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PCI01
November 20, 2023
Question

Payments received in 2022 for invoices produced in 2023 counting as income in 2023 PnL

  • November 20, 2023
  • 2 replies
  • 0 views

Hello,

 

I am doing Cash Basis accounting. Doing accounting for a construction company and the way we do invoicing is different than standard transactions. An invoice is not produced first and then the payment is received. We obtain a down deposit (1/2 down) for the value of the work we are going to do. 

 

For instance, we have a job for a customer where we are doing a siding job. For ease of understanding, we obtained a "deposit check" of $10,000.00 for that $20,000.00 siding job on December 15th, 2022. 

 

By the time we get to the customer's job and as we work on this FIFO (first in first out basis), we are now ready to bill the customer and it is now October 9th, 2023. (10 months later).

 

This job is now ready for invoicing. I produce an invoice on October 11th, 2023 (2 days after work is completed) and send the invoice out dated 10/11/2023.

 

Once I receive that payment in full, to 0.00 out the balance, my PnL report shows that 20,000.00 was received in 2023, when in fact on a cash basis accounting system, it should show only 10,000.00 (remaining balance due) was received only in 2023.

 

Now I have *back dated* an invoice in 2022 and that fixes it, but here is the biggest issue. I can't invoice someone when we have payment terms when the invoice was created on 10/11/2022 (Date of deposit check) as from the homeowner's perspective, it shows that when they open the invoice once they recieved it in the mail, it is showing 10/11/2022, as a 10-month-old invoice. That screws up the payment terms.

 

I want the invoice to show the date it was mailed out, but the problem is if I change it to the current date, it pushes that income in 2022 forward into 2023 on the PnL.

 

How would it be possible to be able to have an invoice dated on the day you mail it out, but still making it so the payments received in 2022 & 2023 were accurately reflecting the income split in those years?

 

There has to be a way.

 

The current workaround (which is super annoying) is to update the invoice to the 2023 date, print it off, then change it back to 2022 and save it. I don't like this because it doesn't allow me to have payment terms that are accurate. 

 

*EDIT* - The other issue is the A/R Report. If I pull an A/R Report the day after I mail it out, it shows that the A/R is 10 months old. Thats an issue for us as a company to keep track of lein rights and the amount of days its been since we mailed out the invoice.

 

Greatly Appreciate your suggestions or if someone knows the right way to do this.

2 replies

J
JamesAndrewM
November 20, 2023

Welcome to the QuickBooks Community forum. I appreciate you sharing the details of your concern about your payments received in 2022 for invoices produced in 2023 counting as income in the 2023 P&L. With this detailed information, worry no more, as I've got suitable guidelines to help you resolve these issues.

 

First, set up an account for upfront deposits or retainers in your QuickBooks Desktop. Before that, don't forget to create a current liability account for them. It is because upfront deposits and retainers are liabilities, not income, even though you deposit the money into your bank account. Here is how:

 

  1. From Transactions, pick Chart of Accounts.

     

  2. Right-click and choose New from the pop-up menu in the Chart of Accounts window.
  3. Select Other Current Liability as the Account Type.

     

  4. Enter a name for the account (for example, Upfront Deposit) in the Name field.
  5. Click Ok.

 

 

Next, create an item to use when recording upfront deposits or retainers. Follow these steps:

 

  1. From the Lists menu, select Item List.

     

  2. Right-click and pick New from the pop-up menu in the Item List window.

     

  3. Select the purpose of the deposits you collect from the Type drop-down menu.
  4. You can select Service if you collect upfront deposits for services or Other Charges if you collect upfront deposits for products.
  5. Enter a name for the item (Upfront Deposit) in the Item Name/Number field.
  6. Choose the Upfront Deposit liability account you created from the Account drop-down list.
  7. Click Ok.

     

For detailed information on the entire process, refer to this article: Manage upfront deposits or retainers.

 

I'm adding these helpful articles to help in the future to have a closer look at your activities in QuickBooks:

 

 

Thoroughly following the entire process will resolve the issues about the payments received and in your A/R report. If you have more questions about your invoices and reports in QuickBooks Desktop, I will always be around to answer them. That's it for now. Enjoy your day!

BigRedConsulting
BigRedConsulting
November 20, 2023

@PCI01  RE: Once I receive that payment in full, to 0.00 out the balance, my PnL report shows that 20,000.00 was received in 2023, when in fact on a cash basis accounting system, it should show only 10,000.00 (remaining balance due) was received only in 2023.

 

That is not the way QuickBooks works. QuickBooks cash basis reports - correctly, I think - count the income on the first date it can be interpreted as being earned, which is the latter of the payment date or the invoice date.

 

Note that cash basis isn't at all the same as cash flow, a different reporting concept. With cash basis, everything is reported on the P&L in the normal way (even if cash is not impacted at all) except that for A/R and A/P, income and expenses are delayed - usually until the payment date...

 

However, when there is a prepayment, the accounting logic is that until you invoice the customer, it is not clear that you have actually earned anything. Up until that point the prepayment is basically a liability, not  income, since the books don't have any reference to income with which to associate the payment until the invoice is recorded, and in the prepayment case that is presumably on the date you actually earned the income.

 

Also, it would be difficult otherwise, because last year's P&L could never include the unapplied payment as income, because there is no invoice at all until this year. So, if the income was not counted last year (can't be as the invoice didn't yet exist) and isn't this year either (your proposal) then you'd never see it on any P&L in the normal reporting cycle.

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