Insider Secrets to Customer Prepayments in QuickBooks · Insider Secrets to Customer Prepayments in QuickBooks Copyright 2008-2010 Jennifer Thieme – All Rights Reserved Visit

Insider Secrets to Customer Prepayments in QuickBooks

Copyright 2008-2010 Jennifer Thieme – All Rights Reserved

Visit http://www.GetMoreFromQuickBooks.com

QuickBooks and QB are registered trademarks of Intuit, Inc.

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This guide was written to share basic information about recording customer prepayments in

QuickBooks. This guide is not intended to replace the services of a competent accounting

professional. If accounting expertise is required, it should be sought. Furthermore, while the

author and publisher have made every effort to offer the most current, correct, and clearly

expressed information possible, inadvertent errors can occur, and the rules and regulations

regarding accounting for businesses can change. The author and publisher assume no

responsibility for the accuracy of any transaction posted in any QuickBooks file as a result of

this guide.


Published by:

Jennifer A. Thieme, Inc.

P.O. Box 3303

Vista, California 92081, USA





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Table of Contents

� About the Author, p. 4

� Introduction, p. 5 � Two Methods? p. 5 � Revenue or Prepayment? p. 6

� Special Note on Printing, p. 7

� Method #1 – the Traditional Method, p. 8

� Setup QB for the Traditional Method, p. 11

♦ Step 1 – Create a New Account in the COA, p. 11 ♦ Step 2 – Setup Your Item, p. 13

♦ Step 3 – Create a Customized Sales Receipt, p. 16 � Using the Traditional Method in QuickBooks, p. 19

♦ Recording Prepayments, p. 19

♦ Determining Customer Prepayment Balances, p. 21

♦ More about QuickReports, p. 24 ♦ Retainer to Revenue, p. 25 ♦ Double Check Your Work, p. 27

♦ Advantages & Disadvantages to this Method, p. 28

� Method #2 – the Modern Method, p. 30 � Special note to CPA’s and other accounting professionals,

p. 30

� Record the Prepayment, p. 33

� Prepayment to Revenue, p. 35

� Year End Journal Entries, p. 38 � Advantages & Disadvantages to this Method, p. 45

� Handling Refunds for Cancelled Jobs with Method #1, p. 47

� Handling Refunds for Cancelled Jobs with Method #2, p. 51

� Prepayments vs. Vendor Costs Using Method #2, p. 56

� Which Method Should You Use? p. 60





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About the Author

Jennifer A. Thieme is a Certified QuickBooks ProAdvisor who

offers QuickBooks training, bookkeeping, and income tax services

to clients throughout the United States.

Do you want personal help with QuickBooks? Contact Jennifer

today by visiting:

http://www.jenniferthieme.com/quickbooks-help-contact.html

>>> Looking for Free QuickBooks Help? <<<

Sign up for Adventures in QuickBooks, Jennifer’s free monthly

ezine about QuickBooks. Get unique tips, tricks, and how-to’s for

QB delivered to your inbox monthly:

http://www.jenniferthieme.com/quickbooks-help-free-ezine.html

More free QuickBooks help is available at Jennifer’s website. Lots

of free QB articles, tips, and advice, most of it written by Jennifer:

http://www.jenniferthieme.com





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Introduction – Two Methods?

Did you know that there are two ways you can record

customer prepayments in QuickBooks?

Yes, that's right. There are two ways, not just one. I'm

going to walk you through both ways in this paper, step-

by-step.

Which way should you use? Do two things:

1. Read through this entire ebook. You must be familiar

with each way before deciding.

2. Have your CPA read through this ebook to help you

decide. There are very practical considerations for each

way that I will address, and these must be considered

carefully before choosing.

Very Important Note – Must Read!

Do not combine these ways. Choose one or the other - do

not do both for the same time period.

You may do one for a certain time period, such as a year,

then you may switch. But be careful about switching...

this will pose problems if not done correctly. For best

results, choose one method and stick to it.





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Revenue or Prepayment?

"Why can't we just record these as regular revenue and

make life easier?"

>>> Important: consult with your CPA or other

accounting professional to determine whether or not

this money is revenue or a prepayment. If it’s a

prepayment, also get advice as to WHEN it should be

recorded as revenue. <<<

Money is “revenue” when it is payment for services or

products rendered. If services or products are to be

rendered in the future, then the money is not “revenue”

until the services or products have been rendered.

