Accounting with QuickBooks®
2013 Edition
Copyright© 2012 Bybee & Company, CPAs, PLLC
QuickBooks is a registered trademark of Intuit, Inc.
This book or parts thereof may not be reproduced in another document or manuscript in any
form without the permission of the publisher.
ii
Accounting with QuickBooks
Table of Contents
TAB
DESCRIPTION
PAGE
100
Introduction ..................................................................................................................... 1-1
200
Overview of Accounting and QuickBooks .................................................................... 2-1
300
Processing Sales and Receipts with QuickBooks ......................................................... 3-1
400
Processing Purchases and Payments with QuickBooks .............................................. 4-1
500
Processing Payroll with QuickBooks ............................................................................. 5-1
600
Making Accounting Adjustments with QuickBooks ...................................................... 6-1
700
Maintaining the General Ledger with QuickBooks ........................................................ 7-1
800
Preparing Financial Reports with QuickBooks .............................................................. 8-1
iii
iv
Introduction
1
Table of Contents
Section
Description
Page
100
Introduction .......................................................................................................... 1-1
105
Who Are the “Accounting Staff”? ....................................................................... 1-1
110
Introduction to QuickBooks® ............................................................................... 1-1
115
What Does the Guide Cover? ............................................................................... 1-2
120
How Should the Guide Be Used? ........................................................................ 1-3
TOC 1-1
Introduction
100
1
INTRODUCTION
100.01 This Guide is the only guide that teaches you both small business accounting and QuickBooks. In
addition, this guide presents and explains a practical step-by-step approach to developing an accounting
system with QuickBooks.
100.02 QuickBooks is vital to the success of many small businesses. Yet, minimal guidance and few
tools exist to help the typical QuickBooks users perform their duties. In most cases, employees are
forced to develop their skills by trial and error and constant on-the-job training, otherwise referred to as
the "school of hard knocks." This approach generally leads to periods of frustration and
miscommunication of the business' financial information before users finally become proficient in their
job.
100.03 This Guide provides the practical guidance to help fill this void. It provides how-to accounting,
payroll, and QuickBooks guidance to help users perform the various accounting and payroll tasks with
QuickBooks. It provides guidance on how to process the day-to-day transactions, maintain the general
ledger, and prepare financial reports. It also focuses on monthly, quarterly, and annual tasks.
This chapter introduces the Guide by addressing the following:




105
Who Are the “Accounting Staff’?
Introduction to QuickBooks
What Does the Guide Cover?
How Should the Guide Be Used?
WHO ARE THE “ACCOUNTING STAFF”?
105.01 In a small to mid-sized company, the accounting staff represents those persons handling the
accounting department’s day-to-day activities. The term generally encompasses all accounting
department personnel below the controller level, including data entry personnel, accounting clerks, and
degreed and nondegreed accountants. In companies with small accounting staffs, the controller’s or
head bookkeeper’s duties also frequently fall under the umbrella of the accounting staff’s role. The
accounting staff individuals are crucial to properly carrying out the traditional accounting functions of the
department.
110
INTRODUCTION TO QUICKBOOKS
110.01 QuickBooks is the best-selling, low-end accounting software product on the market today.
Developed specifically for small businesses, it is being marketed as a program that allows users with little
or no accounting knowledge to write checks, prepare payrolls, and manage their company’s finances
with ease. Those marketing claims, to a certain degree, are true—the software is intuitive and easy to
use. Users are discovering, however, that a basic knowledge of accounting is essential to effectively use
even the most well-designed accounting programs.
1-1
Introduction
110.02 This Guide is designed for both professional bookkeepers and accountants and their clients. It
includes step-by-step instructions on setting up QuickBooks. It also provides practical guidance on using
QuickBooks, focusing on the problems professional bookkeepers and accountants and their clients
encounter most frequently.
115
WHAT DOES THE GUIDE COVER?
115.01 This Guide covers the full range of the accounting staff’s duties in the typical small to mid sized
company. It provides guidance on how to process the day-to-day transactions, close the general ledger,
and prepare financial reports with QuickBooks.
115.02 This Guide also introduces you to QuickBooks—Intuit’s easy-to-use, powerful accounting system
for small businesses. This guide is designed to teach you how to use many of the features available in
QuickBooks Financial Software for Windows. The main focus of this guide is on how to use the features
in QuickBooks: Pro, but it also contains features available only in QuickBooks: Premier and higher
editions. This guide does not cover how to use the features in QuickBooks: Online Edition, QuickBooks:
Simple Start, or QuickBooks: Pro for Mac.
