Why the profit and loss report does not match with my sales and my bank statements

I know why the payments on your Profit and Loss (P&L) report don't match, @xhandllc. I'll lay down the details below.

Regardless of receiving a payment of $1,500 in February, the $2000 will still appear in January, the month you opened the invoice for a total of $2000 with a $500 deposit.

Transactions are recorded when they occur using the Accrual basis in your P&L report, showing $2,000 as income in January. In contrast, the Cash basis records income based on when cash is received.

By default, QuickBooks categorizes deposit transactions as Undeposited Funds, a temporary holding account until payments are deposited into the bank. You can transfer your funds by making a deposit or transferring it.

For future reference, here's an article on saving your report's customization settings: Memorize reports in QuickBooks Online.

You can post anytime if you still have queries about the P&L or other reports in QBO. Please know the Community has your back. Take care always.

Thank you for your answer . Now I know a litter more about the custom reports and how to classify my customers deposit. But i still trying to figure out how can get on my reports my real Income. I just wanna know if its possible to get the information in the way i see it right.

Example:

Invoice A for $2000 total with $500 downpayment

- $500 donwpayment received on January

- Job was done later in February while we were waiting for a permit.

-Final $1500 payment was received on  February when the job was done and completed.

Invoice B for $5000 total with $1000 downpayment

- $1000 donwpayment received on January

- Job was done in January  and the customer pay later on February. 30 day balance due.

-Final $4000 payment was received on  February.

Actual behaivor using the Profit and Loss report using the Cash method

But from my point of view it is not real and what i would like to see is:

Why ?

The invoice A was a job done and complete on February so I dont want to see it on January becuase the $500 downpayment is a money that is not mine until i complete the job and can be refund is the job is canceled.

The invoice B was a job done in January and it should appears on February becuase was really completed on January just got a final payment delay.

I sincerally hope that your team can show a way to do this. I have trying for weeks and i have not be able to find any information about how to do it. I pay my team depending of my net earning and every week is a headache do it manual.

Thank you in advance.

I know a way to show your transactions according to your preference in the profit and loss report, @xhandllc. Let's work on this together so we can start recording them properly.

The reasons why reports display the amounts paid to the invoices on separate months are due to the following:

• The deposit amount was posted together with the invoice transaction created in January.
• The remaining balance was recorded as payment in February.

Since the Cash basis accounting method records income at the time you receive the payment, this explains why the deposit shows in January as this is considered income upon the creation of the transaction. You mentioned that the $500 downpayment is money that isn't yours yet until completing the job. Thus, we could have created a retainer deposit instead of including this within the invoice. 

Retainer deposit increases the amount in your liability account to show that the money isn't yours yet, and to avoid treating it as income until later.

To begin, let's create the retainer deposit entry by creating a liability account first:

1. Go to the Gear icon and select Chart of Accounts (COA).
2. Hit the New button to create one.
3. Enter an Account Name, and select Current Liabilities for the Account Type.
4. In the Detail Type dropdown, choose Trust Account-Liabilities.
5. Enter the Opening Balance and the as of date. Then, click Save.

Then, we'll have to create a retainer item to enter this in receiving the deposit:

1. Go back to the Gear icon and select Product & Services.
2. Click the New button, and select Service as the product type.
3. Enter a Name to easily identify it for your prepayment transactions.
4. Select Liability account under the Income account dropdown.
5. Then, select Save and Close.

If you need to separate the prepayments or deposits in a trust account, you can create a separate bank account which is a trust liability account. You can refer to Step 3: Create a trust liability bank account in this article: Record a retainer or deposit.

After that,  let's create a sales receipt for the retainer transaction amounting to $500 dated January to recognize the deposit amount. 

Then, edit the invoice you have created and remove the deposit at the bottom of the transaction. Add the retainer item as another line item in negative amounting to $500 to diminish the amount deposited by your client. I added snapshots below for your visual reference:

Lastly, receive the payment dated February to record this in QuickBooks and keep your financial data accurate.

Furthermore, you can export your reports to get a copy of them or use them outside QuickBooks. You can refer to the complete guidelines in this article: Export your reports to Excel from QuickBooks Online. 

Let me know if you need additional help managing your reports or even transactions from your company file, @xhandllc. I'm always around to lend a hand for help. Have a good one!

@xhandllc 

"I just wanna know if its possible to get the information in the way i see it right."

