QuickBooks Online 2021 customer prepayment or unearned revenue, we’re going to take a look at two different methods to record the unearned revenue. Let’s get into it with Intuit QuickBooks Online 2021. Here we are in our get great guitars practice problem, we’re going to take a look at the trial balance.
First, let’s first duplicate a tab up top, we’re going to right click on the tab up top and duplicate it, then we’re going to go down to the reports down below, we’re going to be opening up then a trial balance typing into the find area trial balance and open that up range, change it up top Indian ads, we’re going to say 1230 121. And then we’re going to go ahead and run that report. Let’s close up the hamburger for this tab, hold down Control scroll up just a bit.
So in the prior presentation, when we had a customer prepayment, we’re thinking about a situation where we’re getting money before we do the work. And on an accrual basis, we can’t then recognize the revenue even though we’ve got the money because we haven’t earned it at that point in time, let’s jump on over to our QuickBooks desktop version.
So we can take a look at the flow chart, you don’t need the desktop version to follow along. But we’re just taking a look at the flow chart here. Now we’re looking at the customer section usually with the sales cycle, we would do the work first or do the work at the same point in time and therefore create an invoice or sales receipt. At this point we’re getting paid before we do the work.
So we got paid before we do the work. In our case, we could think of a deposit on work that we’re going to basically do in the future, or maybe a pre payment that we do if a lawyer came in and said, Hey, I would like to get the money down payment. First, I want the money now. And then I’ll do the work, then we can think about a situation like that or a prepayment on a large purchase, such as a guitar that we have that we might get a prepayment and then apply it to the invoice we’ll create in the past.
And obviously this is the second point that we see in this normal arrow process, which is unnatural, that’s not the way it normally goes. And that’s what leads to this kind of unusual type of situation. Now last time, we entered a receive payment item. And we’ll do that again, this time for one of the two ways to deal with it. But there’s another way we could do with it, that’s a little bit more proper for so that we don’t have to do the same kind of adjusting entry process at the end of the time period. So let’s just touch on that quickly.
And then we’ll do the same method so that we’d have something there that we have, that we can do an adjusting entry at the end of the month with. So let’s say what we want to do typically for for bookkeeping purposes, or accounting courses, you would want an unearned revenue account then down below, and then you would receive the payment as opposed to a negative accounts receivable account. Now how can I do that? If I go back to the first tab?
How can I do that with our forms up top because I want to basically be linking up my forms to do that. One way we could do it is try to set up a product or customer that’s going to go to that unearned revenue account instead of income. So we could say, let’s do this, I’m going to say all right, well, let’s go down to the sales item down here. And let’s go to our products and services. So I’m going to go to the product and services tab. And when we know we’re going to set up a product for the prepayment.
So what I’m going to do is I’m going to say let’s add a new item, I’m going to hold down Ctrl and scroll down just a little bit to 100%. I’m going to say we want a new item here, I’m just going to make it a service item. So we’re going to make it a service item. And this is going to be a customer deposit or advanced payment, we could say we might just call it unearned revenue payments. So I’m going to say that’s going to be it’s no category description, I’m going to keep that I’m not going to put anything in the sales price, because I’m going to populate it basically as we go.
The trick here is that we’re not going to be recording it to an income account, but rather to the unearned revenue, so that when we create the invoice it’ll go to unearned revenue rather than an expense account. So let’s go on down here, we’re gonna say current and new item, I’m gonna call it then I’m setting up an account now, I’m going to call it an other current liability account, it’s going to be called then unearned revenue, which is going to be like other liability, other current liability,
I’m going to call it on earned revenue, which is probably the account we’re most you know, people that see this in accounting problems are most familiar with. So now I’m gonna say, save it and close it. There we have it, it’s not going to be a taxable item. So it’s going to be non taxable, we’re going to say, and so non taxable, and there it is, let’s go ahead and save it now. Now let’s jump over to our flowchart on the QuickBooks desktop version to just think what we’re going to do with that now. So now we have our item.
The item is typically used with either an invoice or a create sales receipt. And what we’re going to do is we’re going to use the invoice or the Create sales receipt. In our case, I’m just going to use the Create sales receipt to record the deposit, which is a little bit funny because you would think to record the deposit the money that we got from the customer, you would record something like a receive payment, meaning we shouldn’t be recording an invoice or creating sales receipt because those are usually the forms that indicate that we did work and then should be hitting the income account in some way.
But we’re going to use the Create sales receipt form here, in order to properly record out the the credit that we’re going to have to the unearned revenue account. And then when we actually do the work and invoice the client, then it’ll tie out we’ll use the invoice to basically tie out the unearned revenue that we have applied out to the invoice that will create in a future point. So we’re going to get a deposit, I’m going to get the money that deposit from the customer, we want it to be increasing, then the cash that we received the other side then go into unearned revenue.
