{"id":2822,"date":"2016-02-01T09:00:53","date_gmt":"2016-02-01T17:00:53","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=2822"},"modified":"2019-07-01T15:36:33","modified_gmt":"2019-07-01T22:36:33","slug":"recording-customer-deposits-in-quickbooks","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/recording-customer-deposits-in-quickbooks\/","title":{"rendered":"Recording Customer Deposits in QuickBooks"},"content":{"rendered":"<figure id=\"attachment_3081\" aria-describedby=\"caption-attachment-3081\" style=\"width: 300px\" class=\"wp-caption alignright\"><a href=\"http:\/\/evergreensmallbusiness.com\/wp-content\/uploads\/2016\/02\/computer_deposit.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-3081 size-medium\" src=\"http:\/\/evergreensmallbusiness.com\/wp-content\/uploads\/2016\/02\/computer_deposit-300x263.jpg\" alt=\"deposit via computer\" width=\"300\" height=\"263\" srcset=\"https:\/\/evergreensmallbusiness.com\/wp-content\/uploads\/2016\/02\/computer_deposit-300x263.jpg 300w, https:\/\/evergreensmallbusiness.com\/wp-content\/uploads\/2016\/02\/computer_deposit-1024x897.jpg 1024w, https:\/\/evergreensmallbusiness.com\/wp-content\/uploads\/2016\/02\/computer_deposit-622x545.jpg 622w, https:\/\/evergreensmallbusiness.com\/wp-content\/uploads\/2016\/02\/computer_deposit.jpg 1600w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/a><figcaption id=\"caption-attachment-3081\" class=\"wp-caption-text\">deposit via computer<\/figcaption><\/figure>\n<p>Here\u2019s a key piece of information to know. Taxpayers almost always need to report payments from customers as income to the IRS when cash is received, not necessarily when it is earned.\u00a0This is true\u00a0even if they\u2019re accrual-basis taxpayers [see <a href=\"http:\/\/www.leagle.com\/decision\/1990696493US203_1682\/COMMISSIONER%20v.%20INDIANAPOLIS%20POWER%20&amp;%20LIGHT%20CO.\"><em>Commissioner v. Indianapolis Power &amp; Light Co.<\/em><\/a> (1990)]<a href=\"#_ftn1\" name=\"_ftnref1\">[1]<\/a>.<\/p>\n<p>So what does this mean for you? Recording advance payments from customers correctly in QuickBooks is essential for making sure that you\u2019re accurately reporting your taxable income to the IRS.<\/p>\n<p>And note one other thing too. If you report cash you receive in the wrong year then get audited, you will get caught. A standard trick up any IRS auditor\u2019s sleeve is the \u201cbank deposit analysis,\u201d where the auditor adds up all your bank deposits, compares it to the revenue you report on your tax return, and then asks you the taxpayer to explain the difference.<\/p>\n<h2>How to Correctly Record a Customer Deposit<\/h2>\n<p>Intuit\u2019s instructions on correctly recording advance payments from customers in QuickBooks appear <a href=\"http:\/\/support.quickbooks.intuit.com\/Support\/pages\/inproducthelp\/core\/qb2k12\/contentpackage\/core\/retainers\/task_handling_retainers_and_upfront_deposits.html\">here<\/a>.<\/p>\n<p>You want to make sure you follow Intuit\u2019s instructions very carefully when recording a deposit or advance payment\u2014especially if it\u2019s your first time doing it this way. And carefully check the balance sheet and income statement after the first few times you try to record this in QuickBooks, just to make sure everything that shows up on the financial statements makes sense to you.<\/p>\n<p>The effect of recording an advance payment correctly in QuickBooks is that the deposit is added to a current liability account (the credit) and to a cash account (the debit) on the balance sheet.<\/p>\n<p>Note that customer deposits show up on the balance sheet in QuickBooks this way regardless of whether the balance sheet is accrual or cash basis.<\/p>\n<p>Note also that while this is proper GAAP accounting for customer deposits, it\u2019s often not the proper tax accounting, as discussed earlier in the article.<\/p>\n<p>If you provide correctly-prepared financial statements to your tax preparer, he or she can use that data to calculate an appropriate adjustment to your taxable income to properly report the advanced payments.<\/p>\n<h2>How <em>Not<\/em> to Record a Customer Deposit<\/h2>\n<p>Don\u2019t use credit memos to record advance payments. Credit memos really only work well for recording refunds to customers and returned items. In our experience, incorrectly used credit memos cause a lot of weird-looking errors on QuickBooks balance sheets. (By the way, if you <em>do<\/em> want some assistance on how to use a credit memo correctly, Steve\u2019s written a tutorial on how to do so that\u2019s available <a href=\"http:\/\/www.dummies.com\/how-to\/content\/how-to-record-credit-memos-in-quickbooks-2014.html\">here<\/a>.)