back down. So this is a nice kind of fancy way or a little bit of a tricky way. It seems a little abstract when you first look at it to basically do that. Now, if you didn't get the inventory back, then you could just delete this line item altogether and you could just reverse the bad debt. But if we're getting the inventory back, then we still need this line item here to adjust the inventory. So let's save it and close it and just check that out. The transactions you're editing is linked. Are you sure you want to replace it? I'm going to say yes. Normally we wouldn't do that after we've already linked it and closed it. But there it is. So now if I go back to the balance sheet, I won't check all the accounts. We should still be in the same area with the accounts receivable and whatnot. The thing that changed now should be the income statement account. If I run this report, instead of us reversing the sales now, we reversed it to the cost of goods sold. That's the point. That's why we did it. So that's one thing you can do. Now maybe you don't want it in cost of goods sold, but maybe you want a contra account as a contra sales account. So a sales returns and allowances account, for example. So let's just do it one more time. I'm going to go back to the first tab and I'm going to go into that credit memo again. And let's populate it the way it was. The way it was is I had 1,000 here and I'm going to delete this second line. So it's the same strategy. I'm just going to make another item down here to go to sales returns and allowances, which is a contra income account, a contra revenue account as opposed to an expense account. So we'll just do the same thing. I'm going to make another item and I'm going to call it a service item. You might be able to call it a non inventory as well. The point is we're not tracking inventory with it, you know, so I'm going to make it a service item. This is going to be sales returns. I'll just call it that and copy that. We're going to put that in the description here. I'm sorry. I'm not going to put a rate on it because I'll just populate the rate. It's not going to go into services. That's the point. I'm going to make another account here, which I'm going to call an income type of account, but it's going to be a contra income account. It's going to be a negative kind of income account. So other primary income, I'll just call it that and I'll call it sales returns and allowances. And there it is. We'll run that, save it and close it. And then I'll do the same thing here. I'll put the thousand dollars here and just delete the thousand up top. We end up with the same result. So what's this going to do? It's a credit memo. It's going to reverse the accounts receivable for the full amount, which is the same 1,080. The other side's not going to reduce sales. However, but instead be driven by this one to sales returns and allowances a contra sales account. So we don't decrease the revenue directly. And then we're still reversing the sales tax payable, which is good. And then the inventory is still impacted by this line item. That's why we still need it. So it's going to go back up and the cost of goods sold is going to go down and the sub accounts of accounts receivable by customer as well as the inventory should be impacted the same way as well. So save it and close it. And we're going kind of long on the time here. So I'll try to check it real quick. And we're going to go to the balance to the income statement income statement, which is here. And run it. So now we did the same idea, but now we've got these two in the same line. So sales only goes up. And then you've got the sales returns and allowances showing the returns. That's oftentimes how you like to report the income side of things having the income accounts only go up and then have a contra account showing those reversals that took place breaking those out oftentimes. Okay, let's go back to the first tab. And I'm going to hit the cog dropdown switch to the business view just so we can see where some of these items are located and the business view. So if I go back up to the get things done, if we hit the plus button, we've got our same forms here. There's the credit memo. No change really there. We've been working in the get paid pay area primarily where we have our get paid. There's our customer area that we've been working in primarily. We also created an invoice so you can go into the invoice here and sort on the invoices that way. And then we were looking at the the transactions which are in the the bookkeeping area down here and then the transactions up top. And we can look at the sales transactions. And that's where we have all of our transactions and we looked in here for once again those invoices that were open invoices. But you can also search in here for like the other sales transactions like a credit memo, for example. And so now we can kind of search for we can we can sort this item by the credit memo. And then of course we looked at the reports and reports are in the business overview and the report. It's just another all the stuff should be basically in this you know format of it. There it's just in a different kind of location with different terminologies on the tabs just the skin deep differences typically.