Resolving Unapplied Payments and the Significance
One issue that many people – including bookkeepers – are not aware of is the way unapplied payments and credits in QuickBooks can affect your Financial Statements. I am talking about payments you have received from customers that were “received” in QuickBooks by using the received payments window, but not applied to an invoice during this process, or credit memos prepared but never applied to an invoice.
It is important to know that unapplied customer payments and credits will not show up as Income on your Cash-Basis Profit and Loss report. Even if you have created an invoice and received a payment, if the payment is not applied, your Income will be under-stated!
This could have some serious consequences if you bring your Profit and Loss report to your tax professional and ask them to estimate your income taxes for the year so far and you have a $30,000 customer payment that is not showing up as income. This ACTUALLY happened to one of my clients!
How could this happen? Normally, a customer payment will apply automatically to any outstanding invoices in the received payment screen. However if you create the invoice after you receive the payment, or for some reason void the original and re-create it, the payment often will not be applied. When you are receiving payments, it is also important to be sure that a check-mark appears next to the invoice you want to apply it to.
A quick way to find out if you have any unapplied payments is to run a report called “Open Invoices” under Reports – Customers and Receivables. If you see any negative numbers on this report you have payments or credits that are not applied as in this example:.
Fortunately, this potentially disastrous situation is easily reconciled:
Method 1: From this report you can drill down by double clicking on the negative number (if it is a payment) and once the received payment window pulls up, you can put a check mark next to the invoice you would like to now apply it to, save and close – you’re done.
If it is a credit memo, or you have a whole list of credits to apply to one invoice simply open the “received payments” window and type in the customer name, but leave the received amount as $0. Click on the “Discounts and Credits” button in the lower left hand corner and apply the out-standing payments or credits that appear in the “credits” tab. Save and close.
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It is also important that your payments are not dated prior to your invoices, so be sure to avoid this during your regular processing.
If you receive deposits, be sure to follow a procedure that does not leave unapplied payments in your system. (see my blog article Handling Customer Payments in QuickBooks).
On the Accounts Payable side, you have a similar issue, where you do not want to have Bill “payments” made to your vendors that are not applied to a vendor Bill.
Here you want to print out a “Vendor Balance Detail” from the Reports menu – Vendors & Payables. You can apply payments to bills through the “Pay Bills” by check-marking the bill and using the “set credits” in the lower left-hand section. I often find that there is no bill and one will need to be created – just be sure to date it on or before the payment date.
Unapplied payments are more common in pre-2006 versions because the system did not offer as many prompts for applying payments and credits as the more recent versions.
A quick way to find out if you have unapplied payments or credits in your Accounts Payable or Accounts Receivable system is to run a Balance Sheet report on a Cash Basis. If you see negative numbers in the Accounts Payable or Accounts Receivable here, you you have a problem.
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Perfect Payroll Option for Job-Costing in QuickBooks – Assisted Payroll
Many businesses prefer to use an outside payroll service for the peace of mind provided by someone else taking responsibility for the Payroll Reports and Tax Payments.
Many employers are more comfortable with this arrangement. I have personally known a few Employers who have gotten burned because the person responsible for paying the payroll taxes and filing the reports did not do the job. Unfortunately, the employer is ulitmately responsible. In some cases, these surprised employers owed a considerable amount of penalties and interest, in additon to liabilities they thought were paid!
For instance, last November I was hired by a General Contractor named Jonathan. His well-paid bookkeeper just stopped showing up, and he needed help. I discovered that not only had she not entered all of his banking transactions or reconciled his bank account for the entire year, but she had not paid his payroll taxes for 3 months, or filed his quarterly reports. Jonathan knew something was up, but he really had no idea that his payroll taxes were so far behind.
In a more dramatic instance, Patrick, an Electrical Contractor, came to me with an even worse situation. His bookkeeper had provided his employees with incorrect W-2’s, which we discovered while unraveling the disasterous bookkeeping. One of his employees ended up owing the IRS hundreds of dollars, and Patrick owed thousands. This employer really thought his bookkeeper was “taking care of everything”. What a nightmare!
If you know a payroll service is handling the taxes and reports, you can avoid a situation like this. For Contractors and other Professionals who use Job-costing, it is not always the easiest choice.