"Prepayments" or "retainers" means that the client paid

you in advance for work not yet performed. Since you

have not performed the work, generally it's not taxable

revenue. If it’s not taxable revenue, the money should

get recorded on the Balance Sheet when you receive it,

not on the Profit & Loss statement. This way, the money

is not taxable until you have actually performed the

work. Then when the work has been completed, the

retainer becomes revenue. It gets moved from the

Balance Sheet to the P&L.





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The following pages show the two methods for

recording this type of transaction. I’ll show you:

1. Step-by-step instructions for each of these methods.

2. Financial statement impact – what happens to the

financial statements at each step.

3. Advantages and disadvantages for using each method.

Special Note for Printing – Optional:

You may want to print these instructions on a color

printer. There are lots of color graphics with red

highlighting. They show best when printed on a color

printer, but not so well when printed in black and white.





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Method #1: The Traditional Method

I'm calling this The Traditional Method because this is

method records the prepayment directly into the Other

Current Liability account. As such, it’s a more traditional

approach and does not take into account the ease of use

of the modern day convenience of a program like

QuickBooks. It’s quite likely that most CPAs will prefer

this method.

Sidebar: this is the same basic method given within the

internal QuickBooks help of the program. I’ve written my

own version of these same instructions. My process is

very similar, but not exactly the same. Plus I include

important pieces of information that are not included in

QB, such as…

• Financial statement impact at each step

• Screen shots to help you see what’s going on

• Customized Sales Receipt instructions

• Advantages & Disadvantages to this method





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Why I included this method

I’ve included this method in this guide to help you

compare the two methods, and to include more

information that what’s available in the internal QB help.

Once you compare the two methods side-by-side, and

get your CPA’s input, you will be better able to decide

which method is the best for your business.





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Overview of Method #1

First we will setup QB to use this method. There are

several things in QuickBooks that must be set up

correctly before this method can be used:

• An Other Current Liability account in the Chart of

Accounts.

• A "Service Item" in the Item List.

• A customized Sales Receipt (this is optional, but it's

nice to have and easy to create).

Then we will walk through, step-by-step, how to actually

use this method.





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Set Up QB for the Traditional Method

3 Steps

Step 1 - Set Up the Other Current Liability Account in

the Chart of Accounts

Go to the Chart of Accounts and create an Other Current

Liability account called Client Retainers.

The specific instructions to setup new accounts in QB

vary slightly from year to year, but the general idea is to

go to the Chart of Accounts and press Control-N. This

opens a New Account window. From here choose Other

Current Liability, setup the name as "Client Retainers" or

"Customer Prepayments" or something similar. Do not

enter an opening balance. Enter an account number if

your company uses account numbers. You may assign a

Tax Line, if you know which tax line to use (and if you

export QB data into tax preparation software). If not,

then don't setup a Tax Line. Click Ok.

The next page shows a graphic of the Add New Account

screen. This is for QuickBooks 2008 – earlier versions of

QuickBooks look a little different, but the idea is the

same.





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Notice the items circled in red. The one on the left shows

the type of account being selected. The one on the right

show’s QB’s description of this account.





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Step 2 - Set Up New Item in the Item List

Go to the Item List. Once there, press Control-N. This

opens the New Item window. Select Service as the Item

Type. Tab to the Item Name. Enter "Client Retainers" or

"Prepayments" as the name of this new Item. Tab to the

Account, and select the Other Current Liability account

you just created above. You can enter a description if you

wish. You do not need to enter a rate, but you can if you

charge the same rate for all client retainers.

The next page shows a graphic of the New Item setup

screen, and the Other Current Liability account being

selected in the Account drop down box.

Notice the item circled in red. It is the Other Current

Liability account you created in the previous

step.





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Caution #1- If you already have accounts or items set up

for retainers: take particular care that they are set up as

I describe here before using them further. Common

mistakes I see are...

• The item is pointing to a revenue account, not

another current liability account.

• The retainer account in the Chart of Accounts is an

"Income" type, not an "Other Current Liability" type.

Caution #2: If your current items or accounts are set up

incorrectly, do not change them, particularly if they've

ever been used in any transaction. Instead, set up new

ones as I describe here. Alter the names of the old items

or accounts and make them inactive so that you are not

tempted to use them again.





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Step 3 - Set Up a Customized Sales Receipt

This step is optional, but it's nice because it makes the

Sales Receipt look like it's specifically for Client Retainers.