Let’s do that I’m going to go back on over and Sarah, let’s hit the plus button. Let’s say we’re going to say sales receipt, enter a sales receipt. And we’re going to do this for Anderson here. I say Anderson, Mr. Anderson. And let’s do this as of 221. Payment Method, I’m just gonna say cash. So this is the cash down payment we got, we’re not actually selling the guitar, it’s gonna go to undeposited funds.
On the other side, we’re gonna say this is our customer deposit, customer deposit, I’m just gonna make it for a small dollar amount that being $10. So now we’ve got our sales receipt, which would typically be there like that’s the form that we would use. If it was like our cash register, you know, we’re imagining making a sale at a cash register. But we’re at our cash register here, they gave us money, we didn’t give them anything. At this point in time, we will in the future.
So that’s why we’re using the customer deposit, which will increase instead of an income statement account, the unearned revenue account. So that’s what we’ll do. Now I’m going to say let’s save it and close it and then check it out. Save it, close it, check it out, if I go back over to my trial balance and run it again. So it’s fresh, we’re gonna say in unearned revenue, we now got the money, which is that $10 down payment, that’s really going to lock them in, they don’t want to lose their $10. Because then so there’s the $10 right there.
And then that’s the sales receipt that we created. And then I’m going to go back to the to the trial balance, the other side then is going to be going into unearned revenue, which is now a liability account. That’s where we want it to be. So if I go into the unearned revenue account, then I can actually track the unearned revenue this way I can say, Okay, here’s the unearned revenue.
And I can kind of track it for this particular customer, we can also do that basically on. If I go back to the first tab, and go to the sales center, so there’s the customer center, and then go up to customers up top. And if we go down to the Anderson guitars, then we can track kind of those pre payments that we made with that sales receipt as well. So here’s the amount of that that $10. So we can track that out.
But you got it you got to kind of track that out more manually than you could if you use the other method because this pre payments not going to show up as like a negative amount in this sub account for the customers. In other words, if I go back to the first tab, scroll back up top, I got to kind of manually check this unearned revenue as opposed to basically running a report and accounts receivable, which would show me that negative amount and apply it out basically automatically.
So we’ll see that method. Next, what would be the next step here, we would get paid. Let’s say we got paid then at a later point in time. So we’re going to get the money now from Andersen imagining we’re getting the money. So if they pay us again, we got to kind of imagine or realize or check the unearned revenue account to see that we had that amount outstanding, we need to make now an invoice for it. So we’re going to do that right. So now I’m going to make an invoice. Let’s make an invoice. And this is going to be for Andersen.
We’re gonna imagine time has passed. And we did the work now and we’re making an invoice for it. So let’s make this on the 22nd, let’s say. And then I’m just going to call it hourly service. So we got our lease service that we did. And I’m just going to keep it the same as the $10. The quantity I’m going to say one, rate 10. So I’ll keep it at the $10. So now we’re invoicing for that $10.
What would this do, it would increase the accounts receivable by the $10. And the other side then would be going to a revenue account for the $10. But they already paid us the $10. So I’m going to make another account here another line item that is going to be I’m going to tab through this. The other line item is going to be for the customer deposit, which I’m going to put in place as a negative $10. So you can see now when we create the invoice we can kind of net this out. So the first line item which is disappearing on me, which is kind of funny.
That’s going to be going to the hourly service, hourly service for the $10 And then the second line item is going to be netting out the $10 for the customer deposit, which means they don’t owe us anything at this point. Now obviously, if we had the hourly service that we charged something more than $10, then we would have the balance due that would be nice and calculated for us in this particular invoice, right up top, basically in the invoice. So if I record this, what’s going to happen? Well, the accounts receivable would have gone up by the 10, but then it got netted out by the negative 10. So it’s back to zero because we already got paid for it.
And the other side for the hourly service is going to be going to the income account recording the income like it should. And then the other side for the customer deposit is going to go to unearned revenue, which will net unearned revenue back down to zero. Let’s check it out. So if I say save it and close it and checking it out, we’re going to go back to our trial balance. And then I’m going to run this report again, hold down Control scroll up just a bit. Now we’ve got the accounts receivable. It went in and out of the accounts receivable for this amount. So it netted out to zero right netted out to zero scrolling back up the other side then in unearned revenue.
So if I go down to the unearned revenue, it’s down back down to zero as well. So now we’ve netted the unearned revenue down to zero because we have now earned it at that point in time. So that’s one method that’s kind of a workaround method that that allows us to basically use this unearned revenue rather than using like a negative receivable. It’s got its pros and cons. Both methods have its pros and cons.