QuickBooks integrated payroll is the best way to extract comprehensive job-costing information. Extrapolating job-costing information from outside payroll services reports accurately is difficult at best and impossible without sophisticated spreadsheets for every job.
Fortunately, QuickBooks does offer a solution called QuickBooks Assisted Payroll. With this solution, Payroll is processed inside of QuickBooks and after each processing is sent electronically to QuickBooks Payroll Service, who takes care of remitting the payroll taxes and filing the reports. The cost is pretty reasonable, in the range of $50-$75/mo. You print your own paychecks or use direct deposit, so you no longer have to wait for that FedEx package.
If you are considering switching payroll services, before the first payroll of the year is the best time.
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Job Costing: The Key to Unlocking your Estimating Genius
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For years, Bookkeepers and Contractors have been utilizing QuickBooks™ to do effective job-costing. Intuit now offers a Premier Version of their software customized for Contractors. I have been asked by many businesses if this version is worth the extra cost. Having used both versions extensively myself, I would answer definitely yes if only for the reports offered exclusively in this version. Having said this, Contractors Edition or no, job-costing in QuickBooks™ is not without its pitfalls. The number one issue you must be aware of is that the fantastic jobcosting reports offered in QuickBooks™ are possible only through the use of Items. If you are a contractor, all job-related costs and income should be entered into your system using Items. It is critical that the Items be set up properly as a two-sided item allowing mapping to the appropriate Income and Cost of Goods Sold accounts. It is also important to realize that each item can only be mapped to one COGS or Income account. In order to get good job-costing reports every Vendor Bill, check written, and even petty cash expenses must be entered into the system under the Item rather than the Expense tab of the transaction screen. Invoices must be created using items for all income. Because the Deposit, Journal Entry and Direct Register screens do not allow for use of items, all job-related income or expenses must be entered through Transactions. This sometimes takes a little creative thinking. I always recommend hiring a professional and experienced consultant to set up your new company and set up some type of support and review process. Next QuickBooks™corner I will address Job-Costing and Payroll. Tip: If you occasionally pay for items with cash – capture these in a bank account called “Petty Cash”. Fund this account with Owner’s equity in small increments.
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How to Hire a Bookkeeper and Accounting Control Tools for the Small Business Owner
We have all heard more “bad” bookkeeper stories than we can bear. One reason for this is that many small business owners are not intimately familiar with accounting concepts or QuickBooks software. Too often, business owners discover a problem in their accounting much too late.
Before you Hire a bookkeeper:
- Do not hesitate to check references – make the calls. Trust references that are reputable, local companies that you have heard of.
- If you are hiring an independent bookkeeper to work with QuickBooks, be sure they are a QuickBooks Pro-Advisor. This demonstrates that they take their profession seriously and have passed the Intuit testing in order to earn the certification. Be sure to verify their certification by visiting the QuickBooks ProAdvisor referral web site: http://proadvisor.intuit.com/referral/ you can also access a free bookkeeper test on my web site: www. Nevadacountybiz.com.
Once you have hired a bookkeeper, how can you be sure they know what they are doing? Here are some practical suggestions for keeping an eye on your books:
After you hire someone: My number one suggestion is to have your books reviewed by a CPA or reputable accounting firm regularly. If you have recently hired someone new, do this within 60 days, do not wait until the end of the year.
- Trust your instincts. Let’s face it, usually there seems to be a lot less money left over than we think there should be – but once we carefully scan the check register or the Income and Expenses, we can usually get a good idea of where the money went. However, if something really seems off, follow up on it with suggestion number immediately. In addition to preventing fraud or disaster, I have had owners correct my mistakes a thousand times. Instinctively, you know where things should be, and your input helps us bookkeepers do our job better.
- Set up reasonable controls. NEVER grant check signing authority to your bookkeeper. ALWAYS review all bank and credit card statements, look at every transaction. Make sure your bank sends copies of the checks back with your statement and review them all. Also double check the vendor bills and statements for checks that you sign. If you use on line bill-pay, have your bookkeeper give you all the bills that he or she has scheduled to pay on line. Review the bill pay section on line every week to see which bills have been paid or are scheduled for payment. If possible, have different people in your office process incoming payments, payroll and payables.
