QuickBooks Pro Plus desktop 2020 to advanced customer payment or unearned revenue method number one, and get ready because we bookkeeping pros are moving up the hill top with QuickBooks Pro Plus desktop 2022. Here we are in our get Craig guitars practice file going through the setup process with a view drop down open windows list left hand side company dropped down home page in the middle maximize into the gray area that reports drop down company and financial balance sheet standard customize in range change a 1012 to 1231 to fonts and numbers customizing those fonts to 14. Okay, yes, please. Okay.
00:44
Reports drop down company and financial profit and loss p&l range change? Oh 1012 to 1231 to two, customizing the report fonts and numbers change in that font to 14. Okay, yes, please. And okay, let’s do it. Again. Reports drop down accounting and taxes, trial balance this time range change a 1012 to 1231 to two, customizing the report fonts and numbers changing that font to 14. Okay, yes, please. And okay, let’s go back to the homepage imagining the scenario.
01:25
So under normal conditions in our business, for example, we either sell guitars or we do goods and services, possibly guitar lessons or repair of the guitar, we can see and imagine that as a sale that happens in the store, in which case, we bring it up at the cash register, basically, where we make a sales receipt. Or we might have a situation where we do the work first get paid later, in which case we have the invoice increasing the accounts receivable getting paid then at a later point, however, it is possible that we could get paid in advance get paid before by the customer, before we provide the goods and or the services. So in that situation.
02:02
And it becomes more common these days in certain types of industries, we have kind of a backwards alignment to most types of industries or the traditional way that we would expect the flow to be happening. That being we provide the goods and services on or before we get paid. Those kinds of industries where this happens all the time would be the classic example a newspaper industry, where you basically are going to get paid for a year’s subscription. That means you got money in that instance, before you gave the newspapers. So under an accrual accounting system, although you got paid, we shouldn’t be recording revenue, but rather unearned revenue until we do the work.
02:41
And, and more examples of that would be computer applications now which are quite common, you have a subscription model, which is becoming more and more common. So anytime you’re in a subscription model type of business, you’re getting paid for services that you’re going to be providing in the future, then under an accrual basis method, you should be recording the revenue that you’re being receiving on an unearned revenue basis until you provide the services that you have promised.
03:08
So that would be another basically common example, if you sell things like a large, like large items for us guitars, or amplifiers or large like a car, then it’s possible that you might get an advanced payment, as you go through the negotiation and say I’m going to get an advanced payment, and then that will lock you in in some way to the negotiation that we have come to and then I’ll do what I got to do possibly talking to my vendor to get some custom customized thing for you, for example, a customized guitar or a customized car. That’s another common example.
03:43
One more common example would be that if you are in real estate type of businesses and you are renting, then oftentimes you’re going to get that security deposit up front, that may not be exactly the same, you might not think of it is exactly the same because you don’t expect that security deposit to be revenue unless there’s damage to the apartment or something like that at the end of the cycle, but it’s still money that has been received that hasn’t been earned and should be recorded as some kind of like liability type of account. So that’s that’s the general scenario.
04:15
How would we record this if you have a normal accounting background, and you’re looking at debits and credits, what would normally happen if you go to the balance sheet is that you would expect then that the cash would be going up because we got money. The other side should not go to revenue, even though it came from a customer but rather increasing a liability account, which will be called unearned revenue. And then you usually have an adjusting entry at the end of the period, the end of the month or the year to adjust for the revenue that has been earned during that period.
04:47
We’re going to alter that a little bit for this method one and I’ll try to give the justifications as to why that would be and then in method two, we’ll try to align it more with that same kind of process that you’re expecting to see a normal account accrual accounting when you’re learning just basically financial accounting. Now, it becomes a little bit more difficult when you’re looking at accounting software to do the same kind of theory concept. Because as you’re dealing with customers, you want to be able to track the pre payments and the amounts that have been that you need to build for, for the customers. So and we track those in the accounts receivable account.
05:25
And the subsidiary account related to that is the accounts receivable subsidiary ledger, the AR Aging, the customer detail. So what I would like to do is be able to create something if I got paid in advance, that’s going to be tracked in the same area being in the accounts receivable sub ledgers, so that when I create the invoice later, I can tie it out to the prepayment. So there’s one easy way to do that, which is not exactly completely proper accounting for reporting purposes. But you could do an adjusting entry to shore it up, which is a very common thing to do.