You can use a generic Sales Receipt if you wish, but why

do that when we can spend a few moments and modify

one specifically for client retainers? It looks much more

professional than a generic one, because after recording

the retainer, you can (and probably should) send a copy

of the receipt to the client.

Go to the Sales Receipts screen by following this path:

Customers > Enter Sales Receipts

The instructions for this vary slightly, depending on

which year of QB you use. But this will get you going in

the right direction.

1. Near the top right corner, click the Customize

button.

2. Click the button called, “Manage Templates.”

3. Highlight one of the Sales Receipts here. Click the

button that says, “Copy.” QB makes a copy of it, and

calls it Copy of: Sales Receipt. Click Ok.

4. Click Additional Customization. Make sure you are at





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the Header tab. Change the Default Title to Receipt

for Client Retainers (or some other appropriate

name). You might need to click the Layout Designer

tab to adjust this name so it fits correctly on the

form.

5. Click Ok until you are out of these screens and back

at the form. You should now see the new name at

the top of the form.

Even though we changed the name, it is still a "Sales

Receipt." We have not changed its basic function.

Examine the new Sales Receipt. Instead of saying Sales

Receipt, it now says Receipt for Client Retainers (or

whichever name you gave). This is a more accurate

description of how the form will be used, although, as I

already mentioned, a generic sales receipt will perform

the same bookkeeping tasks.





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Here’s a graphic showing one step in this process. This

screenshot was taken from QuickBooks 2008 – earlier

versions of QB will look a little different. Notice the

yellow boxes – the one on the left shows where you

enter the new name. The one on the right shows how QB

sees it.





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Using the Traditional Method in QB

Now that we have QuickBooks setup for this method,

here is how to use it.

When it's time to record money received from a client

that is a retainer or prepayment, use the "Receipt for

Client Retainers" by following this path:

Customers > Sales Receipts > then, if necessary, select it

from the drop-down box immediately under the

Customize button in the top right corner. Then:

• Enter the customer name in the top left corner

• Tab to the Date field. Enter the date the retainer was

received.

• Tab to the Check Number field. Enter a check

number if the client paid by check. If not, leave

blank.

• Tab to the Payment Method field. Enter the payment

method.

• Tab to the Item field. Enter the Retainer item you

created above.

• Tab to the Description field. Enter a description.

• Leave the Quantity field blank. Tab to the Rate field.

Enter the amount of the payment.

• You may enter any other information as needed.





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When finished, save the transaction.

Recommended: email or mail a copy of this to your

client.

What Did We Just Do? How Were the Financial

Statements Affected?

We did two things with this transaction:

1. We told QB that cash was received – the amount of

cash has increased on the books. It is now either in

Undeposited Funds or in a bank account (depending on

your Preferences).

2. We recorded money onto the Balance Sheet in the

Other Current Liability Account created above. Run a

Balance Sheet and notice it there (be sure the date range

is correct).





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How to Determine Client Retainer

Balances with Method #1

As time goes on, it will be important to know the retainer

balances of your clients. Here is how to determine them

using the Traditional Method.

Go to the "Client Retainers" other current liability

account in the Chart of Accounts. Highlight it, right click,

and select Use Register. Find any transaction with the

particular customer whose balance you wish to know.

Highlight the customer, right click, and select

QuickReport. QB creates a report showing all of this

customer's retainers paid and used for a particular date

range. Adjust the date range if needed.

Positive amounts = retainers received (and placed on the

Balance Sheet). Negative amounts = retainers used (and

moved from the Balance Sheet to the P&L if done

correctly).

When this QuickReport is run, QuickBooks gives it a

generic name, "Register QuickReport." Sometimes you

may wish to print this report and keep it in a file or send

it to your client. You can easily change the name of the

report by clicking the Modify Report button. Go to the





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Header/Footer tab. The second field is called, "Report

Title." Give the report an appropriate title, such as

"Retainer Balance for John Doe."

The graphic below shows a QuickReport run for the

entire Client Retainer account, and shows all transactions

in that account.

Look at the customer “Cheknis, Benjamin.” He paid

$5,000, and it was recorded on 12/15/2011 via a Sales

Receipt. Then, on 1/31/2012, an invoice was generated

for him, and his $5,000 retainer was applied. Notice the

title. I changed it to say, “Client Retainers.”

