In every set of books, there are more than a few things going on: reconciling ending bank balances, making sure payroll liabilities show up correctly, entering a large equipment purchase as an asset then calculating depreciation; the list goes on and on. There is nothing, however, potentially more confusing then balancing invoices, customer payments and deposits. This is the area that can be the most troublesome to business owners doing their own bookkeeping in QuickBooks or Xero. So how do those three things: invoices, customer payments and deposits relate? Let’s break it down.
First is the easy part - creating an invoice. When an invoice is created, and sent to a customer, the accounts receivable balance increases; in particular, the accounts receivable attributed to that customer increases.
The next step is recording the customer payments. When the money comes in, it is recorded in the bookkeeping software as “Receive Payment”. In there, the customer who paid is selected, as well as the total amount they paid. Then, the total amount they paid is matched against the invoices they have outstanding. If one invoice is outstanding, and they paid the full amount, that’s an easy match! But it becomes tricky if a partial payment comes in. If a customer has two invoices out to them with $50 owed on each, and then pays $75, how is that recorded? For this case, and all other partial payment cases, select the customer, then the total amount they paid. Then look at the invoices they have outstanding, in this case two. Then mark the first one (usually the oldest one) as paid, then select the second invoice. QuickBooks and Xero will automatically apply the remainder of the payment as payment to the next invoice, so in this case $25 towards the second, with an additional $25 still owed. It is very important to use the “Receive Payment” function if there is a payment against an invoice. We can’t tell you how many times we see bookkeeping where invoices go out, and when payments are received, it is booked right to the bank ledger, so the accounts receivable never goes down when a customer pays, and income is “double-booked” – once when the invoice is created and another time when payment is received.
The last step is booking the deposit into the bank ledger. In many businesses, when a check is received from a customer, it isn’t then hauled out to the bank immediately for deposit. It is usually held until there are multiple checks to deposit, then taken all at once. Because of that, we must reconcile the payments received against the bank deposit. This is the trickiest part, and the part it usually goes sideways. After all payments from customers have been received and recorded, it is time for a deposit. In QuickBooks and Xero, click “Bank Deposit”. Type the date and the amount of the deposit, then go through the list of payments received and click each one that is getting deposits. It should match exactly. If it doesn’t, that means that one of the payments wasn’t included in the deposit OR there were payments received that didn’t have an invoice, so they didn’t have a “Receive Payment” option. If the deposit didn’t include a recently received payment, it is important to figure out why – was it stolen or misplaced? Was it not counted correctly by the bank? Every payment received should eventually make its way to the bank. If there are payments included in the deposit that didn’t have an invoice, these are the steps to follow. First, type the date and total amount of the deposit. Then go through and click each payment from an invoice that is included in the deposit. There will be a balance left over that should match what the amount of “non-invoiced” funds are. At the bottom, there is an option to “Add New Deposits”. Select that, and enter the revenue line that the funds without an invoice are for, the description, and the amount. This will book that extra amount to the income statement where they should be. It cannot be stressed enough that the bank deposits must match to the payments received, and if they don’t it is important to understand why. If there is frustration with the process, it is probably time to get a professional bookkeeper and remove this job that distracts you from your business.
Halon offers bookkeeping review, full bookkeeping financial preparation, and CPA meeting time add-on packages if bookkeeping is something you would like off your plate. Just contact your Halon tax team and they will get you squared away!