Effortlessly Manage Your Invoice Deposit for Product Quality

Invoice deposit for Product quality

hi folks in this video we're going to talk about customer deposits or customer prepayments in quickbooks online now the context behind this is that you're going to get paid from your customer you're going to receive money from your customer prior to you delivering the product or performing the service therefore this payment is technically not a payment for the product or service is a prepayment or a deposit towards the future delivery of product or the future performance of services now this is going to have special accounting treatment because of a rule called revenue recognition this is an accounting rule that says you must or you should only recognize the sale you should only recognize the revenue when you effectively have delivered the product or performed the service just because you tell the client to pay you and they actually pay you or you invoice them it doesn't mean that you get to recognize that sale and the reason for that is because most sales in which the customer makes a prepayment if you don't deliver that product or service you probably have to pay them back and before because of that it's not really a complete sale so the idea is that in quickbooks we're going to have one method to bring the money in and there's gonna be two options to book that and when we actually uh perform the service or deliver the product then we're gonna take the payment and apply it towards the invoice in the future so i mentioned two methods and we're gonna go into quickbooks online and we're gonna cover each of the methods let's start with the first method which i call the negative accounts receivable method and in this method we're gonna receive a payment prior to creating an invoice and then after the invoice is created we're going to apply that payment so let's do an example let's say i'm selling the customer a 10 000 service from which they have to pay me let's say in august 30 percent but we're going to perform the service in september and then in september we're going to recognize the entire sale apply the 30 percent and then receive the remaining amount of 7000 in the future so let's do that example let's say first we're going to receive the money so we're going to click on the new menu on the top right and then we're going to click on receive payment again this is the negative accounts receivable method we're going to select our customer let's say this customer is called robert's development and we're going to simply receive a payment you're going to notice that there are no open invoices in here and even if there were open invoices you must make sure that you don't click on them because this is a prepayment or or a deposit in which we don't want to apply to a payment yet so i'm going to go ahead and select let's say the date that the customer paid us let's say that's august 1st we're going to perform the service let's say in september but we're going to receive three thousand dollars off that ten thousand so i'll just put here that they paid us with a check check number one two three four and then we put here uh three thousand dollars now you could put in the memo something that would make sense to you you can put something like 30 you know down payment for september service something that just makes sense to you something that you that you know or recognize later on and that's it we received the payment and that's it now the challenge with this method and probably the reason why a lot of people don't like this method is because i can't give the customer a document i can't give them a paper that says hey you have to pay me i guess you can email them you can tell them verbally you can open up a word file create your own uh payment request or down payment request you could create an invoice and it's sorry an ira invoice an estimate and specifying the estimate that they have to pay you 30 to get started something like that but there isn't sort of one-to-one document that matches the payment with um with you know the act the actual money from the payment with the action of requesting the customer the money so this is just a payment that's not being applied to i'm receiving a payment like normal i can send it to undeposited funds or send it straight to the bank account whatever method you use to deposit that payment so anyway so we got three thousand dollars in there i'm gonna go ahead and click on save and close and then it tells you here warning i don't have any invoices to apply you're going to have a credit for your customer that could be used in the future so i'm just going to click on save as credit and that's what it means it's a negative accounts receivable now what does negative accounts receivable mean well i'm going to go into my balance sheet so i'm going to go into reports and then i'm going to click scroll down and click on balance sheet and i and i should see a negative three thousand dollars into my accounts receivable right so it's a negative accounts receivable method now the three thousand dollars are sitting here in under positive funds because i didn't deposit it to the bank yet let's say we're going to go ahead and do that deposit and this deposit has to do with depositing in the bank the second part has nothing to do with the deposit we get from the customer that received payment was essentially the deposit now we have to make the action of depositing the money into a bank account so i'm going to click here on bank deposit and then follow the process let me just create a bank account this is a brand new blank quickbooks file we'll call this boa one one two two which started with zero dollars and i'm gonna go ahead and deposit this uh three thousand dollars here into the bank and here's a memo that we wrote earlier beautiful thing we'll click on uh save and close so now one i'll actually have to click on this little checkbox here to make sure that we select that payment to be deposited then i click on save and close so that we made the deposit now the money is sitting in our bank the way it's supposed to and then we have a negative accounts receivable of 3 000 that means that we owe someone three thousand dollars a negative accounts