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Level 1

Liability Account for Customer Prepayment

Just not finding the answer I need in search so hoping some fine people in this community can advise me of the error in my ways.

 

I own an event venue and my clients rent the venue for private events.  Payment is made prior to the event (50% at reservation, 25% at 6-months, and 25% 3-months prior to the event) using Quickbooks invoicing.  I am running Accrual Method Accounting and want these payments to go into a Liability Account (Service named "Venue Rental Liability") until the day of the event when they will then change over to a Sales Account and count as income.

 

So far, I have no problem invoicing and collecting payment into the Liability Account.  The Liability Account grows and does not show up as profit.  But I cannot figure out how I am supposed to transfer the money out of the Liability and record it as a Sale/Income on the day of the event.  What works (but I feel like must be wrong) would be to create an expense from Checking to the "Venue Rental Liability" service; then create a Sales receipt (for the same amount) to Checking for the "Venue Rental Income" service.

 

Also, the Liability Account is just a ledger account and is not real.  In reality, all paid invoices are ending up in a Checking Account and are able to be spent, technically.  The Liability Account is just for tracking what my liabilities are and to manage tax reporting.

Solved
Best answer 12-12-2018

Accepted Solutions
Level 15

Re: Liability Account for Customer Prepayment


@hokie350lt1 wrote:

Just not finding the answer I need in search so hoping some fine people in this community can advise me of the error in my ways.

 

I own an event venue and my clients rent the venue for private events.  Payment is made prior to the event (50% at reservation, 25% at 6-months, and 25% 3-months prior to the event) using Quickbooks invoicing.  I am running Accrual Method Accounting and want these payments to go into a Liability Account (Service named "Venue Rental Liability") until the day of the event when they will then change over to a Sales Account and count as income.

 

So far, I have no problem invoicing and collecting payment into the Liability Account.  The Liability Account grows and does not show up as profit.  But I cannot figure out how I am supposed to transfer the money out of the Liability and record it as a Sale/Income on the day of the event. 

 

On the day of the event, create the sales receipt, list the event rental charges, as the last item list the deposit item, set the qty to negative one, enter the amount, save the paid receipt.

 

the negative amount reduces the liability account the item points to, and "pays" the sale.

 


 

View solution in original post

10 Comments
Level 15

Re: Liability Account for Customer Prepayment


@hokie350lt1 wrote:

Just not finding the answer I need in search so hoping some fine people in this community can advise me of the error in my ways.

 

I own an event venue and my clients rent the venue for private events.  Payment is made prior to the event (50% at reservation, 25% at 6-months, and 25% 3-months prior to the event) using Quickbooks invoicing.  I am running Accrual Method Accounting and want these payments to go into a Liability Account (Service named "Venue Rental Liability") until the day of the event when they will then change over to a Sales Account and count as income.

 

So far, I have no problem invoicing and collecting payment into the Liability Account.  The Liability Account grows and does not show up as profit.  But I cannot figure out how I am supposed to transfer the money out of the Liability and record it as a Sale/Income on the day of the event. 

 

On the day of the event, create the sales receipt, list the event rental charges, as the last item list the deposit item, set the qty to negative one, enter the amount, save the paid receipt.

 

the negative amount reduces the liability account the item points to, and "pays" the sale.

 


 

View solution in original post

Level 1

Re: Liability Account for Customer Prepayment

Thank you Rustler.  That appears to solve my problem.  As I'm also learning about Journal Entries, I'm now realizing that I could do a very similar thing with a Journal Entry.  Is there any reason that I would want to use a Sales Receipt instead of a Journal Entry?

Moderator

Re: Liability Account for Customer Prepayment

Hello hokie350lt1,

 

Thank you for posting in the Community. I'm here to provide information about using Sales Receipt and Journal Entry.

 

You use sales receipts if you receive full payment of the customer at the time of the sale. Ideally, you enter a sales receipt or a deposit if you don't issue an invoice.

 

However, you can still use the workaround provided by @Rustler in this kind of situation.  If you prefer to use the traditional accounting method, you may use a journal entry by entering debits and credits.

 

I'll include an article below since you're on the process of learning how to use a Journal entry:

 

How to create a journal entry

 

Feel free to reach out to me if you need anything else. I'll be on a lookout for your response concerning the process. You have a great day.