115.03 While this guide does not specifically address how to use QuickBooks: Enterprise Solutions,
many of the procedures described in the guide will work with Enterprise Solutions editions.
115.04 Most of the step-by-step instructions and screen captures in this guide were created with
QuickBooks: Pro and QuickBooks: Premier 2013. Your screens may differ, and some instructions may
vary slightly, if you are using a different edition.
The following presents an overview of each of the chapters:
 Chapter 2: Overview of Accounting and QuickBooks. This chapter summarizes
the key elements of accounting and QuickBooks. It discusses the types of source
documents, the day-to-day transaction processing covered in chapters 3 through 5,
and basic internal controls. This chapter is intended to give QuickBooks users the big
picture of the accounting process and QuickBooks before jumping into the more
detailed discussion in the rest of the Guide.
 Chapter 3: Processing Sales and Receipts with QuickBooks. This chapter
discusses the accounting behind and various steps required to process sales invoices
and cash receipts. The cash receipts discussion addresses processing of both mail
receipts and over-the-counter receipts. The chapter also covers various period-end
activities, such as reconciling the bank accounts and the subsidiary ledger.
 Chapter 4: Processing Purchases and Payments with QuickBooks. This chapter
provides the accounting behind and detailed guidance on processing vendor invoices,
recording the invoices in QuickBooks, making the payments, and performing periodend reconciliation and cutoff procedures. The chapter addresses common problem
areas, such as obtaining invoices, obtaining payment approvals, dealing with 1099
forms, and assigning proper general ledger accounts.
 Chapter 5: Processing Payroll with QuickBooks. This chapter begins by providing
the background and guidance on obtaining key payroll information and computing
wages. It then covers the steps required to process each period's payroll. The last
three sections address specific monthly, quarterly, and annual payroll activities
(including filing payroll tax reports) that must be completed.
1-2
 Chapter 6: Making Accounting Adjustments in QuickBooks. The previous three
chapters cover the processing of day-to-day transactions. This chapter provides
accounting behind and guidance on preparing common period-end journal entries
needed. It illustrates and explains the increases and decreases relating to recording
cost of sales, making accrual entries, adjusting asset valuations, recording
depreciation expense, and various other entries.
 Chapter 7: Maintaining the General Ledger in QuickBooks. This chapter builds on
the previous four chapters. After day-to-day transactions (Chapters 3 through 5) and
various adjustments (Chapter 4) have been posted to the general ledger, users are
ready to complete the general ledger closeout. It explains why and how you prepare
key general ledger supporting documents, review the general ledger, and protect and
store files and records.
 Chapter 8: Preparing Financial Reports with QuickBooks. This chapter provides
the accounting behind and guidance on generating the basic monthly financial
statements and modifying the format and presentation of the financial statements. It
also shows how to prepare selected other management reports.
120
HOW SHOULD THE GUIDE BE USED?
120.01 This Guide contains in-depth guidance on all key aspects of accounting, QuickBooks, and setting
up a QuickBooks accounting system. Because of the breadth of the materials and level of detail, it will
generally not be read from cover to cover. Instead, it will most often be used on an as-needed basis as
situations arise. As such, the Guide should be kept in an area within the accounting department that is
visible and accessible by all accounting staff. Some common expected uses for the Guide include the
following:
 Addressing day-to-day questions. The Guide will frequently be used as a reference
tool to answer accounting staff questions as they arise. For example, the accounts
receivable staff person may need answers on how to handle exceptions encountered
while processing cash remittances or auditing the daily cash register report. The
accounting manager may have questions on when and how to file various
government reports, such as payroll tax returns and sales tax returns. The detailed
table of contents in each chapter allows easy answers to accounting staff questions.
 Improving key functions. The Guide may also be used to improve key functions
within the accounting department. The staff person responsible for certain functions,
such as processing vendor invoices or closing the general ledger, would simply read
the related chapter topic and compare the guidance with the company’s existing
procedures. Any proposed recommendations should then be brought to the
controller’s attention.
 Cross training the accounting staff. The controller may use the Guide to cross train
staff to handle additional areas. This cross training will make it easier for staff to take
scheduled or unscheduled time off since one or more other staff persons can help out
temporarily.
 Training new staff. The Guide may be used to help select and train staff that are
new to a particular function within the accounting department. The guidance will
ensure the staff person receives a proper foundation. Once the basic foundation is
set, the new person will better understand why and how to carry out the company’s
policies and procedures in that area.