Your accounting method is determined by what method was selected when the business filed its first tax return.  You can't just decide to record income based on what you think it should be, you need to record based on what election was filed with the IRS.  If you wish to change it, you can file a Form 3115 with the IRS.  

Your point of view aligns with the accrual method of accounting.  If you're on accrual basis, then, yes, you should have $5K in Jan. income and $2K in Feb. income because, on accrual basis, you record income when it is earned.  In your example, you have $5K earned in Jan. and $2K earned in Feb. 

If you're on cash basis, income is recorded when cash is received so the down payments are income when received regardless of when the work is completed.  The way QB is handling those transaction is correct on cash basis.  You received $1,500 in down payments in January, hence you have $1,500 in income in January.  You received $5,500 in payments in February, hence you have $5,500 in income in February.

@xhandllc 

"I sincerally hope that your team can show a way to do this. I have trying for weeks and i have not be able to find any information about how to do it. I pay my team depending of my net earning and every week is a headache do it manual."

Another thought:

If you're on cash basis for tax purposes, you can use your cash basis P&L for tax purposes and your accrual basis P&L for internal use.  If you date Invoice A in Feb. and Invoice B in Jan., QB will show $5K in Jan. income and $2K in Feb. income on accrual basis.  

@xhandllc  RE:

The only way to get that to happen with only two invoices is to date Invoice A in February and then run the report on an accrual basis.

The issue is that you want both:

- Invoice A to appear as income only when you do the work in Feb, but it is recorded in January and you have received money for it in January (neither accrual nor cash methods will show that).

- Invoice B to appear as fully earned in January when you did the work, but you didn't receive payment for all of it in January (only the accrual method will do that).

It seems like you want to treat the customer down payments as deposits on account until you actually do the work and you want the income to be in the month you finally do that work (technically, if you do that work). The only way to make that happen reliably is using an accrual report and where the sale for the work is recorded in the month you do that work.

If correct, if you want the down payment to be treated as a deposit, then you can record it the way Intuit recommends lawyers do, as a retainer invoice and related payment (which will create two invoices for each sale). To record such an invoice, create and use a non-taxable item that uses a liability account as the 'income' account. Then use the item on a retainer/down payment invoice, and then receive the payment against it, which will pay it off.

Then, when recording the actual sale, in addition to the other things on that sale, use that new item again but this time with a negative amount, which will reduce the invoice total by the retainer/down payment amount.

@BigRedConsulting 

"If correct, if you want the down payment to be treated as a deposit, then you can record it the way Intuit recommends lawyers do, as a retainer invoice and related payment (which will create two invoices for each sale). To record such an invoice, create and use a non-taxable item that uses a liability account as the 'income' account. Then use the item on a retainer/down payment invoice, and then receive the payment against it, which will pay it off.

Then, when recording the actual sale, in addition to the other things on that sale, use that new item again but this time with a negative amount, which will reduce the invoice total by the retainer/down payment amount."

I'm not trying to take anything away from your very good post, but I think it's worth mentioning that the issue with that (and I wish QB would mention this) is that QB cannot calculate accurate cash basis income when using that method.  Also, for whatever reason, QB doesn't calculate the Gross Total on the sales tax liability report correctly with that method.  Another thing QB should mention.    

RE: QB cannot calculate accurate cash basis income when using that method.

I guess it depends on what you mean by accurate/what your expectations are, and what problem you're seeing. Notably, QuickBooks cash basis reporting is not the same as not cash flow.

- It is true that, in the case of a down payment for a future sale/job, where nothing is yet earned, the down payment applied to the retainer invoice will not appear as income on either basis. This is appropriate, I think, when accepting a down payment for a sale that has not yet been delivered (and may not ever be, really). 

Consider the case of a hotel that requires a pre-payment for the first night's say of a fully refundable booking. Is that cash basis income? I suspect not because a) the booking is for a thing in the future that hasn't been 'delivered' yet, and b) the customer can cancel and receive a full refund.

- Notably, a similar case where there is a prepayment applied to a future invoice, cash basis income will not show up on the payment date, but instead on the invoice date. The pre-payment is not considered earned until the invoice date (the latter of the invoice or payment date is used).

- When the second invoice is recorded and the 'retainer' item is used to pay down the invoice, that will create income on a cash basis as of the second invoice date. That can be inappropriate, but isn't in this case, I think, because the item represents the pre-dated payment and not some sort of random non-cash adjustment.