<\/p>\n<p>Don\u2019t use the \u201cReceive Payments\u201d feature of QuickBooks to record customer deposits. This will cause Accounts Receivable to be understated on an accrual basis balance sheet, and create a negative Accounts Receivable balance on the cash basis balance sheet.<\/p>\n<p>Understating Accounts Receivable on your accrual basis balance sheet means you won\u2019t have accurate information if you try to analyze the short-term credit you provide to your customers. And keeping accurate track of which customers owe you money, when they owe you money, and for how long they owe you money, is essential to managing a successful business.<\/p>\n<p>Because this method won\u2019t add a balance to a liability account for customer deposits on the balance sheet, your tax preparer might not realize that you have advance payments from customers you need to take into account when calculating your taxable income. This could lead to you underreporting your taxable income to the IRS, which would be pretty bad.<\/p>\n<p>Finally, because negative Accounts Receivable on a cash basis balance sheet looks so odd, it could create trouble for you any time someone might closely scrutinize your financial statements, from an IRS auditor to a loan officer trying to get your SBA loan approved.<\/p>\n<h2>Some Final Tax-Planning Notes<\/h2>\n<p>Taxpayers probably want to think carefully about accepting advance payments from customers late in their tax year.<\/p>\n<p>Let\u2019s say you\u2019re a calendar-year taxpayer and you accept a customer deposit in December and then have to refund the amount in January. When you file your tax return a few months later, you may find yourself in the odd situation where you owe income tax on cash which you never actually earned and isn\u2019t even in your bank account anymore. And you\u2019ll have to wait another year before you can claim the repayment of the refund as a tax deduction.<\/p>\n<p><a href=\"#_ftnref1\" name=\"_ftn1\">[1]<\/a> The IRS has a page on their website with a longer list of authorities on this issue <a href=\"https:\/\/www.irs.gov\/businesses\/small-businesses-self-employed\/advance-payments-income\">here<\/a>. There\u2019s also a good article from 2009 by a tax attorney on the issue <a href=\"http:\/\/www.foley.com\/files\/Publication\/75ee99a0-8c45-4c10-b7c9-b9fa6d1de2ab\/Presentation\/PublicationAttachment\/105f4ab2-ae13-4440-bba2-c21498f69d94\/JPTE_Palmer.pdf\">here<\/a>.<\/p>\n<hr \/>\n<h2>Who Doesn\u2019t Want to Reduce Taxes?<\/h2>\n<p><a href=\"http:\/\/evergreensmallbusiness.com\/wp-content\/uploads\/2018\/10\/stephennelson_smallbiztax.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"alignleft wp-image-7415 size-medium\" src=\"http:\/\/evergreensmallbusiness.com\/wp-content\/uploads\/2018\/10\/stephennelson_smallbiztax-231x300.jpg\" alt=\"\" width=\"231\" height=\"300\" srcset=\"https:\/\/evergreensmallbusiness.com\/wp-content\/uploads\/2018\/10\/stephennelson_smallbiztax-231x300.jpg 231w, https:\/\/evergreensmallbusiness.com\/wp-content\/uploads\/2018\/10\/stephennelson_smallbiztax.jpg 246w\" sizes=\"auto, (max-width: 231px) 100vw, 231px\" \/><\/a>Most small-business owners don\u2019t do a good job with\u00a0maximizing legitimate tax deductions.<\/p>\n<p>For example, business owners usually\u00a0don\u2019t go to the effort of structuring their operations to protect legitimate deductions, to create new deductions, and to recycle (or double-deduct) those that can be used more than once to save on taxes.<\/p>\n<p>That\u00a0is really too bad. Getting disciplined and smart about small-business tax deductions can save businesses and their owners a bundle in taxes.<\/p>\n<p>If you\u2019re thinking maybe you can do a better job with your tax deductions, consider downloading\u00a0our ebook\u00a0<em>Small Businesses Tax Deduction Secrets<\/em> for only $40. This short ebook\u00a0provides detailed instructions\u00a0about 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.<\/p>\n<p><span class=\"button-wrap\"><a class=\"button large\" href=\"https:\/\/www.e-junkie.com\/ecom\/gb.php?c=cart&amp;i=SLNSBTDS&amp;cl=23704&amp;ejc=2\" target=\"_blank\" rel=\"noopener noreferrer\">Purchase and Download<\/a><\/span><a title=\"View Cart\" href=\"https:\/\/www.e-junkie.com\/ecom\/gb.php?c=cart&amp;cl=23704&amp;ejc=2\">View Cart<\/a><\/p>\n<p><strong>Tip:<\/strong> If you are a client, don\u2019t purchase this ebook\u2014or any of our others. Just email us and ask for your complimentary copy. Also, if you\u2019re in the process of becoming a client, don\u2019t buy the ebook yet. Rather, wait until we\u2019re working together. We\u2019ll then provide you with your complimentary copies.