receivable is a liability then step two we're gonna deliver the product or perform the service so we're gonna click on new and then let's go to invoice now we're gonna recognize uh officially we're going to recognize the sale when we actually perform the service let's say on september 1st we perform the service i select my customer here robert's development i'll select a product here let's say this is hours and then let's say this was uh 10 hours at a hundred dollars per hour or let's say 100 hours at 100 per hour that gives us to uh 10 000. notice that nowhere here i'm going to put that they already paid me 3 thousand this the invoice is sort of by itself and this is how you recognize your sale or your revenue and it's independent from the payment so i'm just going to click on save or save and close and then it says hey we automatically applied the existing credit so it did it for you automatically i can show you how you can unapply that if you need to or where you can turn off the option for this to apply things automatically don't remember if there's an option you can change we'll we'll look into that then i'm going to click on okay and now this has been fully um applied to so now we go back into our balance sheet this balance sheet is for august it doesn't contain the september date i'm going to push this up to let's say september 1st which is when i created that invoice click on run report and now we're going to have a different number here we have now an accounts receivable of 7 000 that's the amount that my customer owes me they owe me seven thousand dollars which is the balance between the you know the three thousand i paid for and the ten thousand dollar invoice now i'm gonna click here on the recent transactions button or the search button and then i'm gonna go ahead and open up that invoice so we can go back and see that invoice and now you notice on the right-hand side that it says one payment has been made that was the payment that was automatically applied to the invoice again this is a problem sometimes because if you have multiple invoices quickbooks is not going to know which payment to apply to each invoice this is why we need to look at the second method potentially which we'll do at the end of sort of when we finish explaining this part so i'm going to click here says one payment made so we can see the history of payments i can click on the date so for it to open up the payment and now you can see that this payment for 3000 which previously had nothing here where it said um outstanding transactions it was blank now you can see it applied so once that payment is applied that's when you tell in quickbooks that payment belongs to that invoice if there was three four five invoices you have to manually uncheck it here and select it and apply it to the correct invoice okay so you can actually always go back to invoice and apply that i'm gonna click on save and close and now let's see the the financial uh consequences of the financial elements of doing this so i'm going to run a different report i'm going to run my profit and loss report and click here on profit and loss and i'm going to run my report in accrual basis and i'm going to run it for the month of august okay so i'm gonna click on run report and there's nothing in my profit and loss no sales no expenses no nothing because i didn't create the invoice in august i created the invoice in september now i'm going to switch this to cash basis and then click on run report and now you see that three thousand dollars are being applied in sort of retroactively going back in time and applying the three thousand dollars in august because it was applied to an invoice but the invoice is in september the reason why this worked like that is because i clicked on cash basis and in quickbooks online when you click on cash basis you'll recognize the sale based on when you got paid not necessarily when the invoice was created if i click on accrual and click on run report it only gets recognized in the month it was created so let's go ahead and show august and september together next to each other so i'll show us in september and then where it says columns i'm going to put here months that way we can kind of see the two months together click on run report so in accrual basis where it recognizes based on the date of the transaction notice that nothing is recognized in august and ten thousand dollars get recognized in uh september now let's say that this customer paid us the balance in october so let me expand this one more through october so i'm gonna go through october 31st click on run now we see the three months here put together we're still in a in accrual basis i'm going to go ahead and receive the balance of the 7000 in october so i'm going to click on new i'm going to click on receive payment so this is after the invoice has been created i'll select the customer here and then they're gonna pay us the balance which is seven thousand but just to mess with with uh you a little bit um let's say the customer didn't pay a seven thousand they paid us to say twenty seven thousand it was seven thousand to apply to this invoice and twenty thousand to apply to an invoice in the future let's say for november so i'm gonna put here twenty seven thousand and now notice that it automatically applied it to the only invoice that was there for seven thousand if i want to manually change the application i can put seven thousand dollars in there and notice that it says amount to credit twenty thousand that's basically telling me that uh twenty thousand dollars are left to be applied in the future now let's say this payment was received in october first and then we're going to click on and let's put it straight into the bank i'll skip on the positive funds so i have to do one more step and then click on save and close and now we're gonna see when we go back to our profit and loss let's go back and do 0 8 0 1 20 21 through 10 uh 31 20 21 and then do columns by months and click on run report and then what did you see you see nothing on august because i did an invoice in august you see nothing in october because i did an invoice in october and you only see the invoice in september because that's the only time i created