Let’s look at the other method now, where we actually have a negative receivable the benefit of the negative receivable, although it’s not completely correct for financial accounting, but we can we can adjust for it at the end of the month, and do an adjusting entries. And so if it works, logistically, it might be well worth doing. The benefit up here is that we showed we could see that prepayment on the customer reports the accounts receivable reports, including the customer balance Detail Report. So let’s take a look at that method.
Now we’ll take a look at the second method. So I’m going to go back to the first tab. And this is where we’re gonna have the negative receivable. So I’m going to hold down Control, scroll down just a bit, we talked about this in a prior presentation. So I won’t go into an awful lot of detail. But this time, instead of creating a sales receipt, we’re going to record the form that you kind of would think that we would form record in the process that being the received payment, we’re getting a payment receipt, even though we’re not using the form the invoice or the Create sales receipt,
The two forms that usually are used to record income because we’re not getting income, we’re getting cash that we have not yet earned, and therefore owe it back. So we’re gonna go with the received payment item here. So we’re gonna say let’s have a new item up top and say, now we’re going to go to the received payment, receiving the payment, we’re gonna say, This time, it’s from string music. So I’m going to say string music is paying us stuff. So string music, not the project, just the account.
So and they say, Hey, I’m paraphrasing that saying, hey, string music doesn’t have an invoice down, there’s no invoice down here. You know, if you don’t do anything else, we’re going to apply a credit meaning next time you make an invoice, it’ll apply, it’ll apply it out this pre payment to the invoice you will create next, and we’re gonna say that’s what we want. So I’m gonna say this, let’s bring it down to the 21st, again to 21, let’s just say it’s cash on the payment method, and we’re gonna go into undeposited funds, and the amount this time is going to be for the $300.
So we’re gonna get $300, meaning undeposited funds is going to go up by 300. Because it’s a received payment, the other side is going to be decreasing the accounts receivable because that’s what a received payment form does. But there’s nothing in accounts receivable with regards to an invoice for a particular client. Therefore, it’s going to be decreasing accounts receivable in general and applying it to the to the string music. But that means that there’s nothing to tie it out within string music.
So there could be a negative balance happening for string music, there will be a negative balance there. So if I say save it and close it, let’s see what happens in and I’m going to say save the credit. Let’s go back to the tab on the right hand side. I’m going to refresh this running the screen again and go into the accounts receivable within the accounts receivable on down below. We’ve got the Andersen guitars. So there’s I’m sorry, we’re on the string music, there’s the string music, the $300 there and scrolling back up top. Going back to the prior screen, we’ve got the unearned revenue.
Now having the I’m sorry, the undeposited funds, now having another $300 in it as well. So undeposited funds. If we scroll down, we see the payment of the 300 scrolling back up back to the report. So no impact on the revenue at that point in time. But we have a negative kind of impact on the receivable as opposed to the unearned revenue going up as we saw in the prior method. Now let’s go back up top right click on this tab. And duplicate this tab. And let’s take a look at the customer balance Detail Report.
So we’re going to go down to the reports on the left hand side and reports we’re looking for the customer balance detail. So we’re going to scroll on down scrolling on down who owes you we’re looking for the customer balance Detail Report, customer balance detail scrolling back up, we’re gonna keep the date range holding control scrolling up just a bit. And if I get down here, then to the string music, which is at the bottom, we have this negative amount for that particular customer.
So the total accounts receivable is still positive. But it doesn’t make sense for this, to have a negative receivable apply to a particular customer in general, because the accounts receivable itself means that customers owe us in a negative amount in it would imply that we owe the customer which should not be an asset, but rather a liability. So that’s why this route should more properly be recorded as not here. But in the unearned liabilities, an increase to the liability account. However, it works well in this system.
Because now when I make the invoice, it’ll tie it out meaning I can I could see the activity on this particular report. And it’s more easy for us to basically kind of tie out the the invoice that we’re going to have later when we actually earned the revenue to the payment that we got in advance. And so that’s the method we’re going to use this time we talked about it in more detail in the past, I won’t go into in a lot more detail here. But at the end of the month, if this amount is still outstanding as it will be in our practice problem, then we’re going to need to do an adjusting entry.
And we can then adjust this periodically at the end of the month to still make our financial statements correct at the end of the month, and then do a reversing entry so that we can use this method logistically, which works well. So if you like this idea of having everything run through the customer balance detailed report, as opposed to having another account for unearned revenue that you’re kind of have to manage outside of the customer balance Detail Report, then you can use this method and then do adjusting entries at the end of the month.
If you would prefer to put the information directly into the unearned revenue account, then you can use the other method which is a little bit more complex and have you know it has its pros and cons to it as well. And then increase the unearned revenue as you go as you go through the process. So here’s where we stand in terms of the trial balance at this point in time. If you want to check your numbers we will be printing out the trial balance so you can check it on your own time as well.