06:00
That’s what adjusting entries do. So in this case, we might say, I’m going to use the accounts receivable to in essence, make a negative receivable, instead of creating a liability of unearned revenue, noting that negative receivable is not quite right from a reporting standpoint. But it does make it easy for me to then match out that deposit and track that deposit to the invoice that I’m going to be getting at a later point in time. And I can take that negative receivable. And when I do reporting, just basically do an adjusting entry to adjusted out of the negative receivable and into unearned revenue if it’s still outstanding, and then reverse that entry.
06:42
So I can just make it part of my normal adjusting entries. So we’re going to start with that because it’s quite common, you’ll see this if you if you work with businesses, oftentimes where they have this prepayment situation, they might use it this way, because again, logistically, it’s quite common. However, we’ll also then next time, look at another method, if you would prefer to see a method where we can get it down here into the unearned revenue. To do that, we’ll have to set up kind of new items in order to do that. Alright, so let’s do this, we’re going to go back to the Home tab.
07:13
And we’re going to say we got received the payment before the invoice and we’re not going to create a sales receipt, we’re just going to say receive the payment. And our scenario, the imagination would be our imagined scenario someone comes in, they say I would like a guitar. And we’re going to say, we don’t have that guitar, we’ll order from the vendor possibly, or we need to get some time to get you that color or whatever you want. And so but we would like a down payment of whatever 10% or whatever on the guitar to lock you in.
07:42
So it would be worth our while that I go to my vendor and get the guitar because I don’t want to get the guitar if you’re not actually going to follow through with paying for the guitar. And I’ll be more comfortable doing that if you give me a down payment, which I will then apply to the purchase of the guitar when we get the guitar. That’s a typical kind of scenario you would have if you’re selling kind of a large item. But again, it’s the same kind of idea if you’re doing pre payments of any of any kind a prepayment for a concert or something like that, or a prepayment for a magazine or subscription model type of thing.
08:15
So I’m going to do that by going into the receive payment item here. And I’m going to say that we got a we got a prepayment and I’m going to save the customer. Let’s give it Anderson guitars again, our favorite Mr. Anderson gave us let’s say a cash down payment. And we’re going to say it’s for $300. And it’s on the 25th We’re going to say and it’s going to go into we’ll put it into the undeposited funds here. So we’ll go into undeposited funds, just like our normal kind of transaction.
08:45
The thing that’s different down here is there’s no other place, there’s no invoice to tie it out to you because usually, what is the customer payment mean, it means a decrease to the accounts receivable, which means it needs to tie to an invoice, I don’t have any invoice to tie it to. So what’s it going to do when I record this, it’s going to basically create a decrease to accounts receivable but not a tie it to an invoice, meaning that the next time I enter an invoice for Mr. Anderson, I’ll have the opportunity hopefully, to apply this what they might call a credit to it, which would lower the amount of the bill at that point. That’s what we’re expecting to happen.
09:22
And then the other side’s going to go into undeposited funds. So let’s save it and close it and take a look at it. So I say you’re a credit for your overpayment will remain on the customer’s account meaning now they’ve got an overpayment that can be applied to an invoice if you make an invoice later, you can click Print credit memo to save the transaction and print a credit memo. So we could print the credit memo click OK to save the transaction, click cancel. So I’m going to say go ahead and save it.
09:49
And let’s go to the trusty TB. On the trial balance. We then have in undeposited funds. There’s the $300 There’s the $300 If I go into the accounts receivable accounts receivable, we’ve got the $300 there. But then if we go to the customer balance detail what’s going on there, if I go to the reports drop down customers and receivables to see the sub ledger for the customer balance detail supporting the accounts receivable on the balance sheet. Then under Anderson, I’ve got this negative balance, I’ve got a negative number. That’s funny, like that shouldn’t have a negative number in the receivables because receivable represents people owe enough money.
10:35
What does it mean? If I have a negative receivable for a customer, that would mean I owe them money. So that it’s you kind of say, well, well, that’s kind of true, you do owe them money, and it’s true. But if I owe them money, it shouldn’t be a negative receivable, it should be a positive liability, which we might call unearned revenue. Why don’t I put this into a positive liability called unearned revenue,
10:58
I could, but if I do, I can’t track it with the sub ledger right here, which is by customers as easily. So that would be the point of having this as a negative receivable logistically, because then I can easily turn around to create the invoice when I create the invoice, these two items will net out because I’ll apply that credit to the invoice and I will be okay at that point in time, everything will be working fine.