an invoice this is accrual basis again based on the transactions date if i switch this to cash basis i'm going to click on run report but before i do it what are you expecting to see here okay some of you might before i hit run report some of you might say well i'm expecting to see 3 000 in august and then 27 000 in october and nothing for september let's see let's click on run report so we can see what it is and then basically what's happening here is quickbooks is actually recognizing the three thousand dollars in august because that's when you receive the money then it's recognizing it in september again because that's actually when you actually created the invoice but then it reversed it because you already had previously recognized it in august so essentially you recognize nothing in cash basis and nets to zero because there was no payments no money movement in september remember cash basis follows the cash so you got cash or you got paid in august so that's three thousand dollars being recognized and then you got twenty seven thousand dollars being recognized in october uh of 2021 so that gives you an idea kind of what's going on there now there went out a couple more things to this just because it just this stuff becomes a little bit confusing this account called unapplied cash payment income you actually cannot use that account you can't manually go in there and put things in there that's a very special account that quickbooks uses specifically to apply payments that have invoices in the future or payments that have no invoices attached to them so for example here in october there's no payments attached to that uh 20 000 therefore it puts it there in an applied cash payment if i were to create an invoice in november and then apply it you're gonna see the same sort of weird um reversal effect so let's say so we have the 20 000 in credit let's say i want to create two invoices and i want to choose where to apply that money so how would that work i'm going to click on new i'm going to create invoice and let's say i have an invoice for the same customer i have an invoice let's say for twenty five thousand dollars we'll just put it here so twenty five thousand dollars and of course quickbooks is gonna apply the whole twenty thousand dollars to it but maybe that's not what i want i'm gonna click on save um it did it automatically that's we talked about earlier we didn't have a choice it just did it for you automatically i didn't want to apply the whole twenty thousand to it but it just did it for you that's fine we're gonna go back and leave deal with that in a second i'm gonna create another invoice let's say for three thousand dollars and let's select the same customer here and let's say this is for a different product or service and i should essentially apply i want to apply some of the 20 000 to this one and i want to kind of pick and choose how to apply those 20 000 i'm also i'm going to put this in let's put this one let's put the 3 000 in december and then i'm gonna go back for a minute and let's look for the 25 000 and put the 25 000 in november that way we based on the month we can recognize uh all these invoices then i'm going to click save click yes and then it's just telling you again that it was automatically applied the original twenty thousand i'll close that i'm gonna again do zero one uh zero eight zero one twenty one through december thirty first twenty one will display columns by month and click on run report and we get the entire gamut of what's going on here so in accrual basis we get 10 000 in september that's invoice date we get 25 000 in november that's the invoice date we get three thousand dollars in december those are the invoice dates not tied to payments if i click on cash here click on run report you're going to see that now the revenue recognition uh when in cash basis is based on what you got the money so you got 3 000 in august 27 000 in october is recognizing 30 000 in sales based on the months that you receive the money if i switch back to accrual and click on run i see 38 000 in sales because there's an additional eight thousand dollars that have not been paid for and an accrual basis you recognize things even if you have not gotten it paid for now let's change the way those twenty thousand dollars were applied by i'm gonna click here on the on the magnifying glass and then go back into this twenty seven thousand dollar payment and you're gonna notice that again because quickbooks did it this way there's a seven thousand originally applied and then there's twenty thousand that was automatically applied let's say that out of those 25 20 000 i want to apply the full payment to the 3000 and then the balance to this 25 000 invoice so i'm going to reduce this by 3 000 and then i'm going to click on the next invoice down and apply the other three thousand that's how i can get to pick and choose how to apply to those invoices i'm gonna click save and close and essentially um you're gonna see let's just do it again zero one eight 080 121 12 31 21 do it by month click on run report accrual is going to be the same because we haven't touched the invoices and cash presumably should also be the same you're just going to see sort of different movement sort of the payments are correcting themselves and that sort of thing because they're being they started reporting in unapplied cash payments because of the cash basis method so this gives you a very clear understanding of method one how you can receive the payment prior create invoices later and then pick and choose how to apply them now let's go into the settings real quick i actually don't remember believe it or not i'm gonna click on the gear menu don't remember if there is a setting that allows me to opt out of the automatic application of payments now this would be under sales generally and then let's see down here there's nothing here that allows me to turn off or on application of payments that's strange let me go into advance see if maybe there's something here and no it looks like it looks like just there isn't there's no way for me to oh actually there is automation right here whoops there it is so i'm going to open that and then it says automatically apply credits i