Something way back when didn’t get entered correctly, and now you have to pay an expensive bill to your CPA to figure out where the problem is and how to fix it.

Except, maybe not.

In our CPA firm we see many small businesses make the same small handful of bookkeeping errors over and over again. With a little bit of knowledge of what A/R and A/P measure—and of how QuickBooks does the accounting for it—you might find out that you can fix a lot of problems with these accounts yourself. We’ve already written a blog post on some general DIY QuickBooks clean up, but for this article we’re going to delve further into one method to help you clean up A/R and A/P specifically.

Step 1: Make Sure You Know the Basics of A/R and A/P

We’ve already published two blog posts on this subject already, one on how A/R works in QuickBooks, and one on how A/P works in QuickBooks. Look over these articles and make sure you’re up to speed with how these two accounts work, then move on to Step 2.

Step 2: See If You Can Spot Any Obvious Errors on the Balance Sheet

Here are some procedures you can go through to spot errors in your accounting for A/R and A/P, just by looking at the balance sheet:

First, run a cash basis balance sheet. Do values generate for A/R and A/P accounts? If so, something has gone wrong. Remember from our articles on A/R and A/P (links in Step 1) that cash basis accounting doesn’t even track A/R and A/P. So if values for A/R and A/P are showing up at all on QuickBooks’ cash basis balance sheet, a transaction has clearly been mis-entered somewhere.

And by the way, here’s something to know about wacky A/R or A/P values on a  cash basis balance sheet: If the balances for A/R or A/P show as negative numbers? What’s probably gone wrong here is that you’re receiving customer payments for work you never created an invoice for, and you’re paying bills to your vendors that you never entered a bill to match.

Note: It’s true, you can receive deposits from customers or pre-pay your bills, but those shouldn’t really show up in QuickBooks as negative asset or negative liability accounts, if you’re recording things right. Instead, the customer deposits should be a liability account, and the vendor pre-payments should be an asset account. Click the links for instructions on how to properly record these types of transactions in QuickBooks.

Here’s one last bookkeeping error you can potentially spot. Look at A/R and A/P again on your accrual basis balance sheet. Do the numbers keep increasing from year to year, by a very large amount? Are they increasing drastically even though the size of your business is about the same from year to year? If A/R is massively (or even noticeably) increasing from year to year, this could be a sign that you have the opposite problem as described above. You’re creating invoices for your customers, but then not entering the payments as you receive them in QuickBooks.

Step 3: Isolating Which Customer/Vendor Accounts have A/R and A/P problems

If you’ve spotted problems with A/R and A/P in Step 2, then your next step is to isolate which customer accounts have the bad transactions, or the missing transactions, that are messing up A/R (or which vendor accounts have the bad transactions or missing transactions that are messing up A/P). If you’re comfortable with using Excel PivotTables (here’s a helpful tutorial if you’re not, it’s a four-part video series), then finding which accounts have the bad transactions doesn’t have to be too grinding of a task:

1. Run a cash basis balance sheet in QuickBooks
2. Double-click on the line for A/R or A/P to get a detail report, then export this detail report to Excel
3. Fix the report formatting so you can easily convert the report into a PivotTable
   • For A/R, debited amounts should be positive and credited amounts should be negative (since A/R is an asset)
   • For A/P, credited amounts should be positive and debited amounts should be negative (since A/P is a liability)
4. Create a PivotTable with Customer/Vendor Name as the first column and Amount as the second column. Filter out customers/vendors with accounts balances that are 0. What’s left are the customer/vendor accounts where there are problems.

Step 4: Fixing the Transactions

Unfortunately, for this last step it’s tough to give a good one-size-fits-all answer. But hopefully you understand enough at this point about how the accounting for A/R and A/P works in QuickBooks that you can figure out where you’ve gone wrong. If you’re missing invoices to match customer payments, add the matching invoices to QuickBooks. If you haven’t been entering bills before you record paying them, it’s a similar solution. If you spot a customer deposit or expense pre-payment that hasn’t been entered properly, you now know how to record it correctly to fix it. These fixes will likely address 90+% of your bookkeeping problems.