Below is another graphic showing a QuickReport for a

single customer, Benjamin Cheknis. I created this by





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following these steps:

• Navigate to the Client Retainers account in the COA

• Open the register (right click, select Use Register)

• Navigate to the customer’s name, highlight it

• Right click, choose QuickReport. Notice how I

changed the title of the report from “Register

QuickReport” to “Benjamin Cheknis.”





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More about QuickReports:

• You may add or subtract columns by selecting them

in the Display tab.

• You may memorize this report, so that QB calculates

it for you. Once you run the report and have

modified it the way you want to see it, press Control-

M, and the Memorize Report window opens. Save

the report here, or select a subfolder to put it in. To

run it, follow this path: Reports > Memorized

Reports. It will either be in this list, or in one of the

subfolders here.

• I highly recommend memorizing these types of of

specialized reports if you run them often.





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Retainer to Revenue - Time to Show it

as Revenue

You've done the job for the client - the work is finished.

Now it's time to move the retainer from the Balance

Sheet to the P&L. Another way to think of it is that we

are going to move it from the Other Current Liability

account, to a Revenue account.

• Go to the Invoice screen (Control-I). Fill in the

customer name, date you wish to show this job as

revenue, and other information as needed. Tab to

the Item field.

• Select the appropriate Item that matches the type of

revenue for this customer or job. I assume these are

already set up - setting up these types of items is

beyond the scope of this article.

• Fill in the revenue amounts, as appropriate.

• At the last line, select the Retainer item, and fill in

the amount of the retainer as a negative amount.

• Notice the Balance Due. If the Retainer is less than

the Revenue, there will be a balance due. If the

Retainer is equal to the Revenue, the Balance Due

will be zero. If the Retainer is more than the

Revenue, QB will not allow you to save the





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transactions - negative invoices are not allowed in

QB. You will need to adjust the Retainer or Revenue

to fix it.

If the client paid the total upfront, this will create a zero

balance invoice.

If the client did not pay the total amount up front, then

this invoice will show a balance due. Save the

transaction, and invoice your client as you normally

would.



Using the Retainer item on the invoice as a negative

amount, along with one or more of your regular items as

positive amounts, does two things:

• The amount in the Other Current Liability account on

the Balance Sheet has been lowered by the amount

used on the Retainer item on the invoice.

• The full amount of revenue was recorded on the P&L

by using items pointing to revenue accounts on the

invoice.





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Double Check Your Work

It’s important to double check your work. You want to

make sure everything is posting correctly. Catch your

mistakes now – they’re easier to correct now than if you

wait until tax time!

1. To verify that the retainer has been used by a

particular customer, follow the instructions above for

"How to Determine Client Retainer Balances."

2. To verify the entries for revenue, run a P&L. Verify the

date range. The revenue will post to whichever accounts

were established for those regular items you used on the

client's invoice. If you are unsure which accounts were

used, go to the Item list, choose an item to examine,

highlight it, right click, and select Edit Item. In this screen,

you can see which account this Item posts to. It should

be a Sales account. (Note that the terms Sales, Income,

and Revenue can be used interchangeable in this

context.)

3. Run an Item report on the items used on the sales

receipts and/or invoices. Do this by going to the Items

list, find an item you want to examine, right click, and

select QuickReport. This will show every transaction

where this item was used for a particular date range.





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Advantages & Disadvantages to this

Method

Advantages to the Traditional Method

1. This method follows traditionally accepted

accounting principles by placing the money directly

into the Other Current Liability account when it is

received. From an "accounting principles"

standpoint, this is the correct area for these types of

funds.

2. Having the customized Sales Receipt looks very

professional, and you can send it to your customer

for his/her records.

Disadvantages to the Traditional Method

I have found that this method is confusing and difficult

for people who are not accountants or advanced-level

bookkeepers. Here's why:

1. People do not understand why a "Sales Receipt" is

used - it's not a sale.

2. They don't understand the concept of "Other

Current Liability," nor do they understand the

function of the Client Retainer item.





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3. They don't remember how to determine the client

retainer balances, since all prepayments are lumped

together into a single “other current liability”

account. This is extremely important and a huge

roadblock for most people using this method.

4. Because they can't remember how to determine

client retainer balances, they get lost when it's time

to generate an invoice for the client - they don't

know how much of a retainer to show on the

invoice.

Because of these drawbacks, I developed another

method for client retainers, something I’m calling the

Modern Method.