In addition, get familiar with QuickBooks:
- Open up and Look at your check register – scroll back through to the previous month’s transactions. Most of them should have a black check mark in the “cleared” box. This means that your bank account has been reconciled in QuickBooks recently. If it is early in the month, scroll back to the month prior. If you do not see a black check mark next to transactions in the last 60 days, it may indicate that your bank account has not been reconciled. It is extremely important that your account be reconciled promptly every month! Your bookkeeper can also print the check register for you. Never accept a checking account “not balancing”, any significant difference should be resolved – not “adjusted”.
- Look at your Financial Reports: From the Reports menu: Company and Financial : Look at your Profit and Loss report. Does it make sense? If there is a net profit, can you account for that money? It should either be in your bank account, or you should be able to account for it in Owner Draws, Principle amount of Loan payments, or large purchases. There should not be any negative numbers on the Profit and Loss Report.
- From the Reports menu: Company and Financial: Run a Balance Sheet report– run it on a Cash basis ( see my blog article with free tutorial Cash vs. Accrual Accounting). Do not underestimate the importance of the Balance Sheet. I know this report is very intimidating and is difficult to make sense of, but there are some things going on here than are critical to your accounting. Here are just a few things to look for:a. There should be VERY few NEGATIVE numbers on this report – they should be Accumulated Depreciation and possibly any Equity Accounts (Equity accounts are at the bottom of the report like Owner’s Capital and Owner’s Draws). Be especially concerned about a Negative Balance in accounts like Accounts Payable, Accounts Receivable, and ANY balance in Undeposited funds .b. If there is an account called “Opening Balance Equity” and it has a balance, you need to see what is in there. The only amounts you should see in there would be from your initial company set up. To see the detail: Go to : Lists- Chart of accounts and double click on the Account called “Opening Balance Equity” to open the register, this report can also be printed by your bookkeeper.
- Under Reports: Customers and Receivables – Run the Open Invoices Report. You should not see any negative numbers on this report, except for customers who legitimately have a credit from you on their account. Unapplied payments will understate your income on a cash-based report, which is obviously a problem. (see my blog article Unapplied payments check)
- If you use items in Job-costing, open up your item list and double click on an item to open it. The box marked “This service is used in assemblies or is performed by a subcontractor or partner should be checked. The Expense account should be a Cost of Goods Sold Account, and the Income account should be an income
account. This is the way items should be set up for reimbursable expenses as well. - If you do not pay off your credit card balances every month, there should be positive balances on your Balance sheet that corelate with the balance owed.
Ideally, have your bookkeeper help you learn how to run these reports and set them up as memorized reports for you and show you how to access them. If you do not use the computer, have your bookkeeper run these reports and print them for you on a monthly basis at minimum. Most bookkeepers will be pleased that you are taking an interest and making their job more worthwhile! Review them with your bookkeeper and do not be afraid to ask questions – there are no stupid questions. Ask the same questions over and over if you need to until you understand. Don’t be surprised if a few things need “cleaned up”, as long as it gets done. If you are not able to get satisfactory answers, go back to suggestion number one. Your bookkeeper may even need a little guidance on some of the issues from someone more knowledgeable, and let them know you support them in their education. There are all skill levels out there and even some really great bookkeepers I’ve met are unfamiliar with some of the issues I describe here. Don’t worry if the bookkeeper seems a little defensive. He or she may feel you are grilling them or suspicious. I recommend approaching them from the standpoint of you need their help and you wish to take more responsability for your financial record-keeping. If you would like to be more independent, pursue training through Seminars, DVD’s, or individual consulting.
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Handling Customer Deposits in QuickBooks
Many businesses who receive deposits from customers are not aware of how to process these payments properly.
One mistake I see often is receiving a payment and leaving the payment “unapplied” to anything until some later date when an invoice is created. This process wreaks havoc with your Accounts Receivable and can have serious consequences under-stating your income if not dealt with later. (See my blog article “Important unapplied payments check”.)