11:24
However, if I was to report this outside of the company in my financial reports, then it shouldn’t be that I have this negative receivable I should have a liability called unearned revenue. To do that, to get that in place, I would then do an adjusting entry periodically at the end of the month to just make that adjustment for presentation purposes, and then do a reversing entry to get back to where we are here. So that logistically we can do what works from a logistical standpoint, which is to track it within the customer area. Now I know this is a topic that really kind of bugs people because they see the negative receivable.
12:01
And they’re like, that’s not what I learned in the accounting thing I don’t, but she could see why logistically, it would work in that way. But from a reporting standpoint, you’d want to report it as unearned. And we will do another method, if you would like to record it that in in unearned revenue, but it’s a little bit longer of a math method to do this might be the easiest thing to do in a lot of cases. So let’s do it. Let’s do a couple more here just to just to practice that again for a couple of customers.
12:29
So I’m going to go back to the home area. And I’m going to say let’s imagine we receive another item, let’s pick another customer and I’m going to say Eric music. And let’s say this is $200 on the 25th as well going into the undeposited funds, and then again, I’m not applying it to anything on down below so that it will just be going into that undeposited area, I’m going to say Save and then it’s the other side it’s going to accounts receivable but it’s not applied to an invoice because there’s no invoice on down below to apply it to, I’m going to do Save and New. And then I’m going to say Okay, and let’s do one more. And let’s do one more for for Sam, the guitar man. And this is going to be let’s say, let’s say 250, this time, also on 225.
13:21
And this will do the same thing. So I’m going to save it and close it this time, save it and close it and check those out. So I’m going to say okay, and if we go to the trusty Trial Balance, now we have undeposited funds, if I go into undeposited funds, we have those three items in that are coming in from undeposited funds, we can then go into the accounts receivable. And we have those items decrease in the accounts receivable, but they’re not applied to an invoice. So if I go to the reports, drop down customers and receivables that customer balance detail, then they’re going to end up with those negative amounts that aren’t tying out to anything. There’s the 300 there.
14:02
Here’s the 200 for Eric music. So we’ve got this 200 like negative receivable. And then the last one we did was for Sam, the Guitar Man where we got that negative 250, the balance still adds up to the 1961 50. That ties out to what’s on the trial balance, that’s great. But that balance is actually lower than it should be. What should happen if we’re on the balance sheet for reporting purposes, is that this should be higher by those three amounts. And then we should have the undeposited funds on the liability side for those three amounts added together down here. But again, undeposited funds doesn’t have the sub ledger tracking by customer.
14:44
So you might say well, what’s the big deal because it’s it’s either a negative acid or it’s a positive liability. It may not be the biggest biggest problem for your logistical purposes generally, but for reporting purposes when you’re reporting the financial statements You would want that break broken out, which is why then you might just do that with an adjusting entry periodically. And that will allow you to get the logistical simplicity of doing this method of having a negative receivable tracking it with the customer.
15:15
And then and then also give you the ability for reporting purposes to break out the liability as needed. So in following presentations, we will then we will then receive the payment. So if I go back to the home, here, we can imagine, then we’re going to receive the invoice and when I make the invoice, I can apply out that credit to the invoice. So we’ll do that in a future presentation,
15:39
I’m also just going to record the deposit. So now we’ve got the three items in undeposited funds, I would like to move them out of undeposited funds and put them into our checking account. So I’m just going to click on the deposit. And we’re going to check off those three items. And I’m going to say okay, there’s the three items as of the 25th. This is going to be increasing the checking account by the 750. And we’re gonna imagine we put those three deposits into the bank.
16:05
And so and so we’re gonna save decrease in undeposited funds, save it and close it, balance sheet. So let’s go to the trial balance, because that’ll show us that zero. So now undeposited funds is now at zero, so we could see them going up and then going down. That’s the beauty of them showing separately in here. So I can just tick and tie them off and see what is actually happening. Closing that out, they go into the checking account then as one lump sum, so that I can then see that on the bank statement hopefully in the same format being able to tie out and reconcile the two.
16:39
Closing this back out. This is what we have thus far. You can you can check your numbers if you’re working along with us. If something is different, you can check your date ranges, adjusting the date ranges, it’s also a date it’s often a date range issue, and then we will be doing the the transaction detail report to further check our numbers at the end of the section. We’ll also be trying to get those backup files if you would like to rework something with the help and use of them