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Experienced Member

entering payments

Hi, I'm an independent music teacher, and some clients pay per semester. I receive a lump sum upfront in September that covers lessons from September through January. Is there a way to input this into quickbooks so that my quarterly and year-end reports reflect accurately that part of that payment is crediting forward into the new year? 

10 Comments
Senior Explorer *

Re: entering payments

Set up an item to sell called "Deposit from Customer" and code it to go to a liability account "Customer Deposits".  You then record the sale in September with two items. One is the lesson income for September for 1/4 of the amount and Deposit from Customer for 3/4 of the amount.

 

Then in October, run an invoice for the October amount that charges for lessons and subtracts from the deposit (enter as a negative number) and the total of the transaction will be zero, but for reporting purposes the income will be moved from the liability account to an income account.

 

Please note, however, that this is correct for the ACCURAL method of accounting.  If you are reporting taxes on the cash basis, then all of the income received in September is taxesd in the current year, even though you haven't earned the January portion yet.  

Established Community Backer ***

Re: entering payments

You don't have any Carryover.

 

Let's review Cash vs Accrual Basis. You, a Cash Basis reporting entity, get paid. When you get the funds, that is Income to you. That's the point of being Cash Basis = when the Money happened.

 

You don't have a trust bank requirement or a liability accounting function. If I prepay all of this in Dec, and in Jan we cancel the rest, your Refund to me is from Income, and that is called Contra-income and it reduces the income for that cycle.  Or, the charges for the upcoming classes are already paid, which you can do using a Prepayment process. But in your case, as a Cash Basis entity, the prepayment is still considered income when you get it. Using Invoices to show current charges and then a Credit Memo or discount to show prepayment is applied, is the same as 100% Discount to you, because the Cash Basis requirement = income when you get the Money. This is called Constructive Receipt. You don't get to defer the reporting of this as income. You got the money.

Established Community Backer ***

Re: entering payments

 This could be considered deferred revenue if you use the accrual accounting method. In this case it would be the portion of a company's revenue that has not been earned, but cash has been collected from customers as a prepayment. You should record the prepayment on your balance sheet as a liability. Deferred revenue is a liability because it refers to revenue that has not been earned for products or services that are owed to your customer.

 

With an accrual accounting method you would divide the total prepayment amount by the number of months of service it covers to get the monthly income amount. Then create a recurring journal entry to move that monthly amount from the "deferred revenue liability" account to the appropriate "income" account on the 1st of each month.

Established Community Backer ***

Re: entering payments

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Experienced Member

Re: entering payments

Right, obviously it still gets reported for tax purposes as income received this year. The issue is creating something that will verify income level for health insurance purposes. If they base my projected annual income on [large lump sum x] received now, it will look like I'm earning a lot more per month than I actually am. I need to show that [large lump sum x] is all the income I'm going to be getting to live on for the next 5 months and so average monthly income is actually [smaller amount y]. I've got a deadline for sending income verification, so can't wait until 5 months later when it will even out and be a more accurate picture. But I think using the method above should work for that. 

Experienced Member

Re: entering payments

Thank you! I think this is what I'm looking for

Established Community Backer ***

Re: entering payments

In the US, a cash basis entity never has Deferred Revenue, unless you are, for instance, a Landlord or Law Firm with a Trust Account Requirement.

 

You need to ask your own CPA or tax preparer, if you find you are getting conflicting guidance from the QB forum. This is not the place to get proper tax guidance, and I don't intend to get into a debate over this. You also can simply read what the IRS tells you.

 

As much as you want to help, @Regina_Lend_A_Hand_Accounting, it seems you should also consult a CPA to help you learn how the tax regulations apply differently to the different entity types, when you answer these questions. I have three CPAs I learn from, depending on if the business is a service provider, a governmental entity or charity, construction, etc. Because all you need to do right now is goggle:

irs accrual basis or read Pub 538.

 

Example:

When You Must Use Accrual

If you operate a sole proprietorship or small business, especially a service-related business that does not carry inventory, you'll be able to use cash accounting as long as your gross annual revenue does not exceed $5 million. Otherwise, you should use accrual accounting. It's compulsory to use the accrual method if your business meets any of the following three conditions:

  • You carry inventory
  • You are a C-corporation
  • Your annual average gross revenue exceeds $5 million per year.