think that that was uh what was doing that automatically so i'm going to turn that off sometimes remember it's hard to remember all the things that quickbooks can i can't do but i wasn't 100 sure that wasn't there but i'm pretty certain that's the one let me click on this little thing and it says yep automatically apply to the next invoice i'm going to click on save click on done if you remember correctly there is um an open invoice i think there's still an open invoice in there let's go into uh customers so let's go into our sales here under invoicing and customers and we should have a customer with an open balance there he is robbers development so let's receive a payment for robert's development i'm going to click on new click on receive payment i'm going to pick uh robert's development and let's say i'm going to receive four thousand dollars now this automatically applied to that that's that's interesting even though we unchecked that uh or we turned turn that on uh it automatically did that that's weird let me go back into the settings again to make sure i didn't miss something in the process it's possible that i did here under advanced automation no i turned that on all right so let's let's do a little bit different just so we can kind of explore how that works let me go to new receive payment again let me receive let me select the customer and let me select eight thousand yep it automatically applied i don't think there's even though it said that i don't think there's a way to actually stop it from automatically applying so if you do want to um not apply you manually are going to have to unapply it but let me do it this other way let me do fifteen thousand dollars that's automatically applied there's the seven thousand dollars what i'm going to do is i'm going to create another invoice from this payment and let me see if it actually applies that automatically as well let me click on save and close so we can figure out whether uh or not that feature is actually worth anything so or that setting that's supposed to do one thing so let's go to new and let's go into invoice and i'll create an invoice for let's say january of the following year and i'll pick just pick an item here and let's make this uh i don't know 9 500 okay there it is let me select the customer and now what i'm thinking or hoping when i click on save that it doesn't apply automatically that payment maybe that's what the settings for we'll click on save and look it didn't say that it did it automatically so it didn't apply automatically the invoice is still showing in there so that setting doesn't um stop quickbooks from applying it in the payment screen it only stops it from applying it in this specific screen let me excited that and let's go back and look at that ninety five hundred dollar no actually um fifteen thousand dollar payment let's look at that and effectively um the original eight thousand is still applied and then the balance of 7000 is not applied yet then i can go back and manually type the 7000 here and apply it later or apply less whatever i want save and close okay so now you know exactly how the entire process works with the negative accounts receivable method you know how the application the automatic application of payments work you see where it's not working and where it is working so keep that in mind okay now we're gonna do method number two which is called the current liability method and essentially with this method we're gonna create a current liability account called customer deposits and instead of having that negative ar that we talked about at the beginning we're gonna have a positive liability or a positive payable that way and again it's the same thing but in the balance sheet it looks like money that we owe not negative money owed to us and it's just done mechanically so it's cleaner in our financial statements it will take an extra step to do this and a couple of additional sort of reporting techniques but this is what most accountants deem as the correct way of doing it so let's say let's start with receiving a payment and the trick behind this is we're not just going to go to new and receive payment we're not going to start that we're actually going to invoice the customer first but generally generally whenever you use this method there is an estimate prior to that that kind of sort of predicts what's going to happen in the future so let me start doing an estimate first so i'm going to click on estimate and then let's say this is going to be a hundred dollar project sorry a hundred thousand dollar project that's gonna be uh paid for over time so i'm gonna create the estimate of what the entire thing looks like and then i'm going to invoice them in pieces so i'm gonna select a new customer let me create a new one and we'll call them abc customer then we click on save and let's say that this estimate is being done january 1st of 2022 i'm okay with that and we'll pick the item here and let's just make this a hundred thousand dollars over time that's the entire project 100 over time and we'll put in the description how we expect to get paid so we're gonna let's say we're gonna get paid uh 25k in february 50k in march and then 25 let's just make it different numbers so 40k in march and then uh that would be 35 000 for the balance right so 35 000 in april okay so this is uh let's just call it uh payment schedule okay so that's payment schedule and payment schedule might be different than the way we recognize the revenue we talked about revenue recognition this is how we're going to get paid which might be different than how we recognize the revenue let's say we recognize the revenue as we complete the work let's just let's just say that so in order to just kind of make it easier here i'm going to put 100 for quantity and then 10 000 for for rate or a thousand for rate um that way we get the same hundred thousand but it's just sort of a little bit easier visually uh to read so this is the again is the payment schedule not necessarily um how we are gonna perform the work so we discuss that in a second so i'm gonna click on save and that's done the estimate is done so now i can send my customer this via email so they know exactly what we're expecting