If you receive a deposit from a client or customer in advance of carrying out the agreed service you may be required to return it if you do not fulfil the agreement. This amount should not be recorded as income until the service is carried out. At which point you apply it to the invoice.
This can be very confusing, particularly when you are collecting sales taxes, and trying to keep track what you are owed by your customers.
In this week’s video QuickBooks Online to set up a “deposit item” you can use to record the deposit, and then apply it to the invoice, showing different sales tax scenarios, and also showing the flow to both the income statement and the balance sheet.
Once you have followed all the steps (do watch to the end!) your customer accounts, sales tax records, and financial statements will all be accurate!
I love to hear from you. Please feel free to comment below, and also, let me know if there is anything else you would like to know about.
Hi Kerry here, from MyQuickBookKeeping.
One of the things that often bamboozles clients is how to record a deposit that paid in advance of an invoice or order being filled.
In some cases the deposit is refundable in others it’s not. The example I’m going to work with is when a refundable deposit is paid by a customer and you want to record it when you receive it and then deduct it from the invoice when the service is delivered.
Be sure to watch to the end of the video, and I’ll show you the impact on your financial statements and how to be sure everything has being recorded correctly.
We will be using the Quick Books sample company.
The first thing we need to do is set up an account in the balance sheet, where we will hold the deposits until they can be included in our income. Select accounting on the left hand tab and then new in the top right hand corner, The type of account we are setting up is a liability, because until we deliver the service we carry out something set out in the agreement we would have to return this deposit to the client. As we expect we will be honouring this agreement within one year it’s a current liability.
If these terms are confusing to you, pause this video and watch my other video, “understanding your balance sheet” hopefully that will explain, if not please make a comment below. If you have questions, others do too, and I would love to explain further.
Detail type is also an other current liability, right here, lets name the account deposits from customers.
Now that we have an account we can post transactions to. Let’s set up an item, there’s also a video explaining this process in more detail, it’s called setting up products and services in quick books online, just in case this goes a little too quickly. From the cog on the top right hand corner select products and services. And then new. We will are use the type “service”, let’s call this deposits received. It doesn’t really belong in any of the categories so we are going to leave that blank. We do sell these to customers, so check that box and here is where it gets interesting, the only time the customer will see this item are an invoice is when it’s deducted from the full amount invoiced, for that reason I would like a notation to say this is, deposit previously paid. This will make sense later on and there’s no set price or rate.
Now we have set up a liability account to post the deposits to, so let’s select it here. And here this is deposit from customers. As you can see the expectation is that you would record a service item against income. As we have not yet supplied the service and we may have to pay it back we don’t want to be recording income yet. So save and close and our item is ready to use.
We’re going to assume we receive a cheque from our customer, let’s put it in the bank. When you receive funds that don’t relate to an invoice, you can use a sales receipt. So let’s just select any customer we’ll go with Cool Cars again. We’re going to deposit it to my savings account. And notice that the description doesn’t really make sense here, but this is not something that client will see so let’s say we received 5 thousand dollars as our deposit. And we don’t want to send this to the customer so we’re just going to save and close.
Let’s have a look at balance sheet. We can see the only changes are an increase of five thousand dollars in our savings account and the liability the five thousand dollars down here the deposits received from customers.
Let’s prepare our invoice for the customer. And say that it’s October. And we’ve completed the contract worth ten thousand dollars
Enter the customer and details of the project or service, in this case it was design project for ten thousand dollars. Ten thousand dollars. And we’re going to mark it as taxable if we have to charge taxes but for the purpose of this exercise I’m just going to leave the taxes out of it,
The next we’re going to go down to one customer deposit. And here is where we entered for the 5 thousand dollars that was previously paid. If you look here you can see that the deposit notation that written makes complete sense. Make sure we do not mark that one as taxable. Now here is a little note about the taxes if we were in a taxable jurisdiction we would be applying all of the tax to this ten thousand dollars right here so let’s just choose one for the sake of it. So California here we collect tax on the entire amount not just on the net amount because we didn’t collect any tax from a collectible deposit, so you can see here that the amount that’s taxable is Ten thousand and hopefully that doesn’t confuse things. So then when we save and send, the customer receive an invoice for the services rendered for the full amount of tax and the deposit we’re looking deducted, everything looks good so we can save and send that. And the invoice email and the invoice is produced for you have a chance to put some extra words in here if you’d like it to and it hasn’t actually gone to the customer and to send. Now let’s look at the balance sheet in October, our accounts receivable have increased by five thousand eight hundred dollars. That is the five thousand dollars remaining on the invoice plus the eight hundred dollars in tax that we collected, let’s have a look down here further, when over eight hundred dollars for taxes, we’ve reduced the deposits from customers down to zero as you can see a drop of five thousand dollars and the net income is ten thousand which is the total amount of the services.
I hope that has taken some of the confusion and mystery out of recording customer deposits, there are a few steps to get it all set up but as you may have noticed by now when everything is properly set up so much easier to get back accurate reports which is even more important when dealing with customers and ensuring that you collected the correct amount of sales tax, nobody wants to upset clients or tax office people for that matter.
We’ve certainly covered a lot today so don’t hesitate to reach out if you have any questions or would like help getting the set up.
If this video has been useful please hit like below, and subscribe to my channel for more Quick Books tips on how to’s.
Also I’ve created a small business month in checklist to help you be sure your records are up to date each month so you can make the best decisions for your business, click the link below to download a free copy
If there’s another topic you like help with please make a note in the comments below and my next vide could be for you, thanks, cheers.