The Wrong Way

The easiest, and most frequently recommended way is to “invoice” the customer. This satisfies the need for the customer to have a document on which to pay the deposit. When the final invoice is produced, then the customer deposit item is put on the final invoice as a negative which offsets the liability account and reduces the invoice. As far as the customer is concerned it all looks okay. As far as your bookkeeping is concerned, the dollars are all posted to the proper accounts.

However, invoicing for a deposit, which should be booked to a current liability account, creates all sort of reporting issues and multiple documents for the customer.

For example:

You invoice using an item code called “Customer Deposit”. That item code is mapped to a balance sheet account called “customer deposit liability” which is a current liability account on the balance sheet.

Reports that are affected by invoicing the transaction:

• Sales by customer summary and detail will all show the deposit as a “sale” and the report will not balance to the profit and loss (yes they should balance!)
• Sales by item includes these deposits, this report should also balance to the profit and loss
• Sales Tax Liability will be over/under stated by the deposits (creating incorrect sales tax filings)
• Conversion of accrual to cash basis balance sheet will not reverse any item mapped to a balance sheet accounts, leaving a balance in the accounts receivable on the Cash Basis Balance Sheet
• Multiple transactions appear in the customer center can cause confusion and clutter.

The Right Way - or at least a better way

Overview:

1. Customer is sent an estimate or sales order requesting the deposit (non-posting transaction)

2. Original Deposit is booked via journal entry or “make deposits” screen directly to the customer deposit liability account

3. Upon completion of the work, or delivery of products, the deposit is moved to the accounts receivable account via a journal entry creating a credit on the account

4. The customer is invoiced and the credit on account is applied to the invoice

5. The customer deposit liability account is reconciled

Detailed Instructions:

1. Documents to request the deposit

It is best to always enter as an estimate or sales order – DO NOT USE AN INVOICE. These templates can be modified to say "pro-forma invoice" or "request for deposit".

2. Receive the deposit from the customer

The monies will be entered using Banking > Make Deposits window. Do not enter as a customer payment.

• Banking Make Deposits
• Received from : Customer name
• From Account : Customer Deposit Account (other current liability)
• Memo : reference the estimate or sales order.

3. Time of shipment/invoicing

Move the deposit collected to the customer’s accounts receivable account.

• Open up the customer deposit liability register
• Enter a transaction at the bottom of the register
• Date = Invoicing Date
• Ref = Sales Order Number
• Payee = Customer Name\Job
• Account = Accounts Receivable
• Enter a DECREASE equal to the amount you are applying to the invoice

4. Invoice the job

• Open up the estimate or sales order and click on create invoice
• Apply the deposit to the invoice
• Click on Apply Credits
• QuickBooks will automatically apply the entire deposit to the invoice, if only a partial apply is necessary, over-ride the “amount to apply”.

5. Reconciling the Customer Deposit Liability Account

• Open up the Customer Deposit Liability Account
• Click "Reconcile"
  
• Date should be today's date
• Ending Balance, enter Zero. Click Continue
• Clear the deposit paid (cash advances ) against the deposit applied (payments)
• When Difference = Zero, click reconcile now
• Reconciliation Report can be printed.

Note: Invoice Template

Your template will need to be modified to show the original invoice amount, payment applied and balance due. You can find these options under lists templates, additional customization, footer. Add the Credits and Payments and Balance Due fields to the template.

Kathleen Fernan has spent over 40 years in the accounting industry and 20 years as a QuickBooks Advanced Pro Advisor. Kathleen’s company K&K Business Solutions, Inc. provides accounting conversions, troubleshooting, systems integration, procedural flow and training to small and medium sized businesses.

Copyright KNKBS, 2022