Level 15

No, not this: "I'm now realizing that I could do a very similar thing with a Journal Entry. "

No, you can't. You would be Bypassing Sales entirely, with a JE. You never use a JE for Sales, not for names, not for AR, and not for listing products/services. You also just bypassed Sales taxes, if required. And you just bypassed cash vs accrual basis reporting requirements.

 

I don't use Sales Receipt ending at 0. I use Invoice for the Actual Charges, and put the Prepayment service item on the Credit Memo as if you are refunding the customer, to apply it to the invoice for the event, as a type of "paid By" activity.

 

You also need to reconcile your Liability account to properly manage it by Name, to manage the remaining balance for a customer. JE is not used for this activity; customer transactions are used. Make a custom report filtered on only that Liability account, set it to total by Name. Make two versions as custom reports to save; one is titled All Activity and one is filtered on Cleared Status = No, and titled Current Balances.

 

As you apply prepayments to actual sales, run the Current Balances report. You see a name is at 0, so you Reconcile your Liability account using only and always Zero, for the ending balance. Clear only the activity for each name that showed as 0. That's why the Current Balances Report shows only Current Amounts still on hand for customers, and if you missed the mark for applying, refunding, or both needs.

 

Please see my attachment.

Anonymous
Not applicable

Re: No, not this: "I'm now realizing that I could do a very similar thing with a Journal Entry. "

Hi There -

 

For some reason I am just not grasping this. Can you help me? I am a CPA and am used to journal entries (obviously not preferred) and my bookkeeper does based on the transaction. So we have handled these prepayments via an incorrect hybrid of wrong. lol. 

 

We have a customer that signed an annual contract, billed in quarterly invoices dated 1/1, 4/1, 7/1, 10/1. They prepaid the full 10k on 11/6/18. My bookeeper applied their payment to all 4 open invoices, that she created ahead of time. I booked JE's on 11/6/18 to Dr. Rev and Cr. D/Rev, then on 1/1, 4/1, 7/1, 10/1 to Dr. D/Rev and Cr. Rev. But something just isn't jiving. There is no Credit to Revenue on 11/6 showing up, so  my total revenue is under for this contract because its just showing my 10k debit on 11/6, then the other invoices and JE's we made. I wonder if its just a lingering credit in the A/R aging? It is just all wrong.

 

Clearly we are doing this wrong. Can you apply your preferred method to my scenario? I just cannot seem to grasp it.

 

Thank you in Advance for your help.

QuickBooks Team

Re: No, not this: "I'm now realizing that I could do a very similar thing with a Journal Entry. "

Hey @Anonymous,

 

Your journal entry may have contradicted with the payment made to your invoices. Allow me to add a few more details and help you further.

 

When you booked the journal entry dated 11/6/18, did you enter the full amount the same as the payment?

 

If so, the amount on the journal entry may have caused why your revenue wasn't posting correctly on the report. To correct this, you'll need to delete the journal entry and link the payment to the invoice.

 

You may read this article about journal entries in your free time: Create a Journal Entry.

 

Don't hesitate to let me know if you have any other concerns about your invoices and their payments. I'll be here to assist you.

Level 1

Re: Liability Account for Customer Prepayment

Hello,

   Here is our scenario:

 

  We need to know a process for collecting a deposit (receipt or invoice or credit memo)for services not provided as of yet into a liability account ,  where later, at the time of the service,  we have the ability to create an invoice deducting a portion from the original deposit liability account and reflecting this amount in the sales report for the month.   This will process will be used until all the original deposit is depleted.

Thank you for your assistance.

QuickBooks Team

Re: Liability Account for Customer Prepayment

Hi there, @Andre-rangel,

 

I'd be glad to help you collect a deposit from customers before they perform any services.

 

Let me guide you through on how to accomplish this:

Step 1: Create a liability account to track retainers.

Step 2: Create a retainer item to receive deposits or retainers from your customers.

Step 3: Create a trust liability bank account.

Step 4: Create Sales Receipts for deposits or retainers.

Step 5: Invoice customers for deposits or retainers.

Step 6: Turn retainers into credits on invoices.

Step 7: Transfer funds from your liability account to the operating account.

 

For the detailed steps of each solution, you can read through this article: How to record a retainer or deposit.

 

If you need assistance with the solution above, please let me know. I'd be glad to lend a hand.

Level 1

Re: Liability Account for Customer Prepayment

It works!!!! thank you so much!!  :heart:

Content Leader

Re: Liability Account for Customer Prepayment

It's great to hear this worked for you, Andre-rangel. The Community always has your back if you ever need assistance again in the future. Take care.

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