Customer credit lingers after JEs to handle as Deferred Revenue

DwhoaTreas · ‎February 24, 2022

I am an HOA Treasurer, using QuickBooks Desktop Pro 2021.

A homeowner paid January 2022 dues in December 2021. I created a General Journal Entry (JE) dated December to debit Accounts Receivable for that customer and credit a Deferred Revenue account. Then I created a JE in January to move the funds from Deferred Revenue back to Accounts Receivable. Then I applied the funds to their January invoice.

Now when I create a new invoice, QBDT asks if I want to apply a credit in the exact amount from the above JEs to this customer's account. Why is there credit? It should be used up.

Am I making a mistake or is this a QuickBooks bug?

Rainflurry · ‎February 25, 2022

@DwhoaTreas

It is not a bug, it is how QBD Pro is designed. QB is able to handle journal entries (J/E) just fine, but you need to know there are limitations. I have companies that use J/Es for essentially everything except bills and bill payments and they work fine and produce accurate financial statements.

The issue here is that QBD Pro is designed to always credit (reduce) A/R as the offsetting entry for an overpayment of an invoice left as a credit for the customer. From an accounting perspective, that's not proper. Ideally, that overpayment should be a credit to deferred revenue, not a reduction in A/R. But QBD Pro does not allow you to do that AND leave a credit on the customer's account - at least not from my understanding.

So, you can do a J/E to move it to deferred revenue but you have to remember to reverse the entry if you use the credit on the customer's account because, at that point, the J/E is no longer applicable. A CPA will tell you to move the reduction in A/R to deferred revenue (debit A/R, credit deferred revenue). But, in doing so, in QBD Pro, you will still have a credit on the customer's account (from the credit memo issued from the overpayment - that didn't go anywhere) AND you have the journal entry that increased A/R and increased deferred revenue. My suggestion is to receive the payment on the invoice and leave that amount on the customer's account. True, it is not in deferred revenue (it is in a reduction in A/R) but at year-end, you can give that amount to your CPA and they can make the adjustment on your tax return. However, if you're an HOA that files Form 1120-H, your balance sheet is not part of your tax return anyways and the overpayment is not in sales.

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Rustler · ‎February 25, 2022

The mistake is using journal entries, they often do not work as intended and are left off of some reports.

Moving the a/r balance is not moving the income. Income is posted based upon the items used on the invoice. So all you did was change the balance sheet.

If your intent was to move the income to deferred revenue, delete the a/r journal entries, and enter another
debit sales income and credit deferred revenue
do the reverse after the new year

DwhoaTreas · ‎February 25, 2022

I needed to create year-end reports, and with HOA dues received in 2021 for 2022 invoices, I was getting a negative Accounts Receivable amount in the balance sheet. The JEs that our CPA told me to create moved that money tidily into Deferred Revenue on the balance sheet. When I created corresponding JEs in 2022, then applied the payments to invoices, the customer's outstanding balance appeared correctly. It's just that QBDT seems to be holding onto those dollars as credits that it wants to apply to new invoices.

I'm not an accountant, but I am a software developer and tester, and this smells like a QB bug. No?

Rustler · ‎February 25, 2022

No it is not a bug, intuit never designed this software to handle journal entries.

It seems you ignored my statement that moving a/r does not move revenue

DwhoaTreas · ‎February 25, 2022

Then I don't understand. QuickBooks is an accounting package that doesn't handle journal entries? The feature exists, and QB instructs people to use JEs, so they at least pretend they work. Setting that aside, let's start over.

I deposited checks in 2021. These were early payments for 2022 invoices. What should I have done with those deposits so the Balance Sheet would be correct?

Rainflurry · ‎February 25, 2022

@DwhoaTreas

It is not a bug, it is how QBD Pro is designed. QB is able to handle journal entries (J/E) just fine, but you need to know there are limitations. I have companies that use J/Es for essentially everything except bills and bill payments and they work fine and produce accurate financial statements.

The issue here is that QBD Pro is designed to always credit (reduce) A/R as the offsetting entry for an overpayment of an invoice left as a credit for the customer. From an accounting perspective, that's not proper. Ideally, that overpayment should be a credit to deferred revenue, not a reduction in A/R. But QBD Pro does not allow you to do that AND leave a credit on the customer's account - at least not from my understanding.

So, you can do a J/E to move it to deferred revenue but you have to remember to reverse the entry if you use the credit on the customer's account because, at that point, the J/E is no longer applicable. A CPA will tell you to move the reduction in A/R to deferred revenue (debit A/R, credit deferred revenue). But, in doing so, in QBD Pro, you will still have a credit on the customer's account (from the credit memo issued from the overpayment - that didn't go anywhere) AND you have the journal entry that increased A/R and increased deferred revenue. My suggestion is to receive the payment on the invoice and leave that amount on the customer's account. True, it is not in deferred revenue (it is in a reduction in A/R) but at year-end, you can give that amount to your CPA and they can make the adjustment on your tax return. However, if you're an HOA that files Form 1120-H, your balance sheet is not part of your tax return anyways and the overpayment is not in sales.

DwhoaTreas · ‎February 25, 2022

Thank you so much for explaining in detail! I appreciate your taking the time.

I'm floored that what I thought was the industry leader in accounting software, behaves improperly from an accounting perspective. Yikes. How can they get away with that? If accounting standards dictate behavior that QB's legacy code base can't handle, I'd say it's overdue for rework, with loads of unit testing to catch errors.

Yes, we are an HOA that files form 1120-H, so at least we're off the hook on providing a balance sheet to the IRS. I wanted to distribute a proper balance sheet to the neighborhood as part of annual reports, which is what sent me down this rabbit hole in the first place. Now that those reports have been distributed, I guess I'll have to delete the JEs that fixed the negative A/R value in order to move forward without weird credits on a handful of homeowners' accounts. I'll leave myself notes for the end of the year so that if I'm still treasurer, I'll avoid depositing anything early. If I were Intuit, I'd be embarrassed.

Thanks again for your helpful answer!

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Customer credit lingers after JEs to handle as Deferred Revenue