we probably don't even need to send our customers invoices because they have a payment schedule so we're going to use the payment schedule to collect from them we don't have to give them an invoice but you could and i'll i'll show you that in a second so let's say this project's actually going to start physically it's going to start being done in march but we're going to start getting paid in february we're going to get a prepayment or a deposit in february so the way we're going to do this you know so we can give the client a document especially if you want to give the client a document for them to pay you is first we have to create a product or a service for that prepayment because that's going to go inside of an invoice so let's go into uh invoicing or sales depending on what your screen looks like and let's go to products and services and then we're going to click here on new and we're going to create a new item a service item or non-inventory either one i find service to be a little cleaner and we call this customer deposit you also you can call it customer prepayment you can call this project payment schedule or project schedule payment that would make a lot more sense so we do product schedule payment and that could just simply be a deposit and then the final payment afterwards i'm making a little more complicated than normally is but that's how we're going to do it then under income account and this has nothing to do with income we're going to create a customer deposits liability account so i'm just going to type customer deposits lie liability and we're basically creating an account that's going to be a current liability account so the account type here is going to be current liability it's called current deposits our customer deposits liability here in detail type doesn't really matter what you put in here if you really want it to make this sort of as close as it's supposed to be you can use just other current liability or not not prepaid expenses payable or something like rents and trust that's kind of what makes the most sense but i'll just do other current liabilities and click on save and close so the item is going to point to the balance sheet into liabilities and i can use the item in an invoice so i'm going to click on save and close now the item is created now i can use an invoice to actually tell my client to pay me so i'm going to go to new i'm going to click on invoice okay i'm going to go into customer here let's say customer a abc there is an estimate here that i could bring but i'm not going to bring the estimate because i'm not recognizing any revenue i'm just recognizing or just requesting my customer to pay me so um i'm going to select the date here let's do february 1st under product and service we'll put customer deposit in description a perfect project schedule payment we can call it number one so we know and then um under quantity i can just put 0.25 and the rate of a hundred thousand just so it's like sort of clear to the customer that they're paying 25 i can also put here uh 25 uh down payment to start or whatever additional information you want to give so now i can click on save i can actually email my customer this invoice they can pay me through the electronic method of being paid will receive the payment will accept the payment all that stuff let's go to receive payment and uh let's receive the payment let's say on that same february let's say the payroll is immediately and then we click on save and close so we have a payment received let's go into my profit and loss report so let's go into profit and loss and let's do 0 1 0 1 20 22 and through let's say april 30th 2022 and then under columns we're going to put months and then i'm going to click on run report and there's my profit and loss what's that 9 500 that's not related to what we're doing just now that's the other 9 500 invoice that we just did we we did get paid 25 000 uh just now but it's not showing up in my profit and loss it's not even showing up in cash basis because that uh 25 000 really has nothing to do with uh with being paid um on an invoice has to do with it being a deposit prior to us doing the invoice so whether it's cash or accrual is completely unaffected that the 25 is are gonna be actually let me delete this ninety five thousand dollars uh ninety five hundred dollars out of here just completely just so we can avoid some confusion here and then we'll go back into our uh profit and loss report and um go back into that and then that was uh by month correct cut one report so we got absolutely nothing again there's no revenue being recognized because that stuff is going in the balance sheet so let's go into reports i'm gonna go ahead and open up the reports menu in another tab and now we're going to open the balance sheet because i want you to see where the 25 000 is so we're going to go there into the balance sheet and the 25 000 should be uh this is uh it was february so to february 1st 2022 okay because the date range needs to match click on run report and now i should have a customer deposit liability of 25 000. that's not income at least not yet it will be income when we apply it to an invoice okay all right that being said so let's say in february we did 10 of the work okay even though we got sorry in march we did 10 of the work we got paid 25 of the payment because that was the payment schedule but we only did 10 of the work so i only want to recognize 10 of that invoice so then what i would do is i would just go to new estimate and i'm just going to recall my old estimate so i'm going to click on this little recent transactions button i'm going to recall my old estimate and i'm going to create an invoice for 10 of this estimate in march when we did 10 of the work so i'm going to click on create invoice and then i have a choice to do the whole thing or to do a percentage okay that's what happens when you create an estimate an invoice from an estimate it will ask you if you want to do what's called progress invoicing and it's a perfect scenario to do that so we're going to select that and then click on 10 percent okay so 10 of the line then i'm going to click on create invoice and then we will um invoice this in march because that's when we