Some Final Tips

Here are some final tips we have to keep the accounting for A/R and A/P working smoothly:

Sometimes A/R can get messed up when you record credit memos, refunds, or customer discounts improperly. If you think these sorts of transactions might be your problem, we’ve included some links below to instructions on how to record these transactions correctly. Check the instructions against your own accounting and see if you can figure out where stuff might have gone wrong.

• How to Record Credit Memos (for entering returned items and refunds)
• How to Create Discount Items (don’t use this for early payment discounts)
• How to Calculate Early Payment Discounts (don’t use this for any other type of discount, like a sales promotion)

Also, sometimes A/P can get messed up when you wait a while to mail out checks after you’ve printed them. Be sure to mail out checks the same day you’ve printed them, if you can. If you don’t have enough money in your checking account to pay your bills yet, just wait to record making the payment. That’s what A/P is there to keep track of, anyway.

The post DIY QuickBooks Troubleshooting for A/R and A/P appeared first on Evergreen Small Business.

Note: I did a post a couple of weeks ago about how to record expenses in QuickBooks. If you read that, some of this material will look a little familiar. Sorry…

Cash Basis vs. Accrual Basis Accounting

QuickBooks, and general accounting conventions, provide two different approaches to measuring revenue. You want to understand both approaches, which means you need to “get” what’s different about cash basis accounting as compared to accrual basis accounting.

I summarize the key differences in the little table below:

One other thing to know. Two types of accounts exist in accrual basis accounting which don’t exist in cash basis accounting:

• Accounts Receivable
• Accounts Payable

Accounts Receivable tally the revenues a firm has earned, but has not yet collected payment on. Accounts Payable tally the expenses a firm has incurred, but has not yet paid.

When to Use Invoices vs. Sales Receipts

Use the Customers menu’s Create Invoices command when the moment you earn the revenue and the moment you collect payment are distinct.

Example: Jim agrees to manufacture and sell Biff a crate of widgets for $1,000. Jim completes the work and ships the widgets—and thus earns the revenue—on June 1^st. Biff doesn’t pay Jim for the widgets until July 15^th. This is an ideal situation for Jim to use QuickBooks’ Create Invoices command, since payment occurs at a later date than the revenue earned.

Use the Customers menu’s Enter Sales Receipts command when the moment you earn the revenue and the moment you collect payment are the same.

Example: Mary owns a small retail shop. On June 1^st she sells a trinket to Kim, which Kim pays for in the store at the point and time of purchase. This is an ideal situation for Mary to use QuickBooks’ Enter Sales Receipts command, since payment occurs at the same moment as the sale.

The main benefit of using Create Invoices and Receive Payments in the first scenario is that it enables QuickBooks to track Accounts Receivable. In this first scenario, if Jim correctly records the invoice for the widgets and subsequent payment received into QuickBooks, then for the period between June 1^st and June 15^th, Jim has an Accounts Receivable balance of $1,000 from Biff if he prepares his financial statements using accrual basis accounting.

Additionally, QuickBooks also uses the information it collects through the Create Invoices and Receive Payments feature to record revenue under the correct date for both the accrual and cash basis financial statements the program produces. In our first example, if Jim correctly records the invoice for the widgets and subsequent payment received into QuickBooks, then QuickBooks will produce accrual-basis financial statements reporting the $1,000 of revenue on June 1^st, and will produce cash-basis financial statements reporting the $1,000 of revenue on June 15^th.

The main benefit of using the Enter Sales Receipts feature in the second scenario is its simplicity. Theoretically, Mary could create an invoice for the trinket on June 1^st, and then record a payment for it on June 1^st, and the financial statements would be accurate. But it’s less work to record one entry for one transaction.