Here is the best way to deal with customer deposits:
1. Create Current Liability Account on your Chart of Accounts called “Customer Deposits Received”.
2. Create an Item on your Item list – the item type “Other Charge” Called “Deposit Received” and map it to the “Customer Deposits Received” Liability Account.
3. Create the customer’s complete order at the total price they will pay for products or services as an Estimate or Sales Order, entering each line item of products and services they have agreed to purchase at the agreed prices, and enter the final item “Deposit Received” as a negative number. (*if you do not have any information on the customer’s order, you can create an invoice later, just be sure to credit them for their deposit payment!)
4. Create a Sales Receipt to the customer for the deposit amount, using the “Deposit Received” item this time as a positive number. The Sales Receipt will send the payment to the bank account, or undeposited funds as you specify at the bottom of the Sales Receipt.
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5. It is extremely important to finalize this process with the last step which involves invoicing the customer for the balance upon receipt of the products and services. When you are ready to collect the balance from the customer – open the “Create Invoices” window.
6. A window will pop up letting you know the customer has an outstanding Sales Order or Estimate – you must now select the Sales Order or Estimate to create your invoice from.
7. If the terms or pricing have changed since the original creation, you may make these changes directly on the invoice. Now create the invoice and you will notice that the deposit from the sales order or estimate will appear and reduce the customer’s current balance due. The process is now complete.
*You may skip the process of creating Sales Orders or Estimates – you simply create a Sales Receipt to the Customer using the Customer Deposit item as I described and then use the same Item on the customer’s invoice as a negative when it is created, and your accounting system will be correct.
For most businesses, however, I prefer the Sales Order/Estimate method because you have a much better system for tracking out-standing customer orders and deposits. To keep track of what is going on with your customer orders and deposits, I recommend running the following reports:
1. Sales Orders: Sales – Open Sales orders by Customer,
2. Estimates – Jobs, Time & Mileage – Job Progress Invoices vs. Estimates.
2. To Create a Custom Report for the “Customer Deposits” Account : Reports : Custom Transaction Detail – On the Display tab, be sure you have date range that would encompass your longest customer deposit period, and in the “Total By” menu, choose “Customer”, then click on the “Filters” Tab and filter by Account: choose the “Customer Deposits Received” Liability Account.
I definitely recommend memorizing this report for future use, just be sure when you pull it up in the future the dates are current! This process combined with these two reports not only keeps you abreast of pending Sales and Customer Deposits you have received, it keeps your accounting process correct along the way.
It’s great for order processing because when you create the Sales Order or Estimate with the negative deposit amount, it will be very clear when you invoice the customer in the future that they have made a payment toward these services and the invoice will be created for the correct total.
On the accounting end, because Sales Orders and Estimates are non-posting, you have not at that time actually posted this negative amount to the Customer Deposits Liability account. The Sales Receipt will post the customer’s payment to your bank account as well as post the Liability appropriately to the Customer Deposits Liability Account – as it should be. After all you do owe either goods and services or a refund to this customer. When the invoice is created, the negative Customer Deposit item will post and cancel out the original liability, now that your obligation has been met.
The Custom Transaction Detail on the Customer Deposits Liability Account will show the history of that account by customer so that you can see what customer’s deposits are still out-standing and those to whom you owe goods or services.
Don’t let the long explanation deter you. The process is actually very simple to follow, and helpful for those who receive deposits from Customers on a regular Basis.