What do you see as inaccurate when using the retainer method?

RE: Also, for whatever reason, QB doesn't calculate the Gross Total on the sales tax liability report correctly with that method.

It seems that the taxable total will not change if the 'retainer' item is a non-taxable item. I'd expect the Gross amount to be the sum of the taxable and non-taxable amounts, and so in this case less than the taxable amount - because the non-taxable amount is a reduction in the sale. Are you seeing something else? (And as an aside, why do you care about the Gross amount?)

@BigRedConsulting 

Warning - long post!

BTW, I appreciate these discussions and hope I don't come off as confrontational.  

"I guess it depends on what you mean by accurate/what your expectations are, and what problem you're seeing. Notably, QuickBooks cash basis reporting is not the same as not cash flow."

I’m aware of the difference between cash basis income and cash flow. It doesn’t depend on what my expectations are. It depends on what the tax code says. The tax code is clear that cash basis taxpayers must include all amounts received as gross income in the taxable year in which they are actually or constructively received (Treasury Reg. §1.451-1). This includes advance payments on contracts regardless of refundability. If a future refund occurs, the refund reduces gross income in the tax year in which the refund is made.

"- It is true that, in the case of a down payment for a future sale/job, where nothing is yet earned, the down payment applied to the retainer invoice will not appear as income on either basis. This is appropriate, I think, when accepting a down payment for a sale that has not yet been delivered (and may not ever be, really)."

See above.

"- Notably, a similar case where there is a prepayment applied to a future invoice, cash basis income will not show up on the payment date, but instead on the invoice date."

That’s the issue. Cash basis income should show as of the payment date and will be if it’s recorded as a payment receipt or the retainer is mapped to an income account and the payment is received on that invoice.

"The pre-payment is not considered earned until the invoice date (the latter of the invoice or payment date is used)."

That’s true of accrual basis. Cash basis is not concerned with when income is earned, it’s only concerned with when it’s received. If a retainer item is used, QB can only calculate accurate accrual basis income. Cash basis would require an adjusting entry to move the liability to income for accurate income reporting.

"- When the second invoice is recorded and the 'retainer' item is used to pay down the invoice, that will create income on a cash basis as of the second invoice date."

Agreed, but on cash basis it should be recorded in such a manner that QB reports the prepayment as income when received and the remainder of the final invoice as income when received.

"That can be inappropriate, but isn't in this case, I think, because the item represents the pre-dated payment and not some sort of random non-cash adjustment.

What do you see as inaccurate when using the retainer method?"

That’s the reason for my post – to let the OP know that using a retainer item will create inaccurate cash basis income. Presumably, the OP is on cash basis since that is the crux of their concern but they haven’t replied so who knows. IMO, the OP would be best served recording the prepayments using Receive Payments and creating a customer credit. That allows QB to accurately report both cash and accrual basis income using the cash and accrual radio buttons. It will record Unapplied Cash Payment Income for the down payment as of the payment received date and the remainder of the final invoice amount as of the date of the payment on that invoice.

"I'm not sure why the taxable total would change if the item is a non-taxable item. I'd expect the Gross amount to be the sum of the taxable and non-taxable amounts, and so in this case less than the taxable amount as the non-taxable amount is a reduction in the sale. Are you seeing something else?"

I’m not sure either but it does. The Sales Tax Liability Report (STLR) is wonky and often doesn’t work as expected. The STLR doesn’t report the amount of the retainer item invoice or the invoice that has the retainer item applied to it in the gross total or the non-taxable total. The STLR does include the total amount of the final invoice in the gross total as well as the taxable/non-taxable split if the prepayment was recorded as a payment receipt and applied to the final invoice.

"(And as an aside, why do you care about the Gross amount?)"

Because all states that I'm aware of require the gross to be reported on sales tax returns.  The gross is made up of taxable and non-taxable, obviously.  However, when you use a retainer item to reduce the amount due on an invoice, only the net amount of the invoice shows up on the STLR and it shows as non-taxable even if taxable. The retainer item invoice mapped to a liability account doesn’t show at all. The tax amount is correct so that’s good but the gross total, non-taxable, and taxable amounts are incorrect. You should try it on your end and let me know if it works differently for you.

I don't disagree with you; you're probably right about all of what you write. I'll just comment on the things I know about...

