Need to move Customer Deposits to Income

For cash-basis accounting, income is counted when cash is received.

 

For accrual-basis accounting, income is recogized when it is earned, so when you are paid in advance it is Deferred income (customer deposit) until you do the work to earn income.

@AGMAIN wrote:

We are an S-Corp running on a cash basis. We get half down from our customers to get a job started and that money goes into a Customer Deposit that is a "other current liability".  When the total due on the bill is paid in full that money is then moved out of customer deposits and into income. The accountant is telling me the money in customer deposits is considered income for the year so I need to move it to income on Dec 31st. What is the best way to move it to income and then back into customer deposits so that when the remaining payment is made on an invoice my customer deposits account will still be accurate? 

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You never use the Deposit screen as your data input worksheet for Customers at all. There is no listing of Liability or Income here.

This is done using an Other Charge Item type, linked to Income; put it on a Sales Receipt when you Got the prepayment: "We are an S-Corp running on a cash basis. We get half down from our customers to get a job started and that money goes into a Customer Deposit that is a "other current liability"."

Later, put that same Prepayment Item on a Credit Memo when you are ready to show it is applied to an Invoice for the Actual Sales.

The Intuit Support Article is here:

QB Desktop Prepayments

QB - Perhaps I can clear up the confusion here. 

Who was talking about the customer deposit screen?  

I assume he was referring to the ACCOUNT called Customer Deposit,  since he said it is a liability account, better known to the rest of the accounting world as  "Deferred Revenue" (so I called it Deferred Income, to follow QB lingo).  Meaning customer paid him in advance.

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@qbteachmt wrote:

You never use the Deposit screen as your data input worksheet for Customers at all. There is no listing of Liability or Income here.

 

This is done using an Other Charge Item type, linked to Income; put it on a Sales Receipt when you Got the prepayment: "We are an S-Corp running on a cash basis. We get half down from our customers to get a job started and that money goes into a Customer Deposit that is a "other current liability"."

 

Later, put that same Prepayment Item on a Credit Memo when you are ready to show it is applied to an Invoice for the Actual Sales.

 

The Intuit Support Article is here:

QB Desktop Prepayments

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@AGMAIN wrote:

We are an S-Corp running on a cash basis. We get half down from our customers to get a job started and that money goes into a Customer Deposit that is a "other current liability".  When the total due on the bill is paid in full that money is then moved out of customer deposits and into income. The accountant is telling me the money in customer deposits is considered income for the year so I need to move it to income on Dec 31st.

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It depends

IF, if the deposit is refundable, then the accountant is wrong, cash or accrual basis, it is a liability until the job/sale is invoiced.

IF, if the deposit is not refundable, then yes it is income when received and should have posted as such on the date received, cash or accrual basis.

IF, if the deposit is refundable until the job starts and then become non refundable, then it is income on the day the job starts.

Please, if you are responding to me, use my name at the top of the post, in this community there is no other way to know who you are responding to.

Only you know which IF applies

Yes, of course, he must post bank deposit for the cash received, buts sounds like unearned revenue paid in advance from what he has explained.  Did not see him say if he is cash-basis for accounting or just for taxes, but either way, if he is paid in advance, sounds like accrual basis might be better for him to not have to pay taxes on money he has not earned yet.  

Keeping in mind that we are answering questions from users and not accountants or bookkeepers

users think of it as a deposit, they do not think of it as unearned revenue and using that terminology confuses them - at least that has been my experience, just food for thought.

enjoy the weekend :-)

He seems to understand it is in a liability account, which most people would never guess to do and he also knows he needs to move it to (revenue) income later, which is way ahead of most.

This is why I shared several account names that all mean the same thing:  Customer deposit, Deferred/unearned revenue/income; all= money paid in advance by customer. I see that QB Teachment calls it Prepayment and what he attached calls it Upfront Deposit, all same thing. 

That does not sound like a refundable deposit to me and yes only he knows the answer for sure but from what he described, my guess is that he is doing accrual-basis accounting (hence the liability) and that he may be doing cash-basis for taxes, which sucks for payments received in advance since then he must pay taxes on it before he even recognizes as income on his books.  

If that is the case, then his books remain the same as it is only revenue on cash-basis tax return.