Common Errors

The most common error people make when recording revenue in QuickBooks is using the Customers menu’s Receive Payments command without first creating an invoice to match the payment to by using the Customers menu’s Create Invoices command. As a result, the Accounts Receivable balance of the financial statement is too low. The balance in Accounts Receivable might even be negative!

Tip: We’ve got another blog post here that describes how to spot these types of errors and how to clean them up after the fact.

This is happening because every time the bookkeeper records a payment received from a customer, QuickBooks subtracts that amount from Accounts Receivable. If no prior invoice was created that first added that amount to Accounts Receivable, then the balance QuickBooks reports in the account will be incorrect.

How to Create an Invoice

Intuit, the company that makes QuickBooks, has tutorials on how to create an invoice available here:

• QuickBooks Online: https://quickbooks.intuit.com/tutorials/lessons/invoicing/
• QuickBooks Desktop: https://community.intuit.com/articles/1501462-create-an-invoice

How to Record a Payment on an Invoice

Intuit has tutorials on how to enter a sales receipt available here:

• QuickBooks Online: https://quickbooks.intuit.com/tutorials/lessons/receive-customer-payments/
• QuickBooks Desktop: https://community.intuit.com/articles/1501464-record-a-payment

How to Enter a Sales Receipt

Intuit has tutorials on how to enter a sales receipt available here:

• QuickBooks Online: https://quickbooks.intuit.com/tutorials/lessons/sales-receipts/
• QuickBooks Desktop: https://community.intuit.com/articles/1501468-create-sales-receipts

Are You a Business Owner Looking to for Tax Deductions?

No kidding, you may be able to save a bundle on your income and payroll taxes by getting strategic about maximizing your business tax deductions.

Why? Small business owners regularly don’t do a good job of structuring their operations to protect legitimate deductions, to create new deductions and to recycle (or double-deduct) the deductions which can be used more than once to save taxes.

If this sounds like your situation, you should consider buying and reading our $40 e-book, Small Businesses Tax Deduction Secrets. This 70pp e-book, which of course comes with a money-back guarantee, provides detailed instructions about how business owners can annually save thousands or even tens of thousands of dollars in income and related taxes simply by more effectively using legitimate small business tax deductions.

View Cart

Tip: If you are a client of our CPA firm, you don’t need to purchase this e-book–or any of our other e-books. Just email us and ask for your complimentary copy. Also, if you’re in the process of becoming a client? Don’t buy the e-book yet. Rather, wait until we’re working together. We’ll then provide you with your complimentary copy.

Instantly Downloadable & Money Back Guarantee

The book is instantly downloadable. You get the e-book when you purchase it. (We also send you an email after your purchase with a link you can also use to download the e-book pdf.)

By the way, we provide a money-back guarantee. If you don’t information you need or want, no problem.  Just email us and request your refund.

The post How to Record Revenue in QuickBooks appeared first on Evergreen Small Business.

I’ll explain when to use the Enter Bills command versus the Expenses tab on the Write Checks window, how those features are different, and why they exist. But first, we need to start with some background information on cash basis versus accrual basis accounting so this all makes sense.

Cash Basis vs. Accrual Basis Accounting

In order to understand why QuickBooks has several different ways of recording expenses, you’ll need to understand a little bit about cash basis versus accrual basis accounting. The key differences are summarized in the table below:

Two types of accounts exist in accrual basis accounting, but not cash basis accounting:

• Accounts Receivable
• Accounts Payable

Receivables are revenues which a business has earned, but has not yet collected payment on. Payables are expenses which a business has incurred, but has not yet paid.

When to Use Enter Bills

Use the Vendor menu’s Enter Bills command when the moment you incur an expense and the moment you pay the expense are distinct.

Example: Jim agrees to manufacture and sell Biff a crate of widgets for $1,000. Jim completes the work and ships the widgets on June 1^st, and thus earns the revenue on June 1^st. Biff doesn’t pay Jim for the widgets until July 15^th. This is an ideal situation for Biff to use QuickBooks’ Enter Bills feature, since he’ll pay the bill at a later date than when he incurs the expense.

