How to properly enter a customer deposit for cash-basis reporting

BrettJ

I use cash basis for tax purposes. I had a customer prepay $12K in December for work to be done and I entered it as a payment, but because there was no invoice to pay against it simply went as a credit on their file (it is deferred revenue, but because I received it along with a 1099 for it later on, I had to pay taxes already).

Problem is that the payment does not show on any of the cash-basis P&L reporting.

I just entered an invoice in February for $4000 for this client and used part of that $12000 credit balance to pay it.

When I re-ran my 2020 P&L, it now shows a $4000 increase in Gross Sales dated the day I received that deposit.

This concerns me for tax purposes, because my next invoices to this client will be May/June, so if the same thing happens, my P&L for 2020 again changes (and I'm doing taxes now based on that).

To get around this, I just created an invoice for 12/31/2020 and used the entire deposit to pay that invoice, so I will need to keep a separate log of the credit balance.

What is the proper way in Quicken Home and Business to account for deposits on a cash-basis accounting method so they properly show in the reports?

Frankx

Hi again @BrettJ,

Here's how you should account for the transactions - on the cash basis - in Quicken:

1) Create an invoice in December - dated when you receive the payment - for the entire amount of the payment received - $12k.
2) Deposit the check in December - when you received it.
3) Do not create any other invoices in Quicken or otherwise.  There is no need for other invoices because you billed for the entire job in December and you collected and recorded that income - when received - in December.
That is how the "cash basis of accounting" works.

If you want to track your progress on the job - that needs to happen outside of Quicken - not because Quicken could not assist in that task,  but because if you start issuing invoices that are totally extraneous to the projects you are performing (remember - you already billed, collected and recorded the income for the project in December) your records will be duplicative at best and impossible to decipher by a third-party (think tax examination) in the worst case.

Any tracking that you want to do on the progress of the project - including work to be performed and costs related to that project compared to amounts you billed and collected - should be outside of Quicken in my view.

Hope this helps to clarify...

Frankx

Frankx

Hi @BrettJ,

As a cash basis taxpayer, and cash that you collect for any goods or services must be recorded as income on your tax return (and also as income on your books & records) when you receive the  funds.  Therefore in your situation, you should have entered the $12k as income in December - not as a "payment" on account.

Your workaround:
 BrettJ said:

To get around this, I just created an invoice for 12/31/2020 and used the entire deposit to pay that invoice, so I will need to keep a separate log of the credit balance.

is pretty much correct way to account for this situation in Quicken - only the invoice should have been dated the day you actually received the payment (or the day you deposited it) rather than on 12/31.  

You should not be "creating invoices" each time you complete another phase of the overall job because - while they may help you to understand where you are in terms of your progress on that project - they are duplicative invoices. 

Let me know of you have any followup questions.

Frankx

BrettJ

I understand that it should be entered as income, but how does one account for the "downpayment" so to speak? Is there anyway to do so within Quicken? It doesn't make sense that if you create an invoice dated 2/2021 but there is a payment dated 12/2020 that it only classifies that as income for cash-basis once you apply the partial payment to the invoice and then backdates the partial payment for cash-basis reporting.

Any money coming in should be treated as "income" in that case within Quicken, including an overpayment on an account.

Frankx

Hi again @BrettJ,

Here's how you should account for the transactions - on the cash basis - in Quicken:

1) Create an invoice in December - dated when you receive the payment - for the entire amount of the payment received - $12k.
2) Deposit the check in December - when you received it.
3) Do not create any other invoices in Quicken or otherwise.  There is no need for other invoices because you billed for the entire job in December and you collected and recorded that income - when received - in December.
That is how the "cash basis of accounting" works.

If you want to track your progress on the job - that needs to happen outside of Quicken - not because Quicken could not assist in that task,  but because if you start issuing invoices that are totally extraneous to the projects you are performing (remember - you already billed, collected and recorded the income for the project in December) your records will be duplicative at best and impossible to decipher by a third-party (think tax examination) in the worst case.

Any tracking that you want to do on the progress of the project - including work to be performed and costs related to that project compared to amounts you billed and collected - should be outside of Quicken in my view.

Hope this helps to clarify...

Frankx