Here's why this is wrong: "He seems to understand it is in a liability account, which most people would never guess to do and he also knows he needs to move it to (revenue) income later, which is way ahead of most."

It is Income for the cash basis entity; their CPA told them so. If we were to do one example, you can see that this concept for Moving is wrong: "so I need to move it to income on Dec 31st. What is the best way to move it to income and then back into customer deposits"

Let's do one Deposit that is $100,000 on July 15, 2017 and we treat it incorrectly as Liablity. On Dec 31, 2015 we want to Move it from liability to Income. This is supposed to have been reported as Sales, already. It isn't generically income, but Sales. We "move" it to income, for purposes of tax reporting. On Jan 1, 2018, we "move" it back to Liability. Then, in April 2018, we finally make a Sale, and we "remove" it from Liability to income again, but the Real Sale is the income, now.

Here's what is supposed to happen: A cash Basis entity got Funds in July 2017. That is part of their sales, and they also need to address if that is Taxable at that time or not. Then, we want to show in April 2018 that a different Sale has happened (our actual sale) and we want to show the customer does not need to pay again. That's why the Prepayment is handled properly the first time we get the money and later, that same Prepayment concept is used to Apply to the actual Sale as a Credit Memo, which results in functioning as a Discounted Sale, for a cash basis entity, because they already reported the Fund amount as sales and income in the previous year.

An Accrual Basis entity handles the prepayment item linked to Liability. It is Liability when they first get it and it Relieves the Liability when they list that prepayment amount on the credit memo in April to apply that to that Actual sale.

And that's what the Intuit Article teaches you, as well.

QB - Unanswered question in my mind is whether he is doing cash or accrual basis on books. Sounds like accrual-basis on books since he has in liability account, but maybe in error.  CPA seems to be doing cash-basis for taxes, from what he said he was told to do, but it seems to be a mix of accrual and cash basis accounting, so I think that is the first question to be answered.  

You may notice I never give specific instructions on QB functions, I always let you add that. I only answer accounting questions in general if I know answers, on what s/b done, not how. As you may recall, my clients can't use QB in our industry since it does not meet regs.  I may have one of 10 current clients on QB but only for a short time until they must pass audits. Used to use QB for my own accounting but I switched as of 2019 since I got a better deal.

QB terminology of sales and income, are meaningless to me since I refer to revenue and profit.

All my clients must do accrual-basis accounting so most do accrual-basis for taxes by 2nd year. 

So there is a period where they do accrual-basis accounting but do cash-basis for taxes. I'm not looking to learn how to do things on QB but know many people are so I try to help by answering first part of question to help, knowing you will respond with the how-to on QB.  

Procedure you describe below with prepayment and credit memo functioning as discounted sale sounds convoluted to me but if that is what is required to use QB, that is up to each client. In my industry, most clients must focus on the key criteria of their Govt contract customer so they don't have time to mess around with trying to get QB to do what is needed for basic accounting. Most functions needed cannot be done on QB, but I keep watch on QB to see if /when they do.

@qbteachmt wrote:

Here's why this is wrong: "He seems to understand it is in a liability account, which most people would never guess to do and he also knows he needs to move it to (revenue) income later, which is way ahead of most."

 

It is Income for the cash basis entity; their CPA told them so. If we were to do one example, you can see that this concept for Moving is wrong: "so I need to move it to income on Dec 31st. What is the best way to move it to income and then back into customer deposits"

 

Let's do one Deposit that is $100,000 on July 15, 2017 and we treat it incorrectly as Liablity. On Dec 31, 2015 we want to Move it from liability to Income. This is supposed to have been reported as Sales, already. It isn't generically income, but Sales. We "move" it to income, for purposes of tax reporting. On Jan 1, 2018, we "move" it back to Liability. Then, in April 2018, we finally make a Sale, and we "remove" it from Liability to income again, but the Real Sale is the income, now.

 

Here's what is supposed to happen: A cash Basis entity got Funds in July 2017. That is part of their sales, and they also need to address if that is Taxable at that time or not. Then, we want to show in April 2018 that a different Sale has happened (our actual sale) and we want to show the customer does not need to pay again. That's why the Prepayment is handled properly the first time we get the money and later, that same Prepayment concept is used to Apply to the actual Sale as a Credit Memo, which results in functioning as a Discounted Sale, for a cash basis entity, because they already reported the Fund amount as sales and income in the previous year.