When to Use the Expense Tab of the Write Checks Window

In general, you use the Expenses tab (available on the window that QuickBooks displays when you choose the Banking menu’s Write Checks command) when the moment you incur the expense and the moment you pay the expense are the same—or in the same accounting period.

Example: Mary owns a small retail shop. On June 1^st she sells a trinket to Kim, which Kim pays for in the store with a debit card. Kim’s trinket purchase is a business expense. This is an ideal situation for Kim to use QuickBooks’ Expenses tab, since payment occurs at the same moment as the sale.

Enter Bills and Pay Bills Commands vs. Expense Tab

The main benefit of using Enter Bills and Pay Bills commands is that this approach enables QuickBooks to track Accounts Payable.

In the “Jim sells widgets to Biff” scenario, for example, if Biff correctly records the bill for the widgets and subsequent payment made into QuickBooks, then for the period between June 1^st and July 15^th, Biff has an Accounts Payable balance of $1,000 to Jim if he prepares his June financial statements using accrual basis accounting.

Additionally, QuickBooks also uses the information it collects through the Enter Bills and Pay Bills commands to record expense amounts under the correct date for both the accrual and cash basis financial statements the program produces.

In the “Jim sells widgets to Biff” example, if Biff correctly records the invoice for the widgets and subsequent payment received into QuickBooks, then QuickBooks will produce accrual-basis financial statements reporting the $1,000 of expense for June (with the actual expense occurring on June 1^st), and will produce cash-basis financial statements reporting the $1,000 of expense for July (with the actual expense occurring on July 15^th).

The main benefit of using the Expenses tab feature in the second “Kim sells trinkets” scenario is its simplicity. Theoretically, Kim could enter a bill for the trinket on June 1^st, and then record a payment for it on June 1^st, and the financial statements would be accurate. But it’s less work to record one entry for one transaction, not to mention less complicated.

Avoid This Common Expense Tracking Error

People make a common error when recording expenses in QuickBooks. They use the Pay Bills command without first using the Enter Bills command to describe the expense they pay the bill for.

This is wrong and produces a financial statement error: The Accounts Payable balance of the financial statement gets understated. The balance in Accounts Payable might even be negative!

This understatement occurs because every time the bookkeeper records a bill paid, QuickBooks subtracts that amount from Accounts Payable. If no prior bill was created that first added that amount to Accounts Payable, then the balance QuickBooks reports in the account will be incorrect.

How to Enter Bills

Intuit, the company that makes QuickBooks, has a tutorial on how to enter bills in QuickBooks Online available here: http://quickbooks.intuit.com/tutorials/lessons/enter-bills/

An excerpt from Steve’s book, QuickBooks for Dummies, explains how to enter bills in QuickBooks Desktop here: http://www.dummies.com/software/business-software/quickbooks/record-bills-enter-bills-windows-quickbooks-2017/

How to Pay Bills

Intuit has a tutorial on how to pay bills in QuickBooks Online here: https://quickbooks.intuit.com/tutorials/lessons/pay-bills/

An excerpt from Steve’s book, QuickBooks for Dummies, explains how to pay bills in QuickBooks Desktop here: http://www.dummies.com/software/business-software/quickbooks/how-to-pay-your-bills-in-quickbooks-2015/

How to Record Expenses/Write Checks

Intuit has a tutorial on how to record expenses in QuickBooks Online available here: https://quickbooks.intuit.com/tutorials/lessons/expenses/, and it has a tutorial on how to write checks in QuickBooks Online available here:  http://quickbooks.intuit.com/tutorials/lessons/checks/.