<\/p>\n<h2>Immediately\u00a0Downloadable &amp; Money-Back Guarantee<\/h2>\n<p>The ebook is instantly downloadable when you purchase it.<\/p>\n<p>Also, we provide a money-back guarantee. If you don\u2019t get the information you need or want, no problem. Just <a href=\"http:\/\/evergreensmallbusiness.com\/795-s-corporation-tax-return-preparation\/\">email us<\/a> and request your refund.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Here\u2019s a key piece of information to know. Taxpayers almost always need to report payments from customers as income to the IRS when cash is received, not necessarily when it is earned.\u00a0This is true\u00a0even if they\u2019re accrual-basis taxpayers [see Commissioner v. Indianapolis Power &amp; Light Co. (1990)][1]. So what does this mean for you? Recording [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":3081,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[8,17],"tags":[],"class_list":{"0":"post-2822","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-bookkeeping","8":"category-corporate-taxation","9":"entry"},"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.3 (Yoast SEO v27.3) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Recording Customer Deposits in QuickBooks - Evergreen Small Business<\/title>\n<meta name=\"description\" content=\"You need to be correctly recording customer deposits in QuickBooks if you&#039;re a cash basis taxpayer, alas many small businesses get the process wrong.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/evergreensmallbusiness.com\/recording-customer-deposits-in-quickbooks\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Recording Customer Deposits in QuickBooks\" \/>\n<meta property=\"og:description\" content=\"You need to be correctly recording customer deposits in QuickBooks if you&#039;re a cash basis taxpayer, alas many small businesses get the process wrong.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/evergreensmallbusiness.com\/recording-customer-deposits-in-quickbooks\/\" \/>\n<meta property=\"og:site_name\" content=\"Evergreen Small Business\" \/>\n<meta property=\"article:published_time\" content=\"2016-02-01T17:00:53+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2019-07-01T22:36:33+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/evergreensmallbusiness.com\/wp-content\/uploads\/2016\/02\/computer_deposit.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1600\" \/>\n\t<meta property=\"og:image:height\" content=\"1402\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Beth Nelson CPA\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@SeattleCPA\" \/>\n<meta name=\"twitter:site\" content=\"@SeattleCPA\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Beth Nelson CPA\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"5 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/recording-customer-deposits-in-quickbooks\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/recording-customer-deposits-in-quickbooks\\\/\"},\"author\":{\"name\":\"Beth Nelson CPA\",\"@id\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/#\\\/schema\\\/person\\\/85111873e184a3ae745c0c1f4a377a10\"},\"headline\":\"Recording Customer Deposits in QuickBooks\",\"datePublished\":\"2016-02-01T17:00:53+00:00\",\"dateModified\":\"2019-07-01T22:36:33+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/recording-customer-deposits-in-quickbooks\\\/\"},\"wordCount\":1037,\"commentCount\":0,\"image\":{\"@id\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/recording-customer-deposits-in-quickbooks\\\/#primaryimage\"},\"thumbnailUrl\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/wp-content\\\/uploads\\\/2016\\\/02\\\/computer_deposit.jpg\",\"articleSection\":[\"Bookkeeping\",\"Corporate taxation\"],\"inLanguage\":\"en\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\\\/\\\/evergreensmallbusiness.com\\\/recording-customer-deposits-in-quickbooks\\\/#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/recording-customer-deposits-in-quickbooks\\\/\",\"url\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/recording-customer-deposits-in-quickbooks\\\/\",\"name\":\"Recording Customer Deposits in QuickBooks - 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