 

An Accrual Basis entity handles the prepayment item linked to Liability. It is Liability when they first get it and it Relieves the Liability when they list that prepayment amount on the credit memo in April to apply that to that Actual sale.

 

And that's what the Intuit Article teaches you, as well.

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@Teri

How is this "unanswered?" " Unanswered question in my mind is whether he is doing cash or accrual basis on books"

When it is in the Original Question at the top: "The accountant is telling me the money in customer deposits is considered income for the year"

It helps to read everything here.

1) He says they do cash-basis but they made entry for accrual-basis. 

2) CPA said to move revenue to 2018 and he is questioning.

3) In my experience, clients often know more than their CPA. 

 

@qbteachmt wrote:

@Teri

How is this "unanswered?" " Unanswered question in my mind is whether he is doing cash or accrual basis on books"

 

When it is in the Original Question at the top: "The accountant is telling me the money in customer deposits is considered income for the year"

 

It helps to read everything here.

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Yes, I do read everything here and that is why I said this and why I am guessing they may be doing accrual-basis for books and cash-basis for taxes since he did not specify which he was referring to.

Why else would he be questioning including 2018 cash received in 2018 as not being 2018 sales?

Thank you to everyone that has responded to my post. You are all super knowledgeable and I appreciate all of it. I am going to have to try to read this very carefully to make sense of it all. You are correct that I don't speak accountant lingo very well! Yes the account listed on my chart of accounts that I was referring to is indeed called "customer deposits" and yes it could also be called "deferred income". Regarding the question of is the deposit refundable that depends. Sometimes it is, sometimes it isn't. It depends on the job (contracting). As far as I know we are reporting taxes on a cash basis but after reading all of these comments I think I need to take this to my accountant and get a better understanding. 

Just to clarify, you can do Taxes on Cash-basis or Accrual-basis.

You can also do Accounting on Cash-basis or on Accrual-basis.

These may or may not be the same, some companies switch to accrual-basis accounting for

exactly the reason you are asking about, which is to avoid paying taxes on deferred revenue.

Answers to the two questions above will determine how to handle this transaction on QB.

Interesting you have an accountant that does not know QB when that is the system you use.

qbteachmt 

I did confirm that our taxes were reported on a cash basis. Based on your scenario it sounds like the accountant is right that the money needs to be counted as income for the year.  If I am understanding correctly the initial deposit should not be going to a liability account but to a sales account. So I have it set up incorrectly in Quickbooks to begin with. If it was set up as a sales account I would not have to move it at year end because it would already be counted as income and not a liability? 

Agree, if CPA said you must count as revenue in 2018 for taxes, you are doing cash-basis Taxes.

I was asking if you were doing ACCOUNTING on cash or accrual-basis, since you posted entry that implied you were doing Accounting on accrual-basis, but it sounds like CPA decided that for you if you did not know the difference.  Was hoping to save you some taxes, or a least to pay next year.

Teri

Reading your responses I can understand why you would think it is accrual. We are actually doing cash basis for both accounting and taxes. Unfortunately it seems that the "customer deposits" should not be going to a liability account at all and it is just set up wrong in Quickbooks. It was set up this way before I started working here and now that I am aware it isn't right I will be trying to figure out how to fix it so everything records properly and hopefully I won't have to worry about moving it around at the end of the year! Thank you for your replies it has helped me have a better understanding of the way it should work.  

Hello AGMAIN,

Thanks for trying to follow the awesome suggestions of our Established Community Backers. I'm glad that they've helped you shed some light on how to move the customer deposits into your income account.

If you have other questions, we are happy to answer it for you. Just post it here as a comment and we'll take a look at it.​​ Have a good one.

No problem.  I just hate to pay taxes early myself so assume others do too. So if deferred revenue was common or majority of my business, I would want to do accrual-basis accounting to be able to pay taxes on that money in the next year. Unlikely your CPA would tell you this since that would be more work for him or her (many do not even recall accrual-basis accounting from what I see).

I assumed you were the biz owner, where most I work with are pretty picky about overpaying tax.

In my business, I teach accounting to small biz owners so I hate to see folks get half answers even if they only want to know minimum to complete a single transaction because that usually leads to confusion and problems later. I know this since most of my clients start out with huge mess in QB.