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Method #2 - The Modern Method

After working with clients, I developed this method that I

call the Modern Method for recording customer

prepayments. It’s very practical, and requires little effort

from current QuickBooks users. They don’t have to learn

new procedures or instructions, and QuickBooks does

not have to be setup in a special way. It makes sense to

people, and because it makes sense, they use this

method very easily.

Special note to CPAs and other

accounting professionals:

In this method I teach people how to record the

prepayment as a negative receivable, and also how to

make year-end journal entries to move the money from

A/R to a liability account.

In the event that some of you object to the money being

recorded as a negative receivable, I’d like to explain my

rational for legitimizing it:

1. Many QuickBooks users are already recording

prepayments as negative receivables. Why not make





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sure they are doing it correctly, and also teach them

how to move the money from A/R to a liability

account when it really matters (like at tax time or

when applying for a loan)?

2. Because many of them are already doing it this way,

it will be hard to successfully convert them to

Method #1. Method #1 is confusing to non-

accountants.

3. It’s very easy to record and use prepayments this

way, so mistakes and “clean up” will be less.





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Note to those receiving prepayments in order to make

future purchases for customers:

Please scroll down to page 56, to the section called,

“Keeping Track of Prepayments vs. Vendor Costs Using

Method #2.” I have added some instructions and altered

the work order so you can keep track of the prepaid cash

more easily.





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Recording Customer Prepayments Using

the Modern Method

When you receive a prepayment from a customer:

1. Go to the Receive Payments screen:

Customers > Receive Payments

Enter the customer information as you normally would.

Enter the amount paid, as well as the payment method,

date, etc.

2. If there are open invoices for this customer, they will

be displayed in the lower half of this screen. Make sure

this payment is NOT applied to any of them. The screen

should look like an unapplied customer payment – that’s

what it is.

3. Save the transaction.





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We did two things:

• We created something called "a negative

receivable". If you run an A/R Aging report, you will

see this there (Reports > Customers & Receivables >

A/R Aging Summary). If you run a Balance Sheet, the

amount for Accounts Receivable will be lowered by

this amount.

• We told QB that cash was received, so the cash

balance is higher in either Undeposited Funds or

your bank account.





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Prepayment to Revenue - Time to

Record the Sale

When you've done the work for the customer:

1. Create an invoice as you normally would, using the

normal items you would use.

2. When the invoice is done, click the Apply Credits

button.

The next page shows a graphic of the Apply Credits

screen. The customer’s prepayment is circled in red.





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3. Select the prepayment. QB applies it.

4. Save the invoice. Send a copy of the invoice to you

client if needed. The next page shows a graphic of how

the bottom of the invoice looks after the prepayment has

been applied.





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• We recorded revenue on the Profit & Loss statement

via the items on the invoice.

• We raised amount that the client “owes” by clicking

the Apply Credits button and applying the

prepayment. The client's A/R balance has been

raised (remember, in most cases the client’s balance

was a negative amount. We just used that money, so

now it's probably at a zero balance).





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Year End Entries Needed for Tax Time or When

Financial Statements are Submitted for Other

Reasons (such as a loan)

If there are unapplied/unused customer prepayments as

of the end of the tax year, these need to be moved to the

Liability section of the Balance Sheet so that the tax

returns will be correct. There are four steps to do this:

• We'll create an Aging report to help us

• We'll create a journal entry as of the end of the year

for each customer, to move the money from A/R to

Liabilities

• We'll create another journal entry as of the first day

of the next year, to move the money back to A/R

(aka "a reversing entry")

• We'll apply these two journal entries to each other

so they will “disappear” from the aging report.

1. Create an aging report as of the end of the year.

Modify it so it shows only payments:

Reports > Customers & Receivables > A/R Aging

Summary





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• Click the Modify Report button

• Click the filters tab

• Select Transaction Type, then select Payment from

the drop-down box

• Select Paid Status as Open

• Click Ok

• Print this report.

Here’s a graphic showing the Filter’s tab, the

Transaction Type, and the Payment being selected.

2. Draw three columns along the far right side of this

report. Label them as follows:





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• 12/31 1st JE

• 1/1 Reversing JE

• Applied to Each Other

3. Go to the General Journal:

Company > Make General Journal Entries

Using the Total for each negative amount in the Aging

report, create a journal entry for each individual

customer effective the year end date (usually 12/31).

