This short blog post explains how to record your business’ revenue in QuickBooks. I’ll explain when to use the Create Invoices feature versus the Enter Sales Receipts feature, 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.
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:
|Cash Basis||Accrual Basis|
|Revenue is recorded||When payment is received||When revenue is earned|
|Expenses are recorded||When payment is made||When expense is incurred|
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 1st. Biff doesn’t pay Jim for the widgets until July 15th. 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 1st 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 1st and June 15th, 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 1st, and will produce cash-basis financial statements reporting the $1,000 of revenue on June 15th.
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 1st, and then record a payment for it on June 1st, and the financial statements would be accurate. But it’s less work to record one entry for one transaction.
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 a tutorial on how to create an invoice available here: http://quickbooks.intuit.com/tutorials/invoicing/.
How to Record a Payment on an Invoice
Intuit has a tutorial on how to enter a sales receipt available here: http://quickbooks.intuit.com/tutorials/receive-customer-payments/.
How to Enter a Sales Receipt
Intuit has a tutorial on how to enter a sales receipt available here: http://quickbooks.intuit.com/tutorials/sales-receipts/.
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