Year end and 1099’s
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1099’s for 2007 are due to your Contract Labor vendors by Jan 31st. Even if you did not set up your 1099 tracking correctly in QuickBooks at the beginning of 2007, you can capture the information by setting it up now. As with any year-end report processing, I always recommend reconciling all of your checking accounts prior to preparing your reports. As with W-2’s, the data you provide to your 1099 vendors will have personal income tax consequences for them, and it’s important the information you report to them and to the government is accurate. The first step in 1099 processing is to be sure you know who to send 1099’s to and have the system set up correctly in QuickBooks. The general rules are that for every unincorporated vendor you contract for labor or labor and material services combined, you must have them complete a form W-9, which provides you with their Tax ID#*. In order to generate a 1099 report for this vendor at the end of the year, you must set up the vendor properly in QuickBooks by clicking on the “Additional Information” tab in the vendor record, checking the “Vendor eligible for 1099”, and enter the vendor’s tax id#. This part of 1099 processing is pretty intuitive, as you are likely to notice these options during vendor set up. However, this is not all you need to do in order to generate the 1099’s in QuickBooks. You also need to go into the “Edit” “Preferences” menu. Near the bottom of the list you will see the option “Tax:1099”, click on this option and the tab “Company preferences”. If you are not sure about what to do here, by all means, consult the IRS web site at www.irs.gov or your tax professional. For most contractors, we are focusing on contracted labor services, which should be reported in box 7 for “non-employee compensation” , which has a default threshold of $600*. Here we need to tell QuickBooks which accounts to apply 1099 reporting to. This step is required in order to generate 1099’s in QuickBooks. The reason QuickBooks needs to know this is that not all payments you make to your 1099 vendors may be reportable on the 1099 as non-employee compensation. For instance, if you happen to reimburse them for materials or mileage, these payments may not be included on the 1099*. In this space, I usually select the “multiple accounts” option and choose any accounts that I may pay a 1099 vendor that may qualify as non-employee compensation. You must consider how your items are set up as well and be sure accounts that are linked to items that may include employee compensation are included here. For instance, you may choose your Cost of Goods Sold Account called “Sub- Contractor Costs”, but you may sometimes pay your subcontractors with an item linked to a generic Cost of Goods Sold Account, in this case you may need to include this account as well. Keep in mind, though, that material purchases only are generally not included in 1099, only labor or labor and materials contracted in combination*. After saving these preferences, you should be ready for 1099 processing. The next step is to run a 1099 detail and 1099 summary report from the “Reports” “Vendors and Payables” menu and review the transactions that are included carefully. I also run a “Transaction List by Vendor” report for the entire year to be sure I have not missed any vendors who should receive a 1099. Now I will go to the “Vendor” menu and “Print 1099’s and 1096’s”. In this menu QuickBooks has a 4-step process similar to that I have outlined here. Believe it or not, I step through each step once again as a final check. By this time, you should feel confident enough to run your 1099’s. If you are having difficulty capturing the information, or are unsure of the proper set up, contact a QuickBooks expert or your Tax Professional for advice.
*NOTE: I am not a tax professional and do not profess to advise 1099 or tax reporting requirements. These instructions are intended to generalize the reporting IRS reporting requirements in order to provide technical
information on how to set up QuickBooks properly for reporting. Please consult your tax
professional or the IRS for complete 1099 reporting requirements.
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Year End Checklist
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The end of the year is fast approaching, as it always seems to! Just thinking about wrapping up the end of the year bookkeeping can feel overwhelming. Reviewing your yearend tasks now, and getting a head start on some can help you feel more relaxed and in control. Here are a few things you can get started on before the end of the year:
1. Preferably the last day of the year – conduct a physical inventory and make any adjustments into your accounting system.
2. Review your 1099 vendor information to make sure it is complete. In QuickBooks, run the report called 1099 summary under Reports – Vendors and Payables. If you want to make sure you haven’t forgotten to assign a vendor as a 1099 vendor, try this: At the top of the 1099 summary report you will see 1099 Options, from the drop down menu choose all vendors and review the report. If you forgot to mark a vendor as a 1099 vendor upon set up, now you can go back and make the correction in the vendor record.
3. Review your Receivables to be sure there are no payments that are not applied to invoices by running the report under Customers and Receivables called: Open Invoices. Post any unapplied payments through the Received payments feature in QuickBooks. (For more information see my QuickBooks Corner article “Resolving Unapplied payments and the significance” at www.nevadacountybiz.com.
4. Clean up your Accounts Payable as well. Run the report under Vendors and Payables called Unpaid bills detail and resolve any incorrect credits or outstanding bills.
After the end of the year:
5. If you file your taxes on an accrual basis, be sure to accrue any expenses that belong in 2009 by entering bills for them and any accrued payroll expenses by making a Journal Entry. Tip – Use the Reverse button on a Journal Entry to easily create reversing entries. Also be sure to invoice your customers for income Earned in 2009.