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@AGMAIN wrote:

"We are actually doing cash basis for both accounting and taxes".

This is the part I wanted you to understand since I raised the question to begin with.

Even if you don't know what that means, you should be aware there are differences.

 

"Unfortunately it seems that the "customer deposits" should not be going to a liability"

Right, not if you are doing cash-basis, since then you must count in the year received. 

 

"It is just set up wrong in Quickbooks. It was set up this way before I started working here"

Not sure if QB or your predecessor did, but it is (was) setup for accrual-basis accounting.

 

"I will be trying to figure out how to fix it so everything records properly."  Get some help.

QB Teachment sent instructions for how to make this work in QB so he probably knows.

 

"hopefully I won't have to worry about moving it around at the end of the year!"  

This is where I hate to leave you with half information. It is not that you would normally "move this at year end."  You must move it now because it is wrong for cash-basis.

 

Deferred revenue (only exists on accrual-basis) and is normally moved from liability to sales/revenue (income stmt) as earned.  (QB terminology differs from most accounting). 

 

 

Thank you for your replies it has helped me have a better understanding of the way it should work.  

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@Teri

Are you in the US? Because this is not allowed in the US: "I just hate to pay taxes early myself so assume others do too. So if deferred revenue was common or majority of my business, I would want to do accrual-basis accounting to be able to pay taxes on that money in the next year"

Your tax basis is set by what you filed with the IRS; there is a minimum revenue level at which you are required to be on Accrual basis. Otherwise, most small businesses run on Cash Basis. We don't get to choose how to treat prepayments; we treat them per the accounting requirement for our Basis for tax reporting. "Want to do" doesn't drive how to handle something.

In QB, you can manage using the accrual functions, but a Cash Basis entity is supposed to show this is Income. That means the invoice or sales receipt uses an item linked to Income, not liability. It's that simple. Follow the regulations that apply.

And since this person was Told what applies, and they pay that professional for their guidance, they should follow that guidance.

QB - Please stop saying this about accrual-basis accounting when you are incorrect with regard to ALL GOVT CONTRACTORS ARE REQUIRED TO DO GAAP ACCRUAL-BASIS ACCOUNTING, regardless of company size, even if they are one employee/owner company.  

There are millions of them and many use QB that hire me after they have been misled on QB. That is exact reason I have come here to try to prevent that from happening to so many of them.

"Your tax basis is set by what you filed with the IRS; there is a minimum revenue level at which you are required to be on Accrual basis. Otherwise, most small businesses run on Cash Basis." 

The key here is MOST.  Yes, out of all small businesses in the U.S. Govt contractors as small part.

Yes, I am in the US and have no interest in arguing IRS rules since anyone can look at IRS website to see that if you do Accrual-basis Accounting and Accrual-basis for Taxes, Deferred revenue is taxable in the year it is EARNED, not when cash is received. 

The company who asked this question had booked their Deferred revenue on accrual-basis in QB and CPA said they (have been) had to pay taxes on Cash-basis.  Normally, company owner decides how their accounting is done and of course should coordinate with CPA on how they will do taxes.

Hello,

I have paid invoices where the customer pays for a quarterly or annual basis in advance.  Right now my invoice defaults the full amount to revenue but that is incorrect because it needs to get deferred since the payment covers 3 or 12 months.  I think I need to make a J/E at the end of the month where i credit my liability account and debit income.  My question is., what is the best/easiest way to calculate at the end of the month what should my J/E be? Do i need to make a J/E for each client?  see attached for my product details

You don't have to create a journal entry, test32.

Please make sure to select a liability account as your income account when creating a deposit item. Once done recording it, you can apply it to an the invoice when the job has been done. That means, you can create multiple invoices and apply a portion of the prepayment/deposit when it's due. We just need to make sure to select the correct dates when recording them.

Everytime you apply it to an invoice, it'll deduct on the deposit until the total deposit will be consumed. Please check this guide about managing upfront deposits or retainers. You can follow the steps in the Apply upfront deposits or retainers to invoices section. After this process, the funds from your liability account, where you recorded the deposit, will be moved to your income account.

You can run a quickreport of the liability you used to check the balance. From Lists menu, select Chart of Accounts. Locate and right-click on the said account, and select QuickReport.

Comment again if you need more help with this. I'll be happy to serve you again.