Accounts Receivable Part 2: Customer Transactions in QuickBooks

I started off this series with showing to how to add a Customer in QuickBooks. This article is Part 2 of the Accounts Receivable series and will discuss Customer Transactions in QuickBooks. This article is designed to give you an overview of the Accounts Receivable Cycle, the Types of Customer Transactions, and how these transactions interact and link to one another.

Accounts Receivable Cycle

The Accounts Receivable Cycle is a fancy way of saying how your business interacts with and receives money from Customers on a monthly basis. The monthly cycle is shown in the following diagram:

Accounts Receivable Cycle

Customer Transactions in Quickbooks can be broken down into the Accounts Receivable Cycle and flow together as the image depicts. The month begins with sending a statement to the customer for all outstanding receivables, adds new estimates and agreements, which are then approved and performed or sent, new invoices are created, payment is received, and records are updated at the end of the month in preparation for the statements to be sent at the beginning of the next month.

Customer Transactions

The following is a breakdown of the different transactions that you will work with during the Accounts Receivable Cycle each month and includes Statements, Statement Charges, Finance Charges, Estimates, Purchase Orders, Order Approval Form, Shipping Documents, Services Agreements, Invoices, Sales Receipts, Remittance Notices, Received Payments, Deposits, Credit Memos, and Refunds.

Phase 1: Update Records, Issue Statements

  • Statements – statement of all outstanding invoices, credits, and charges on a customer’s account. Usually sent on a monthly basis as a way of reminder for past due invoices and to reconcile accounts between both companies. You can create statements in QuickBooks by going to Customers –> Create Statements and selecting the statement date (1st of the month), period date (previous month or go back to before the oldest outstanding invoice), and Customer. You can also create your own template for this. I will have another article explaining this in greater detail.
  • Statement/Finance Charges – penalties and interest accrued due to delinquent payment beyond the agreed due date. To enter Statement Charges as one-off charges, go to Customers –> Enter Statement Charges. If you want to set up Finance Charges for all customers, go to Edit –> Preferences –> Finance Charge –> Company Preferences and set this up here.

Phase 2: Estimates and Orders/Agreements

  • Estimates – estimates are prepared in a similar manner to invoices and are used in bids for work being performed. If agreed upon, estimates are used as a basis to create future invoices. Go to Customers –> Create Estimates.
  • Purchase Orders – Purchase orders are usually created on the Customer’s end, so you won’t be entering these into QuickBooks, but you may need to reference a Purchase Order from a Customer in an Invoice.

Phase 3: Approval and Shipment/Services

  • Order Approval Form - The Order Approval Form is not in QuickBooks either, but is a document created within a company to ensure that only authorized orders are fulfilled, and that credit is extended to Customers who have reached their credit limit. If you are having trouble keeping track of these authorizations, you may want to consider implementing procedures and documents such as this.
  • Shipping Documents - Again, this is not usually a QuickBooks document, but is often used and may be something that you utilize in your organization. You can combine the Invoice and Shipping Documents through the Packing Slip Template for an Invoice.
  • Services Agreements – These are formal agreements between two companies to offer services for a specified price. This is the basis for future invoicing when you receive a client. I would recommend that every service company use some sort of service agreement in setting up new Customers.

Phase 4: Invoice Customers

  • Invoices – Invoices are the most commonly used transactions in the Customer Center. An Invoice details products shipped to a Customer or services performed that are due to be paid. An important distinction to avoid confusion is that it is an Invoice if you are sending it, and a Bill if you are receiving it. To create an invoice, go to Customers –> Create Invoices and enter the Customer, date of the invoice, Purchase Order #, Terms, Items etc. More to come in a future article.
  • Sales Receipts - a Sales Receipt is used whenever payment is received when the transaction occurs. This combines an Invoice with Payment and can be created by going to Customers –> Enter Sales Receipts and filling it out like you would an Invoice, only including the Payment Method.

Phase 5: Remittance Notice, Receipt of Payment

  • Remittance Notices – These can be attached to the bottom of your Invoices if desired, and are sent back from Customers with Payment. If you want to download an Invoice template with a Remittance Notice, open an invoice and select Customize –> Manage Templates –> Download Templates, or you can design your own.
  • Received Payments - Whenever you receive a payment physically or electronically, you will need to go to Customers –> Receive Payments and select the Customer, Amount, Payment Method, Date, and Invoice(s) the payment applies to. You may also need to apply discounts and credits as necessary. More to come on this. If you don’t have an Invoice set up, to apply payment against, you either need to enter a Sales Receipt or enter the Invoice on the correct date and come back to receive payments again. This will set up the payments to deposit into the bank account.
  • Deposits – All money that comes in should be deposited into the bank account. This is even true of cash if possible as it creates a paper trail for you down the road to confirm that the money was received. In order to reflect these deposits in QuickBooks, make sure all Sales Receipts and Payments are recorded correctly and go to Banking –> Make Deposits. The pop-up will show you checks and cash that are waiting in Undeposited Funds to be deposited in the bank account. Select the items to be deposited, assign the correct bank account, and date, and save the deposit. If you have old payments that have not been deposited, you likely have an error in your bank account or Customer account, or you still have funds sitting somewhere that you need to find and get deposited.
  • Credit Memos – If a Customer receives broken merchandise, complains about services, or for whatever reason needs a reduction in their amount due, you may agree to enter a Credit on their account to be taken against future Invoices. This Credit is created using a Credit Memo, which is similar to an Invoice, only in reverse. Go to Customers –> Create Credit Memos/Refunds. Enter the amount credited to their account. A Credit Memo is also created if an overpayment is made during the Receive Payment transaction and you select to leave the overpayment as a credit on their account. You can apply credits to Invoices in the Receive Payments transaction.
  • Refunds – If the Credit Memo is not used against a future Invoice, you may select to refund the money to the Customer. If this is done, enter the applicable Credit Memo and on the top of the Memo select Use Credit to –> Give Refund. A check will then open up that you can make out to the Customer and set to print.

Bringing it Together

The different transactions described above that you will be using in QuickBooks all fall into the different parts of the Accounts Receivable Cycle. Each builds upon the other from Estimate to Shipment to Invoicing to Payments to Deposits to Credit Memos to Refunds to Updating Records to Monthly Statements. Go into your QuickBooks file and create a fictitious customer and play around with some of these transactions and watch to see the affect on the customer’s balance and how these transactions interact. After you have an idea, go ahead and delete the transactions and new customer so as to not affect your actual Accounts Receivable. Let me know if you come across any questions or issues that you need help understanding.

As we continue on in exploring Accounts Receivable, you will continue to see how all of these transactions and the Accounts Receivable Cycle come together. The goal here is to help you understand, manage, and make effective decisions regarding Accounts Receivable with your Customers so as to maximize income, reduce bad debts, and manage your Cash Flow. I hope this article was informative and helpful in building your knowledge of how to run your business. If so, share with a friend! If not, leave me a comment so that I can clear things up for you!

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