Debit Accounts Receivable for the amount, and credit an

Other Current Liability Account called "Client Retainers"

or something similar. Do this for each individual

customer. As you work, place a checkmark in the first

column next to each customer. This helps you to avoid

duplicating your work. QB will force you to assign a

customer name in the journal entry - do this for both

lines. QB only allows one entry for each customer on an

A/R account. Here’s a graphic showing how it should

look.





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Next, create the reversing entries effective on 1/1 of the

next year. Debit the Other Current Liability Account, and

Credit Accounts Receivable. QB will force you to assign a

customer name - do this for both lines. Again, in the

column labeled “1/1 Reversing JE” place checkmarks next

to each name as you work. Here’s another graphic

showing how the entry gets reversed on the next day.

Last, apply these two entries to each other.

Important: If these two journal entries are not applied

to each other, they will remain forever on any A/R

Aging reports.

Go to the Receive Payments screen:


With the Aging report in front of you, enter the first

customer's name. QB will display the first journal entry in

the lower half of the screen. The second journal entry is





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located in the Discounts & Credits button. Click it - the

Apply Credits window opens. Locate the second journal

entry there and select it. You may need to apply it to the

first journal entry, or QB may do it for you - depends on

the other information on this screen.

Here’s a graphic showing the first journal entry in the

yellow box. This is how the screen looks immediately

after you type in the customer’s name (if there are no

other open invoices):

Click the Discounts & Credits button - here’s a graphic

showing the second journal entry located in the Apply

Credits window:





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Repeat this for all customers on the A/R Aging report.





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Important: only these two entries should get applied to

each other here - do NOT apply these to any other

invoices or other activity – apply only the two journal

entries to each other here!



• We raised Accounts Receivable and raised Client

Retainers as of 12/31. Verify this by running a

Balance Sheet for 12/31.

• We lowered Client Retainers and lowered Accounts

Receivable as of 1/1. Verify this by running a Balance

Sheet as of 1/1.

• We applied these two A/R entries to each other so

that they won't show up on the A/R Aging reports

forever.





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Advantages & Disadvantages to this

Method

Advantages to the Modern Method

• Most QuickBooks users find this method extremely

easy to use in their day-to-day activities. Recording

the prepayment and applying it to an invoice require

no new skills or understanding.

• Determining customer balances is a snap - simply

look at the customers' A/R registers:

Customers > Customer Center > highlight your

customer > right click > Enter Statement Charges

Disadvantages to the Modern Method

• Some CPAs may object to this method since it lowers

Assets on the Balance Sheet throughout the year.

• The year-end journal entries appear in the

customers’ registers and on their statements.

• Recording the Year End Journal Entries requires

advanced skill. It should be done by somebody who’s

very knowledgeable in QuickBooks and who also

understands accounting principles (financial

statements, debits/credits, etc.).





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• There’s no customized Sales Receipt to send to your

customers when they’ve issued the prepayment to

you.





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Handling Refunds for Cancelled Jobs

with Method #1

If your customer decides to cancel the job, determine

how much of the prepayment to refund. You may first

want to determining the customer’s prepayment balance

by following the instructions on pages 9-10.

To Refund the Entire Prepayment

Go to the Write Checks screen (press Control-W) and

issue a check to this customer. Enter the amount of the

refund. In the lower half of the screen, click the Items

tab, and select the Client Retainer item you created on

page 6. Enter the amount of the refund in the Amount

column. Enter the customer’s name in the Customer:Job

column. Issue the check as you normally would.





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FAQ: Why use an Item here, why not use the Expenses

Tab?

Since an Item was used to record receipt of the

prepayment, I think it’s a “best practice” to use an Item

again for the refund. When a report is generated for this

Item, it will show both the receipt of money, and the

refund. Makes for a better audit trail for this Item.

To Refund a Portion of the Prepayment

If you decide that your customer owes you a portion of

the prepayment, you will need to refund what is left

over.

Create an invoice as you normally would. Enter the

revenue item(s) and amounts as you normally would.

Enter the Client Retainers item created in page 6, and

enter the amount that you will keep as a negative

amount in the Amount column.

Generally, in this instance you will probably want to have

a zero “balance due” in the lower right area of the

invoice. In other words, your revenue items will probably

equal the negative retainer amount.

Keep in mind that if there is a balance due here, then





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your customer will owe you money.

Enter any other information as needed. Save the

transaction.

Notice on the graphic below how the Client Retainers

item is used, and how the amount is negative. Also

notice how it’s a zero balance due invoice.

