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PT 1: Recording Deposits vs. Receiving Payments

by Kevin J. Harris,  the founder of QuickSolvers Inc, which provides which provides accounting, consulting and QuickBooks training to small businesses.

“If you do what you’ve always done, you’ll get what you’ve always gotten.” – Anthony Robbins

I have worked with over one hundred QuickBooks using businesses and individuals over the past two years.  Many QuickBooks users are doing themselves a disservice by continuing to use the system in ways that are causing more problems than not.  Over the next two weeks, I’ll tell you about the issues that I see on a regular basis, and painless approaches to ridding oneself of being ordinary.

Do you like to “Record Deposits” rather than “Receive Payments” when a customer pays an invoice? If so, you’ve probably noticed that one or more of the following is true of your QuickBooks data:

  1. Income is grossly overstated
  2. Invoices which have been paid still appear to be outstanding in the system
  3. Your receivables have gotten to the point where you laugh each time you look at a balance sheet
  4. Reconciling the deposits in your checking account is a mathematical challenge

By “Recording Deposits” instead of choosing “Receive Payments,” you’re essentially assuming your customer’s payment has already processed, and those funds are currently available in your bank.  This can be dangerous for small business owners that need to know exactly how many pennies they have in the bank.

Solution: When a customer gives you money to pay down an invoice that exists in QuickBooks, use “Receive Payments” to tie that payment directly to the invoice (the amount of the payment gets dumped into the asset account “Undeposited Funds.”)  Then when that payment, and hopefully others, makes its way to the bank, you “Record/Make Deposits” and lump any checks deposited together into one single transaction.

This small, but powerful step will ensure your books are correct, so you can spend the money you actually have, not the money that you’re promised.

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2 Responses

  1. Dee says:

    Makes sense. I have one question. After receiving the payment and then recording your deposit, when does that Undeposited Fund transaction turn into Income on your Balance Sheet. In the past I have created Invoices, received payments and then Make the Deposit only to see these transaction labeled as Undeposited Funds on my Balance Sheet instead of Income. What am I doing wrong?
    Thanks Kevin!

  2. Kevin says:

    Thanks for the question Dee. It sounds as if you’ve got the process down… Invoice > Receive Payment > Make Deposit. When you go to make the deposit, after you’ve already received the payment, you should get a pop-up box which shows you all payments that have been received but not yet deposited. This is where you choose the payments that are being deposited. Once you make the deposit, the payments received should be cleared out of Undeposited Funds. If that doesn’t happen, then you need to “verify data” in your file. You may be corrupted. As for the income, it depends on whether you’re using accrual or cash basis accounting. Income is realized the moment that you create the invoice (accural) or receive the payment (cash). You will see the income on your Profit & Loss Statement, not your Balance Sheet.

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