An excerpt from Steve’s book, QuickBooks for Dummies, explains how to record expenses in QuickBooks Desktop here: http://www.dummies.com/software/business-software/quickbooks/how-to-write-checks-in-quickbooks-2010/

You Might Also Want to Make Sure You Get Your Tax Deductions Right…

While you’re thinking about the subject of correctly recording your business expenses, we may as well mention something else. You may be able to save a bundle on your income and payroll taxes by getting strategic about maximizing your business tax deductions.

Small business owners regularly don’t do a good job of structuring their operations to protect legitimate deductions, to create new deductions and to recycle (or double-deduct) the deductions which can be used more than once to save taxes.

If this sounds like your situation, in addition to doing your accounting for expenses correctly, you may also want to buy and read our $40 e-book, Small Businesses Tax Deduction Secrets. This 70pp e-book, which of course comes with a money-back guarantee, provides detailed instructions about how business owners can annually save thousands or even tens of thousands of dollars in income and related taxes simply by more effectively using legitimate small business tax deductions.

View Cart

Tip: If you are a client of our CPA firm, you don’t need to purchase this e-book–or any of our other e-books. Just email us and ask for your complimentary copy. Also, if you’re in the process of becoming a client? Don’t buy the e-book yet. Rather, wait until we’re working together. We’ll then provide you with your complimentary copy.

Instantly Downloadable & Money Back Guarantee

The book is instantly downloadable. You get the e-book when you purchase it. (We also send you an email after your purchase with a link you can also use to download the e-book pdf.)

By the way, we provide a money-back guarantee. If you don’t information you need or want, no problem.  Just email us and request your refund.

The post How to Record Expenses in QuickBooks appeared first on Evergreen Small Business.

At various points, I’ve found myself drawn into shows about restaurants, bars, retail shops, hotels—oh and my new favorite is the CNBC show hosted by Camping World CEO Marcus Lemonis, the Profit, where he’ll come into all sorts of crisis situations and try to help owners fix a broken venture.

But I’m getting off track here.

One of the things you often notice in a show like the ones mentioned is the importance of having a checklist that you and your team use as a roadmap to do some work-related project the right way: For example, the checklist to clean the room in a hotel.

So I thought I’d create a similar checklist for QuickBooks users. The checklist that follows can be used to find and fix most serious errors in your QuickBooks data. And that’s important, because finding and fixing those errors should mean you get better quality financial statements. Financial statements you can use to run your business better, for example. And financial statements your banker will comfortably use to make lending decisions.

Enough rambling, here’s my list:

Step 1: Reconcile the Bank Accounts

Okay, a first, easy thing but an important thing to do? Be sure that someone reconciles the bank account or bank accounts each month. This process catches errors in your bank account bookkeeping (important in and of itself since you need to know what cash you hold).

And the process means that connected errors in other places (like expense accounts and in sales revenue numbers) get fixed too.

You can delegate this work to some competent bookkeeping type on your team. But a couple of cautions: Be sure to confirm the person knows what they’re doing and that they’re doing it right. (Ask your outside CPA to check their work at least once.)

Furthermore, do look over the reconciler’s work to make sure they’re honestly handling your accounting. (Employee theft often shows up in a good thorough bank reconciliation, so this is one of the areas you want to keep an eye on…)

Need some help with this in the form of step-by-step instructions? Dummies.com has a tutorial Steve’s written on bank account reconciliation here.

Step 2: Audit Liability Account Balances

You can double-check some of your balance sheet values by comparing what your QuickBooks data says to what outside parties say. For example, you can compare what QuickBooks says you owe the bank to what the bank says.

You want to do this. If the numbers don’t match, either loan payments aren’t getting recorded or the breakdown into interest and principal isn’t getting done right.

Typically, you can fix a liability account balance using a journal entry. (You use the Company menu’s Make General Journal Entry command to do this.) And note that when you do use a journal entry to fix such a balance, you’ll also be fixing some other incorrect amount too (often the loan interest number.)