did the work so let's say i was at the end of march so 331 2022 and i'm going to click on save now remember that we turned off the feature that quickbooks will automatically apply payments to the invoice the payment has not been applied yet if i click on receive payment it will take me to the receive payment screen and now i can manually apply part of those twenty five thousand dollars to this invoice prior to doing that let me go back into the profit and loss and click on run report just so we understand what is going on here i recognize ten thousand dollars of um of the invoice because uh that's that's the revenue that i recognize that's how much work i have done if i switch over to cash basis it's going to go completely blank the 25 000 will not be recognized again because we're using a different method that send it to the balance sheet that way my i'm never going to get that weird unapplied uh cash payment income in there that's why most accountants like the second method better because it keeps the profit and loss clean i'm gonna go back and click on run report and then there's the 10 000 again it's an accrual i'm going to go back into cache click on report nothing is being nothing is showing okay so now in order for us to effectively apply part of those 25 thousand dollars into that invoice we actually first need to run a report that let us know uh whose money we have and whether or not we have any money from that customer in our liability account so i'm going to go into my balance sheet here and let's date this for 2022 so it includes that there's my 25 000 i can click on the 25 000 and i can click here it says group by and i'm going to group that by customer and click on run report that way i will know that that out of that money abc customer has 25 000 but let's say just so we can complicate this a little bit let's say that during that month we reset let's say two other prepayments right that way we um we have a little bit more information in here and it's not showing just one customer so i'm gonna go to new i'm gonna go to invoice and i'm gonna select let's say this roberts customer and let's say that in uh back in february we got the customer deposit of let's say twenty one thousand dollars and then i click on save again a different transaction a different thing altogether click on save and new and let's say a couple of days later we invoice a different customer let's say steve okay and then we invoice steve uh also a customer deposit let's say of nine thousand dollars and then we click on uh save and close so let's say we got paid let's assume we got paid and we'll skip that part and let's go back into the balance sheet and now we have fifty five thousand dollars in customer deposits who does that money belong to so i'm gonna click on the fifty five thousand dollars and then i'm gonna click on group by click on group by customer click on run report and then i'll know exactly how much money is left for each customer so that's a really important piece is you got to be able to run this report probably save customization and we can call it customer deposits by customer or whatever save it in there that way we can recall the report later on because we have to make sure that there's balance in there before we add or apply part of that money into that invoice so abc customer still has 25 000 in there so i can just go back to that invoice i'm going to go to new invoice and then i'm going to click on the recent transactions button pull my ten thousand dollar invoice pull it from there and then it's a really tricky part in order for me to apply that ten thousand dollars to uh the ten thousand dollars of the prepayment to this um to this invoice i have to add the customer deposits line as a negative amount so i'm going to come in here and put negative ten thousand dollars now usually your customer will not be getting this invoice just because it might be a little bit uh confusing to them so this is more revenue recognition this is how we internally recognize our sales and let's say we want to apply that in march right that's the same the same the date that we recognizing the the revenue there's my ten thousand dollars you could probably go back into your balance sheet report let me just do that real quick and this is optional you don't have to do it but i can go back into my balance sheet report let's run our customer deposits again and then let's group this by customer and let's say this is the 25 000 that we got on february 1st so if you want to get optional you you can actually add a note into here somewhere anywhere you can just put it maybe in the in the in the messaging or or or down here in the text somewhere whatever you want to put it i can come down here and put from 25 000. sorry let me do it again apply from 25k received in zero two zero one 2022. again you don't have to do that additional text i'm doing it just to make it easier for me so i can see it in there and then i'm going to click on save okay then i'm going to click on yes so what that's going to do i'm going to go back into that report and i'm going to click on run report what that's essentially going to do is now it's going to run a live tally of the funds that are available for their customers abc customer has fifteen thousand dollars available in their prepayment account and here's the very clear right when when we actually got paid which was uh february 1st and then when we recognized part of that payment which is march 31st and then we put here in the notes again that's really up to you how you want to um you know add notes and memos to that but that gives you a really sort of clear understanding of how that works now let's say for example now in march let's say we did 40 of the work so we're gonna create a um no actually let's make it more than that let's say much we did seventy percent of the work now however we we still can invoice forty thousand dollars because that was how we uh arranged the contract so i'm gonna send an invoice to um request the forty thousand and then i'm gonna i wanna create an invoice for internal purposes for us to recognize the set the additional seventy percent actually uh the the additional sixty percent because we've already done uh ten percent