RE: The tax code is clear that cash basis taxpayers must include all amounts received as gross income in the taxable year in which they are actually or constructively received (Treasury Reg. §1.451-1). This includes advance payments on contracts regardless of refundability.

QuickBooks Desktop doesn't do that.

With QB Desktop cash basis reporting, prepayment checks applied A/P Bills and customer prepayments applied to A/R Invoices are not recognized until the Bill or Invoice date.

Also, any unapplied amounts for both A/R and A/P payments will not show up on a cash basis P&L - ever.

Additionally, transaction that don't involve any cash can create cash basis events. For example, if you include both sales of new items and the return of an item on an invoice, that will create a cash basis event on the invoice date - even when no payment is received.

RE: Cash basis income should show as of the payment date and will be if it’s recorded as a payment receipt or the retainer is mapped to an income account and the payment is received on that invoice.

QB won't do that.

RE: That’s true of accrual basis. Cash basis is not concerned with when income is earned, it’s only concerned with when it’s received.

Yea. But how do you know that cash received on deposit for some future job will become income until it's applied to something - like an invoice - in the future? How do you know if the money is "received as gross income"?

It seems that some businesses know it will be income, some won't be sure, and some will know it is not income - even before it is applied. For example, if the eventual invoice includes sales taxes, other taxes, and other licensing fees or permits, which are paid for and billed to the customer, that's not income. Those fees might routinely make up 20 - 30% of the eventual sale, depending. As I think about this, the prepayment itself may be made to secure the permits and pay other fees. In this case, I expect, the business will know that the deposit on account is not "received as gross income".

RE: Agreed, but on cash basis it should be recorded in such a manner that QB reports the prepayment as income when received and the remainder of the final invoice as income when received.

With QB, that will only happen if the initial invoice and the first payment are on the same date, or the payment is dated after the invoice.

Maybe then using QB's cash basis reports for tax purposes isn't the best idea, at least if these data cases create a material difference across tax years.

@BigRedConsulting 

"QuickBooks Desktop doesn't do that.

With QB Desktop cash basis reporting, prepayment checks applied A/P Bills and customer prepayments applied to A/R Invoices are not recognized until the Bill or Invoice date.

Also, any unapplied amounts for both A/R and A/P payments will not show up on a cash basis P&L - ever."

Additionally, transaction that don't involve any cash can create cash basis events. For example, if you include both sales of new items and the return of an item on an invoice, that will create a cash basis event on the invoice date - even when no payment is received."

Why are you referencing QB Desktop?  This thread is about QB Online and Online handles these transactions differently than Desktop.  QB Online posts A/R payments received prior to an invoice to 'Unapplied Cash Payment Income' and posts A/P payments made prior to the bill date to ‘Unapplied Cash Payment Expense’ on cash basis. No cash basis event is posted in QB Online when you sell new items and return an item.

"Yea. But how do you know that cash received on deposit for some future job will become income until it's applied to something - like an invoice - in the future? How do you know if the money is "received as gross income"?"

It’s the user’s responsibility to record the prepayment accurately regardless. Invoice, deposit, sales receipt, whatever. It’s no mystery in the OP’s case what the payment is for – it’s a prepayment for a future service and the IRS is clear that it is income when received on cash basis.

Per the IRS: (link here )
Prepaid income. Prepaid income, such as compensation for future services, is generally included in your income in the year you receive it. However, if you use an accrual method of accounting, you can defer prepaid income you receive for services to be performed before the end of the next tax year.

The word “generally” is there because there are some exceptions for crop insurance, disaster payments, livestock loss, and a couple of others.

"For example, if the eventual invoice includes sales taxes, other taxes, and other licensing fees or permits, which are paid for and billed to the customer, that's not income. Those fees might routinely make up 20 - 30% of the eventual sale, depending. As I think about this, the prepayment itself may be made to secure the permits and pay other fees. In this case, I expect, the business will know that the deposit on account is not "received as gross income"."

Have you worked as an accountant (financial or tax) or as a bookkeeper? This is cash basis we’re discussing so, yes, it’s income (gross income as the IRS refers to it). It can’t be anything else. If you incur expenses on behalf of your customer and bill them for those expenses, you better record it as income otherwise you’ll deduct the fees as expenses and not have the offsetting income, thereby understating your net (and therefore taxable) income. The IRS frowns on taxpayers understating their taxable income.