Issue the actual refund by determining the customer’s





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prepayment balance as described on pages 9-10, then

issue a check by going to the Write Checks screen (press

Control-W). Enter the customer’s name, date, check

number, and the amount of the refund. In the lower half

of the screen, click the Items tab, and select the Client

Retainer item you created on page 6. Enter the amount

of the refund in the Amount column. Print the check (or

hand-write it if you use hand written checks).





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Handling Refunds for Cancelled Jobs

with Method #2

If your customer decides to cancel the job, determine

how much of the prepayment to refund. You may first

want to determine the prepayment balance. Do this by

going to the customer’s A/R register:

Customer List > highlight the customer > right click >

select Enter Statement Charges





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Scroll through the register to find the prepayment and to

see if any invoices were applied to it. Once you’ve

determined the prepayment balance…

To Refund the Entire Prepayment

Go to the Write Checks screen (press Control-W) and

issue a check to this customer. Enter the amount of the

refund. In the lower half of the screen, under the





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Expenses tab, select Accounts Receivable. QB should

enter the amount automatically. Tab over to the Name

column and enter the customer’s name. Issue the check

as you normally would.

Then, apply the refund to the prepayment. Go to the

Receive Payments screen:


Enter the customer's name. QB will display refund in the

lower half of the screen. Click the Discounts & Credits

button. You will see the customer’s prepayment in the

Apply Credits box. QB should select it automatically – if

not, then put a checkmark next to it. Click Done to close

this window.





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Notice the refund check under the “Orig. Amt.” column,

and the prepayment in the “Credits” column. The entire

transaction has a zero effect – we’re just applying these

two transactions to each other so they won’t continue to

show up on the A/R Aging reports.





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To Refund a Portion of the Prepayment

If you decide that your customer owes you a portion of

the prepayment, you will need to refund what is left

over. The portion you keep is now revenue. Here’s how

to record it.

Create an invoice as you normally would. Enter the

revenue item(s) and amounts as you normally would.

Click the Apply Credits button. If there are other credits

for this customer, make sure you select the prepayment.

QB will apply the prepayment up to the total amount on

the invoice. This leaves the balance of the prepayment to

be refunded in the next step. Click Done, then save the

invoice. It’s probably a good idea to create a zero balance

invoice here, and not a ‘balance due’ invoice. Otherwise

it could be confusing to your customers – you’ll refund

part of their money, but also generate an invoice for

them.

To refund the rest, go to page 28 and follow all of the

instructions for Refunding the Entire Prepayment (except

you aren’t refunding it all, just what is left over after the

invoice).





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Keeping Track of Prepayments vs.

Vendor Costs Using Method 2

Overview

Sometimes customers prepay, and they need to take that

money and buy items for the customers. It’s important to

keep track of that cash, as you don’t want to spend it on

other things. This is considered an accrual function.

Although QuickBooks allows you to run reports on an

Accrual basis, QuickBooks is not for heavy-duty accrual

reporting – it’s definitely “light-duty accrual,” at best.

I’ve developed a non-traditional work order so people

can take advantage of the ease-of-use that QuickBooks is

famous for, while still getting the important information

they need in this situation.

Note: this work order/method does not work if

“Inventory Items” are used. This is because “Inventory

Items” record the cost on the P&L when the customer’s

invoice is entered in step 6 below, not when the vendor

bills are entered in step 4 below. Use any other type of

Item for these instructions to work.





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Alternate Work Order for

Keeping Track of Prepayments vs. Vendor Costs

These instructions work best with QuickBooks Premier or higher.

QuickBooks Pro cannot turn an Estimate into a vendor Purchase Order,

which is required in Step 3 below.

If you use QuickBooks Pro and need to monitor vendor costs against

customer prepayments, consider upgrading to QuickBooks Premier (link

takes you to the Intuit website where you can purchase QuickBooks

Premier and download it immediately):

http://tinyurl.com/66yeqw

Important: these instructions assume you will be using any Item type

except “Inventory.” “Inventory” items will not work with these

instructions. See the FAQ on page 64 for the explanation why.

1. Create an Estimate or Sales Order for your customer

for the full amount of the sale. Set up the new

customer if necessary.

Customers > Create Estimates (or Sales Orders)

2. Receive the payment from your customer. This step





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may happen later if you have not received the

payment yet.

Record this in the Receive Payments screen as you

would for a normal payment. Be 100% certain this

payment is not applied to any existing invoices. This

will create a negative balance in the customer’s A/R

register as explained above in “Method #2 – The

Modern Method.” You will need this figure later.


