How to automatically apply credits

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In our last article on how to spend less time in QuickBooks by turning on automation settings, we showed you how to pre-fill forms.

Next, let’s take a look at the automation setting Automatically apply credits.

First, what’s a credit and how do you create it?

A credit decreases what your customer owes you. And if your customer owes nothing when you create the credit, she’ll have a negative balance.

Here are two ways to enter credits in QuickBooks.

You issue your customer a credit

You issue a credit to record a return or to lower the amount owed for some other reason (such as customer dissatisfaction, etc.).

  1. Click Create (+) > Credit Memo.
  2. Enter the customer’s name, and what they’re returning or what you’re issuing a credit for.
Your customer overpays or pre-pays
  1. Click Create (+) > Receive Payment.
  2. If the amount received is greater than the amount due, the difference appears as a credit.

How to turn on the apply credits setting

Gear > Company Settings > Advanced > Automatically apply credits

Our example

Let’s say you have an open invoice for Mark Cho in the amount of $314.28.

QuickBooks apply credits

  • Invoice status: Open
  • Invoice balance: $314.28

Mark isn’t happy with his order. You decide to issue him a credit for $100, following the steps above.

What happens if the setting is turned ON

QuickBooks automatically applies the credit by creating a special payment transaction.

QuickBooks apply credits

  • Invoice status: Partial
  • Invoice balance: $214.28 ($100 credit automatically applied)
  • Credit memo status: Closed

If you click the payment, it looks like this:

QuickBooks apply credits

Notice the amount received is zero and the memo says “Created by QB Online to link credits to charges.”

When the setting is on:

  • A credit is automatically applied to the customer’s next invoice, assuming there are no older open invoices. Otherwise, the credit is automatically applied to the oldest open invoice first.
  • If the credit is more than the amount of the oldest open invoice, the remainder is applied to the next oldest open invoice.
  • When you receive a customer payment using the Receive Payment page, it doesn’t include a Credits checkbox, because credits are applied automatically. (Unless you view an existing payment.)
  • Credits appear as Closed on the Customer and Sales transaction pages.

What happens if the setting is turned OFF

The credit is left unapplied so you can apply it the next time you receive payments.

QuickBooks apply credits

  • Invoice status: Open
  • Invoice balance: $314.28
  • Credit memo status: Unapplied

When the setting is off:

  • When you enter a credit, it isn’t automatically applied to any open invoices.
  • When you receive a customer payment using the Receive Payment page, it has a Credits section (if the customer has credits). You can then choose which/when to apply credits and to which invoices.
  • If you don’t link any credits, the Customer Balance Detail reports shows that both the invoice and the credit memo have open balances. They also appear as Open on the Customer and Sales transaction pages.

Turn it on or off?

Depending on your particular business and situation, you may want to turn this on or off.

Turn it ON if:

  • You want to automatically apply credits to the oldest open invoices for the same customer.

Turn it OFF if:

  • You create a lot of invoices and credit memos for customers (e.g. you’re a manufacturer’s rep) and need to apply specific credit memos to specific invoices.

Consult your accountant if you’re not sure what’s best for your particular business or situation.

Notes

  1. To try this setting out with sample data, use the test drive and enter the examples in this article.
  2. Thanks as always to Travis and Real World Training for their detailed review!

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