of the work so we're gonna get up to seventy so let's go ahead and close that and we click on save so i'm gonna go into new i'm gonna go to invoice and now we're gonna request invoice to get paid so i'm gonna go abc customer i'm gonna select here our customer deposit i'm gonna put here payment number two oh sorry schedule payment number two this is going to be forty thousand dollars and that was on april first 2022. notice that i'm not going to touch the invoice here because i'm not recognizing revenue i'm simply just requesting to get paid um and it is possible that you can customize this form you can edit it so instead of saying invoice appear i can say deposit request or payment request if you want to make it a little bit less confusing to the client it's up to you as well but they recognize invoice and through the memo and the description you can explain all those moving parts so we'll click on save and close so we requested that additional money i'm going to click on run refresh the report and now for this customer i got 55 000 in the back that's how much uh money we owe the customer that we can apply to future invoices that's 55 000 now let's go ahead and create an invoice for the additional 60 for us to get to 70 completion of the job let's create an invoice and again we might not even send this to the customer we don't need to this is internal revenue recognition we'll select that let's say this is going to be for end of april i can i have it right here under estimate so i'm going to let's just delete that and i'm going to click on add here so this time around i am going to select the the estimate not going to select a random item in there i want to bring that in there again because i want to do the percentage so i'm going to do 60 this time so i can bring the i can bring it up to 70. click on copy to invoice this is now going to bring this in here or ours was the item that i had used okay i remember now okay so there's that in there so there's sixty thousand and now i can apply the money from my customer deposit account now in my customer deposits account i only have fifty five 000 if i actually make the mistake of putting customer deposit and then thinking maybe not remembering or not using the report that i can apply the entire uh 60 000 let's put the 60 000 in there negative sixty thousand so i think i can apply the whole thing you can i know the invoice you know market paid or whatever but when i click on save and close and i go back into my report now i'm gonna have this balance is gonna be negative you should never have a negative customer deposit this is why you need to check this report first check the balance and make sure that you only apply up to that amount so i'm going to go back into that invoice for 60 000 and i'm only gonna apply the negative 55 that i have left in there so i can only bring this up to zero and yes this invoice will continue to have a five thousand dollar open balance and you don't have to send this to the customer because you will confuse them um that is just going to be open for internal purposes so let's go ahead and click on save and close and let's say that now we get to um we get to invoice our customer the remaining amount from the payment schedule which is the other 35 000. notice that my um liability account is at zero so i'm gonna go to new i'm gonna go to invoice now we're requesting money not recognizing revenue particularly let's say this happened now in may i may have messed up the dates but i guess you can follow we're not going to bring it from the estimate again because we're not recognizing revenue we're just requesting money we'll put here customer deposits and the balance of the os was 35 000 and then we'll put in their payment schedule number three we click on save save and send send it to the customer hopefully they'll pay us in may so i go back into my report and now i have a liability of uh 35 000 that's how much money i've received i have not yet applied to any invoices let's go back into the profit and loss again for a minute here let's go into a reports um profit and loss so we can kind of follow what revenue recognition look like 0 1 0 1 22 through let's say may 31st 22 by month and let's go to run report and notice that i recognize 10 000 because i did 10 of the work in one month and then 60 000 in april as i did the other sixty percent of the work now we got we're up to seventy percent the only thing we can recognize so far is seventy percent because that's how much work we have done even though we got fully paid uh let's say we don't get to complete the work let's say until june okay so now i'm gonna push the report to june here and click on run report and i'm gonna recognize the remaining 30 in june and now i have to apply from those uh 35 000 i have to apply 501 and 30 on the other so let's go to new let's go to invoice again this is an internal invoice for revenue recognition i'm going to select abc customer let's say this is june okay well let's do june 30th june 30th 2022 june 30th 22 yes let's do in this case uh bring no we're going to bring it from the estimate because we're recognizing the revenue so i'm going to click on add so we're going to bring the remaining balance here which is 30 okay i can also select this top one that says remaining totals this is the last invoice then click on copy invoice this will bring the remaining 30. it will remove that open estimate from the left hand side so no longer we'll keep reminding you to bring it and then in here i'm going to come in and put a customer deposit and put here negative 30 000 and then click on save and close so that invoice is paid for let's do zero one zero 122 through june 30 22 by month and click on run report so now we are recognizing our revenue 10 60 and 30 in those months based on when i completed the work when i deliver the product when i uh performed the service that same concept as before so now you're gonna see that correctly being recognized and i'm gonna go back just so we can check real quick i'm gonna go back into my customers and see if any of these customers have an open balance and effectively avc customer seems to have some open balances so let's open up abc customers see what's going on in there