 Learning new skills. Accounting staff sometimes become bored and complacent
1-3
Introduction
because they work year after year in a single area with little challenge or
opportunities for improvement. The Guide can help those individuals expand their
accounting skills to prepare them for handling new accounting opportunities within the
company.
Each of the above uses for the Guide will eventually make the accounting staff as a whole more
knowledgeable and confident concerning the operations of all aspects of accounting with QuickBooks.
1-4
Overview of Accounting and QuickBooks®
2
Table of Contents
Section
Description
Page
200
Introduction .......................................................................................................... 2-1
205
Types of Financial Records ................................................................................. 2-2
210
Primary Accounting Processes ........................................................................... 2-6
215
Basic Internal Accounting Controls .................................................................... 2-10
220
Bookkeeping Skills Evaluation ............................................................................ 2-11
225
Introducing QuickBooks ...................................................................................... 2-13
230
Getting Around In QuickBooks ............................................................................ 2-16
235
All the Accounting You Need To Know ............................................................... 2-21
240
Exiting QuickBooks and Moving Between Company Files ................................ 2-25
245
Creating a QuickBooks Company ....................................................................... 2-26
250
Entering Company Information............................................................................ 2-27
255
Customizing QuickBooks for Your Business ..................................................... 2-30
260
Setting Up Your Business Accounting................................................................ 2-38
265
Completing Company File Setup ......................................................................... 2-43
270
Getting Help While Using QuickBooks................................................................ 2-54
275
Using QuickBooks Lists ....................................................................................... 2-56
TOC 2-1
Overview of Accounting and QuickBooks
200
2
INTRODUCTION
200.01 Understanding the overall accounting and QuickBooks processes is often crucial to the success
of any small business accounting function using QuickBooks financial software. For full-charge
bookkeepers and accounting staff who work with multiple accounting areas, getting a “big picture”
understanding is essential. Even accounting staff who work primarily in one or two areas, such as
accounts receivable or inventory, should have a basic idea of how their area interacts with others.
200.02 This chapter provides a broad overview of small business accounting and QuickBooks.
The following accounting sections are covered:
 Types of Financial Records. Section 205 briefly discusses the five types of financial
records (source documents, summary journals, subsidiary ledgers, general ledger,
and financial statements) used in most small businesses.
 Primary Accounting Processes. Section 210 covers the six accounting processes
found in most small business, consisting of (1) purchasing, accounts payable, and
cash disbursements; (2) sales, accounts receivable, and cash receipts; (3) payroll; (4)
inventories and costs of sales; (5) fixed assets and depreciation; and (6) general
ledger and financial statements.
 Basic Internal Accounting Controls. Section 215 provides a brief overview of the
basic small business internal accounting controls.
 Bookkeeping Skills Evaluation. Section 220 provides guidance to help accounting
managers and supervisors evaluate basic bookkeeping skills before making a hiring
decision.
The following QuickBooks sections are covered:
 Introducing QuickBooks. Section 225 introduces you to QuickBooks and discusses
the use of QuickBooks Forms, Lists, and Registers.
 Getting Around in QuickBooks. Section 230 discusses how you navigate your way
through QuickBooks. The Section addresses (1) how you find information to help you
get started, (2) managing your open windows, (3) using the menu bar, (4) using the
icon bar, and (5) making the Home page your starting point.
 All the Accounting You Need to Know. Section 235 discusses the accounting
basics you need to know to use QuickBooks effectively. The Section addresses (1)
chart of accounts, (2) assets, liabilities, and equity, (3) cash versus accrual
bookkeeping, (4) measuring business profitability, and (5) looking at the journal
entries for transactions.
 Exiting QuickBooks and Moving Between Company Files. Section 240 discusses
how you exit QuickBooks and move between company files.
 Creating a QuickBooks Company. Section 245 discusses creating a QuickBooks
company including (1) the EasyStep Interview, (2) navigating through the Interview,
and (3) starting the EasyStep Interview.
 Entering Company Information. Section 250 discusses how the EasyStep Interview
asks you questions about the type of business you own and how it uses your
answers to get you started quickly.
 Customizing QuickBooks for Your Business. Section 255 discusses customizing
QuickBooks for your business including (1) choosing your company industry, (2)
indicating what you sell, (3) entering sales information, (4) entering sales tax
information, (5) creating estimates, (6) using sales receipts, and (7) choosing
remaining preferences.
 Setting Up Your Business Accounting. Section 260 discusses setting up your
business accounting in QuickBooks including (1) choosing a start date, (2) entering
bank accounts and opening balances, and (3) reviewing the chart of accounts.