Step 3: Find Half-the-story Invoices and Bills

QuickBooks makes it pretty easy (too easy in some ways) to only enter half-the-story transactions. But let me explain.

QuickBooks makes it easy to record a customer payment… but you can do this even if you never create the invoice the customer payment pays.

Similarly, QuickBooks makes it easy to record a vendor payment… but then never count as expense the bill the check pays.

To find these awkward errors, here’s what you do; Print a cash basis balance sheet and then look for a negative value showing for either accounts receivable or accounts payable. If you do see a negative value, you’ve encountered the “half-the-story” problem.

Note: To produce a cash basis balance sheet in QuickBooks, choose the Reports, Company & Financials, Balance Sheet Standard command. Then click the Customize Report button and mark the Cash option button on the Display tab.

To fix the “half-the-story” problems, you simply enter the invoice or invoices you should have entered to “explain” any customer payments. And enter any vendor bills you should have entered to “explain” any vendor payments.

You may need to page though customer and vendor payments to find payments you didn’t entered an invoice or bill for.

You can also often locate a “half-the-story” problem by producing a balance as of a bunch of different dates to spot when the balance in accounts receivable or accounts payable goes negative. (If the negative balance appears on July 19 of some year, you can look at the customer and vendor payments recorded on July 19.)

One other thing to note: The search and locate” process is often made easier by the fact that people usually don’t “forget” that many invoices or vendor bills. It’s common that a $5,000 negative accounts receivable value stems from a single $5,000 payment or a couple of $2,500 payments never applied to an invoice. And it’s common that a $1,000 negative accounts payable value stems from a single $1,000 payment never applied to a vendor bill or from a couple of $500 payments never applied.

Step 4: Fix Weird or Wildly Off Balance Sheet Values

Okay, so here’s a bit of accounting trivia you may find useful.

In QuickBooks (and some other accounting systems), the balance sheet usually spotlights accounting errors.

For this reason, whenever you produce a balance sheet, you should look through the values it lists and verify you don’t see something crazy. Something way, way out of line.

For example, suppose your balance sheet says you have a negative cash balance of, oh, $800,000. In other words, QuickBooks says you’ve somehow overdrawn your account by eight hundred grand. That’s weird. And probably an error stemming from some ongoing bookkeeping glitch.

Or as another example: suppose your balance sheet says you have tens upon tens of thousand of dollars of undeposited funds sitting around the office. Almost certainly, that’s an error, right? And probably some accounting mix-up or bookkeeping boo-boo has occurred.

So you want to just continuously (and this will only take seconds) produce and then briefly review the balance sheet. Confirm that some value isn’t obviously weird.

If you do spot something weird, ask the bookkeeper or accountant to fix it. (This might be you of course.)

And if the bookkeeper or accountant can’t fix the error, consider bringing in an outside accountant to find and fix the error—and then help you avoid the error in the future.

I can’t be more specific about these sorts of errors here unfortunately. People end up doing all sorts of crazy stuff in their QuickBooks file. But if you know that the craziness usually shows up on the balance sheet, you will have a place to start your search for most errors.

Step 5: Spot Suspiciously Static Values

As a follow-up to the previous point, let me also say that you probably want to semi-regularly produce a balance sheet that compares current year values to the previous year’s values. (To do this you choose the Reports, Company & Financials, Balance Sheet Prev Year Comparison command.)

And then when you do this, look for any values that never change from year to year.

If you find some account like this, verify that this constant value balance actually isn’t some old or long-forgotten account that should simply be written off and so removed from the balance sheet.

Often these amounts are small in magnitude: Some old savings account with $3 supposedly—but you know the account was closed years ago. Or some liability account that’s shown an $11 balance for as long as you can remember.

But you should still try to regularly clean this stuff off your balance sheet. A quick painless write-off not only cleans up balance sheet but also means you don’t omit income or deductions that should be counted in QuickBooks.

The post QuickBooks Housekeeping Checklist appeared first on Evergreen Small Business.