6. Check with your accountant, but it may be appropriate to accrue Work In Progress Income or Expenses at the end of the year by creating a Journal Entry.
7. Carefully review your Balance Sheet report for things like Customer Deposits and be sure they are correct.
8. Reconcile all of your bank and credit card accounts.
9. Reconcile your loan accounts and make sure all accrued interest has been recorded appropriately and that your accounting Loan Balance matches your actual Loan Balance.
10. Update your Unemployment rate if it has changed. Sometime in December you will have received a letter from them with your new rate for 2010.
11. Run your Yearend Profit and Loss and Balance Sheet and review carefully. When you are ready to file your taxes, it’s a good idea to set a closing date password in QuickBooks to ensure that you don’t accidentally make any prior year entries into QuickBooks – you can still go back and make necessary entries with the password.
12. If you do payroll, be sure to run your DE6-DE7, 940, 941, W-2 and W-3’s by the end of January.
The end of the year is also a good time to review your Budget and Business Plan. Every business should have both, no matter how long they have been established. Business Matters offers Financial Evaluation, Projection, Business Planning and Budget Planning assistance.
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About “Closing” year end in QuickBooks
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I set a closing date password. To access the feature in QuickBooks: From the Edit menu –select Preferences – on the left of this new window – At the top of the Preferences Menu click – Accounting – and then choose the Company Preferences tab on the Right. At the bottom of the Company Preferences window, you will see the Set Date/Password button under the Closing Date section. When you click this button, another window opens and allows you to select a closing date and enter a password. For the closing date, you should enter the last day of the year, not the first date of the New Year. Keep your password simple and easy to remember, I recommend writing it down…. And, of course….. not forgetting where you wrote it down.
I am often asked by customers about “closing” their books at year-end. Many old-school and complex accounting programs require you to perform a closing process at the end of a financial year before entering any information for the current year. In fact, at the large corporation I used to work, we had to close the books every month! After the closing process is complete, the information is “locked down” and there is no changing it. Period. This creates deadlines, bottlenecks, and stress for all of us in accounting trying to get our work done.
Most small business owners are not native accountants and don’t understand the exact reason for the “closing” procedure, they just know it’s something that is done, and don’t they need to do it? The answer is yes, and no. Large businesses that provide periodic financial statements to shareholders and/or Board Members must ensure that the statements are accurate and will not be changed after presentation. They must close the books in finality at certain periods in order to present this information as complete. For most small businesses, the cut off is related to filing their tax return. In other words, once you run the Profit and Loss and Balance Sheet and use that information to file your taxes, you do not want to make any further changes to that year’s data. That makes sense; after all, if you entered some additional Income or Expenses after the year is over, it wouldn’t be reported on your tax return ever.
QuickBooks doesn’t have a formal “closing” process, and this makes some people feel like it must not be a “real” accounting program. But QuickBooks is designed for Small Business users, and, although it can be dangerous, there are practical reasons why QuickBooks leaves prior year data open for editing. The main reason is that it is just not practical to expect every small business to complete all of their yearend work before creating any other transactions in the New Year. Often there are credit card expenses coming in on statements clear through February. Another reason is that many of us depend on our CPA or tax preparer to provide us with adjustments like depreciation expenses that need to be entered once the tax return is prepared… and that could be much later. So, rather than imposing a locked down closing, QuickBooks creates a Journal Entry automatically at the end of the year to transfer the Net Income to Retained Earnings and allows you to set a closing date password. The closing date password feature allows anyone with the password to change prior year’s data, and helps keep you from accidentally entering anything into the wrong year.
Once I have completed my year end closing tasks (see the Year End Checklist under “QuickBooks Corner” at www.nevadacountybiz.com, I set a closing date password. To access the feature in QuickBooks: From the Edit menu –select Preferences – on the left of this new window – At the top of the Preferences Menu click – Accounting – and then choose the Company Preferences tab on the Right. At the bottom of the Company Preferences window, you will see the Set Date/Password button under the Closing Date section. When you click this button, another window opens and allows you to select a closing date and enter a password. For the closing date, you should enter the last day of the year, not the first date of the New Year. Keep your password simple and easy to remember, I recommend writing it down…. And, of course….. not forgetting where you wrote it down.
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