To add color to these conditions, if you offer any credit to your customers and let them pay you later for the purchases, or if your business makes any purchases on credit, you should use accrual accounting. If you manufacture a product, buy goods for resale, sell merchandise or report any inventory that your business has on hand at the end of each year for taxes, the IRS requires you to use accrual accounting.

 

All you really need to do is look at your own Prior Year tax return, to understand this. Example: I was CFO for an architectural firm that required a prepayment deposit, typically 10% of the project budget. We designed up to 23,000 sf handcrafted log homes; you've seen some of them if you watch TV shows for Custom Log Homes. That means, at any time, we had $300,000 on deposit. And that had to be reported as Revenue, even if the project took 2-3 years, because that firm is a Cash Basis entity.

 

You need to do what the IRS requires. Not what you hope applies.

Established Community Backer ***

Re: entering payments

In the US, a cash basis entity never has Deferred Revenue, unless you are, for instance, a Landlord or Law Firm with a Trust Account Requirement.

You do not know whether this person uses a cash or accrual accounting method, nor did I. I was speaking of the accrual accounting method.

 

You need to ask your own CPA or tax preparer, if you find you are getting conflicting guidance from the QB forum. This is not the place to get proper tax guidance, and I don't intend to get into a debate over this. You also can simply read what the IRS tells you.

I do not give tax advice, nor did I. 

 

As much as you want to help, @Certified_Pro, it seems you should also consult a CPA to help you learn how the tax regulations apply differently to the different entity types, when you answer these questions. I have three CPAs I learn from, depending on if the business is a service provider, a governmental entity or charity, construction, etc. Because all you need to do right now is goggle:

irs accrual basis or read Pub 538.

 

You don't know if I am a CPA, you know nothing about my credentials. You need to stop attacking other Accountants on this forum. We offer QuickBooks advice on this forum, not tax advice. I have helped  a number of people on this forum as a certified professional.

 

Example:

When You Must Use Accrual

If you operate a sole proprietorship or small business, especially a service-related business that does not carry inventory, you'll be able to use cash accounting as long as your gross annual revenue does not exceed $5 million. Otherwise, you should use accrual accounting. It's compulsory to use the accrual method if your business meets any of the following three conditions:

  • You carry inventory
  • You are a C-corporation
  • Your annual average gross revenue exceeds $5 million per year.
  • This was increased to $25 million per year. Try to keep up on the changes.

To add color to these conditions, if you offer any credit to your customers and let them pay you later for the purchases, or if your business makes any purchases on credit, you should use accrual accounting. If you manufacture a product, buy goods for resale, sell merchandise or report any inventory that your business has on hand at the end of each year for taxes, the IRS requires you to use accrual accounting.

 

This has no relevance to the conversation. This advice was not asked for.

 

All you really need to do is look at your own Prior Year tax return, to understand this. Example: I was CFO for an architectural firm that required a prepayment deposit, typically 10% of the project budget. We designed up to 23,000 sf handcrafted log homes; you've seen some of them if you watch TV shows for Custom Log Homes. That means, at any time, we had $300,000 on deposit. And that had to be reported as Revenue, even if the project took 2-3 years, because that firm is a Cash Basis entity.

 

You make too many assumptions and judgement on this forum, and you are often wrong and write extremely long posts that have little or nothing to do with the ask for help. You have no idea how this person does their accounting or taxes.

 

You need to do what the IRS requires. Not what you hope applies.

This person was hoping for nothing but some feedback on their specific question. They can ask their personal accountant for additional advice if needed.

Established Community Backer ***

Re: entering payments

The 2017 Tax Act: "Pass-Through" Tax Provisions - Part 1

 

Under the Act, C corporations and partnerships with C corporation partners may use the cash method of accounting if their annual average gross receipts that do not exceed $25 million for the prior three-taxable-year period (not for all periods, as under prior law), regardless of whether the purchase, production, or sale of merchandise is an income-producing factor.

 

The Act retains the exceptions from the required use of the accrual method for qualified personal service corporations and for taxpayers other than C corporations. Thus, S corporations, and partnerships without C corporation partners, are allowed to use the cash method without regard to whether they meet the $25 million gross receipts test, so long as the cash method clearly reflects income.

Established Community Backer ***

Re: entering payments


@qbteachmt wrote:

You, a Cash Basis reporting entity


There is no such thing as a Cash Basis reporting entity, unless you are referring to the tax basis, which you do not say, and which the question does not say either.

In QB you can run reports on either cash or accrual basis, but only if you keep the books on the accrual basis