we might have sort of multiple invoices happening in there let's go back here for a minute to customers and let's go to abc customer and let's go to that customer transaction list there we go transaction list and then let's filter these two open invoices and click on apply and notice that i have a 35 000 open invoice 5000 open invoice and 40 000 open invoice let's go let's check these out so let's go to these 35 000 open invoice that's for the customer deposit okay so those are the customer deposits that we didn't uh finish receiving the money for let's so that's just um that that one's fine because that was actually a payment and the 40 is a payment so this we're gonna let's just complete it let's receive the payment because let's say we did in fact receive that payment whenever the customer paid us and then we'll receive the payment for the 40 000. we should have done that earlier to avoid confusion here but again these are independent of the revenue recognition so we're going to receive those payments when they happen and the one thing i want to show you is the 5 000 open invoice this one we cannot receive a payment for because this one was originally only fifty five thousand dollars applied because back then we only had fifty five thousand dollars left in that liability account when i go back here to liability account click on run report and we have um five thousand dollars left remember at some point when we looked at this there was only fifty five thousand dollars available this is why we only applied fifty five thousand so we gotta go back to that open invoice and adjust that so we can not sort of proactively apply the other five thousands change this to negative sixty thousand and then click on save and close click on yes then i go back into my report click on run and that customer should now have a zero balance really important to kind of remember to go back and track those one of the things that definitely caused confusion it even confused me or or it at some point i couldn't tell the difference between a deposit invoice and a revenue recognition invoice that's because i had no way of knowing they're just all called invoices so one of the things you could do again is just as an option is you can take the invoices are purely revenue recognition invoices or purely deposit invoices and you can use a tag so i can go into tag and let's just create a new tag called invoice type or something like that so i'm going to create a tag called invoice type and let's do a new group let's do a new group called invoice type actually and then we'll call this one deposit invoice and then click on save and then we'll go back here into manage tags and i'll create a new tag and we're going to call it revenue recognition or project completion whatever you want to call it your invoice type and click on save so now i can clearly tag them depending on what they are so we have this is a deposit invoice for sure click on save and close let's look at the other invoice let's look at this one for 10 000. that was a revenue recognition invoice so we click on save and close okay so now we can use the tags so i can internally know okay what's this a payment invoice or is it revenue recognition invoice this is a deposit for payments and then we have let's do the other ones here this one for 60 000 was revenue recognition click on save and close okay and then we got was it the last one the thirty thousand that was a revenue recognition i think it was a 35 um thousand dollar one that should be labeled as a deposit did i finish doing that one no not perfect so deposit invoice and then click on uh save and close and then that way i when i look at the invoices when i'm looking at them when i'm expecting them it's very obvious to me the type of invoice that i'm looking at now i can run reports for tags so when i go into reports and i click and i type tags i can do transaction list by tag group and now i can see let's go type group invoice type and click on run report and then we'll do all dates and now we can see all the transactions that are here so we see all of our deposit invoices we see all of our revenue recognition invoices it's very clear um how these work and we can see them you know this is how we receive the money and this is how we got paid now on these ones that we got paid with these these are netting to zero because remember these mechanically we zeroed these out so you'll know that deposit invoices will always have a positive amount because as an invoice that we physically sent to the customer and we request to get paid this doesn't say open balance by the way let me click on the gear menu here and see if i can bring open balance i'll bring that here into the line open balance is still zero we still ended up receiving payments for all these this says total net invoice amount so this is how we got paid and then this one is how we recognize revenue although they're zeroing out trust me they are in the profit and loss correctly when they're supposed to all right well that's it that's the entire saga of dealing with prepayments and you saw both methods the prepayment the negative accounts receivable method this one this is used a lot more for construction and longer project-based type businesses we also combine the concept of revenue recognition as well so i hope you enjoyed this lesson again if you like this lesson or lessons like this i you want to take a look at the link i have in my description where you can subscribe to all my advanced content this is one of the few videos that are part of my advanced content that i'm making available in youtube because i want you to get a really good idea of what it's like to sit through my courses with all the detail right because that's my style i go through detail i say examples i show you when i made a mistake i show you where i wasn't sure experiment with the settings that's my type of content so in youtube typically i do much shorter things and if you actually got to the point that you watch up to this point you know that my thora videos are thorough so my subscription to advanced content to advanced training content will contain stuff that looks and feels like this anyway i hope you enjoyed it and see you on the next one