3. Go to the Estimate or Sales Order and create vendor

purchase orders for the goods you will buy – send

the P.O.s to your vendors if appropriate:

Vendors > Create Purchase Orders





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4. Receive the goods and vendor bills – enter these into

QuickBooks. This is when the costs are recorded on

the books. Do not mark the items as Billable:

Vendors > Enter Bills > when prompted, choose the

P.O. QuickBooks populates the Enter Bills screen

with the information from the P.O. Save.

5. Each time you enter a vendor bill for this customer,

run a Job Profitability Detail report to see where you

stand with your costs:

Reports > Jobs, Time, & Mileage > Job Profitability

Detail > choose your customer > Click Ok





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QuickBooks creates the report and you can see the

costs so far.

Important: the revenue will be zero because we

have not recorded any yet. The revenue is recorded

in Step 6 below when we create the invoice.

Subtract the costs on this report from the





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prepayment located in the customer’s A/R register:

Customer Center > scroll to the customer > highlight

the customer > in the Show box select Received

Payments > Filter By All Payment Methods > Make

sure the date range is correct.

The difference between the prepayment and the

costs is what you have not yet spent.

Once you have recorded all of the vendor bills for

this job and are ready to close the job…

6. Go to the original Estimate or Sales Order and create

a customer Invoice from it by clicking the Create

Invoice button at the top of the screen.

7. Once the invoice is created, apply the prepayment to

it by clicking the Apply Credits button located near

the bottom right of the invoice.





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A new window opens called Apply Credits and you can

select the prepayment there.

Assuming the invoice equals the prepayment, once the

prepayment has been applied to the invoice it closes

the job and records the revenue shows on the books





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for both accrual and cash basis reporters.

For Accurate Gross Margins…

One of the problems with this method is that the gross

margins may not be accurate on the P&L.

If possible try to record the vendor bills and

corresponding customer invoices in the same month,

as this will create accurate gross margins - the costs

will be matched with the revenues for the reporting

period. Sometimes it won’t be possible, but sometimes

it will. So keep it in mind as you use these instructions.

Talk to your CPA to find out if this is a significant issue

for you, as it may or may not be.





Page 64

FAQ: Do I have to enter the vendor P.O. if I don’t need

to?

Answer: Yes and no. It depends on what you can

remember.

I strongly suggest using P.O.s in this instance, because

they require Items. Items are required in order for the

Job Profitability Detail report in step 5 to be accurate.

If you can remember to always use Items, you may

directly enter the vendor bill without first creating a

P.O., but always click the Items tab and use Items. Do

not use the Expenses tab in this instance as it will not

reflect on the Job Profitability Detail report in step 5.

Also, creating P.O.s ensures that all of the Items on the

original Estimate or Sales Order are accounted for –

makes for a good audit trail.

FAQ: Why can’t I use Inventory Items with these

instructions for tracking vendor costs against customer

prepayments?

Answer: Inventory items will not show on the Job

Profitability report (Step 5) until the close of the job

when the customer’s invoice is created in Step 6.





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When vendor bills are entered for “Inventory” items,

they are shown as assets on the balance sheet, not as

costs on the P&L. They get recorded as costs on the

P&L when the customer’s invoice is created. This is not

an error or mistake on the part of QuickBooks – this is

the correct way to show cost of goods sold for

inventory.

Other types of items are shown as costs or expenses

on the P&L when their respective vendor bills are

entered. This is why it’s important to use other types

for these instructions.





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Which Method Should You Use?

Choose a method you feel comfortable with, but be sure

to get your CPA’s input. This is an important decision,

and your CPA may have considerations I have not

addressed here.

Ultimately it depends on your own skill level. If you

decide on the Traditional Method, be sure to have your

CPA look over your financial statements periodically to

make sure everything is going smoothly.

If you decide on the Modern Method, you can easily use

this throughout the year without oversight. However,

making the year-end adjusting entries is CRUCIAL, and I

don’t recommend you do it yourself. Let your CPA or

other QuickBooks professional do it for you.

Talk to your CPA or other accounting professional and

get his/her opinion as to which method is best for your

unique situation and skill level.

Documents

Insider Secrets to Customer Prepayments in QuickBooks · Insider Secrets to Customer Prepayments in QuickBooks Copyright 2008-2010 Jennifer Thieme – All Rights Reserved Visit