 Completing Company File Setup. Section 265 discusses completing your company
file setup including (1) adding customers, (2) adding a job, (3) customer and vendor
types, (4) adding vendors, (5) setting up additional accounts, (6) choosing a tax form,
(7) adding a new account, (8) adding items, (9) entering historical transactions, and
(10) learning more about the company setup process.
 Getting Help While Using QuickBooks. Section 270 discusses getting help while
using QuickBooks including (1) finding a topic in the onscreen Help Index, and (2)
finding answers from the How Do I menu.
 Using QuickBooks Lists. Section 275 discusses using QuickBooks lists including
(1) sorting lists, (2) merging list items, (3) renaming list items, (4) deleting items and
making list items inactive, and (4) printing a list.
205
TYPES OF FINANCIAL RECORDS
205.01 The accounting system in each company is responsible for distilling the hundreds or thousands of
monthly transactions into a manageable format (i.e., the month-end general ledger and financial
statements). The monthly financial transactions in most small businesses start with one or more source
documents (such as invoices, cash receipts, and time cards), which are summarized throughout the
month and posted to specified general ledger accounts. The ending monthly general ledger balances are
then used to generate the company’s financial statements.
205.02 Exhibit 2-1 presents an inverted pyramid to show how the various source documents and other
financial records are processed throughout each period to produce the company’s month-end financial
information. The following paragraphs briefly discuss the types of financial records shown in Exhibit 2-1
and the accounting department’s involvement with the records.
2-3
Overview of Accounting and QuickBooks
Exhibit 2-1
2-4
Flow of Basic Accounting Records
_______________________________________
Source Documents
205.03 Each accounting transaction begins with some type of source document, which differs depending
on the type of transaction. The source documents that account for most financial transactions include:
 Purchases. Vendor invoices and supporting documentation, such as purchase
orders, packing slips, and receiving reports, are the primary source documents for
purchases of inventory and various other goods and services.
 Sales. Customer sales invoices and supporting documentation, such as sales orders
and shipping documents, are the primary source documents for recording sales
transactions for companies other than retailers. Cash register tapes, cash receipt
forms, and daily cash-register reports are the primary source documents for most
small retail businesses.
 Cash receipts. Remittance advices and deposit slips are the primary source
documents for recording cash received from customers on credit sales. For retailers
and other companies that do not extend credit to customers, the cash receipt source
document also serves as the sales document.
 Cash disbursements. Company checks (accompanied by previously approved
vendor invoices and other documents supporting the purchase) are the primary
supporting document for recording cash disbursements.
 Payroll. Time cards, time reports, or other documents showing time worked by
employees are the primary supporting documents for recording payroll costs. Payroll
checks are the primary documents supporting the payment of payroll costs.
Whenever possible, appropriate controls (such as using prenumbered source documents) should exist to
help ensure that all transactions are captured and recorded. Section 215 briefly discusses some basic
internal controls that small businesses should consider.
Summary Journals
205.04 Once individual transactions have been captured on source documents, the accounting system
summarizes them by transaction type and general ledger accounts using a chart of accounts and
summary journals. The company’s chart of accounts identifies specific general ledger account numbers
for recording the various financial transactions. Once transactions have been coded with the appropriate
general ledger account numbers, the amounts are grouped together for general ledger posting using
summary journals.
205.05 Each of the basic types of source documents discussed previously usually has a separate
summary journal. Thus, summary journals generally include:
a.
b.
c.
d.
e.
Purchases journal.
Sales journal.
Cash receipts journal.
Cash disbursements journal.
Payroll journal.
205.06 Each of the journals generally include individual transaction amounts or quantities (and selected
other key source document information) and an aggregate general ledger posting amount. Depending on
the type of accounting system, the summary journal information may be presented in a single report or
more than one report. For example, some systems present detailed source document information (such
as customer name, customer number, amount received, and date) in a detailed batch-level report. The
2-5
Overview of Accounting and QuickBooks
system then summarizes the information for each batch and transfers it to a separate report for posting
to the general ledger.
205.07 Thus, summary journals not only provide a trail showing amounts posted to the general ledger,
but they also show the detailed components making up each general ledger posting. This detail makes it
easier for accounting personnel to locate original source documents when questions arise at a later date.
Subsidiary Ledgers
205.08 As the system posts summary journal totals to the general ledger, most systems also generate
subsidiary ledgers for selected balance sheet accounts, such as accounts receivable, inventory, property
and equipment, and accounts payable. These subsidiary ledgers show the composition of ending
general ledger account balances as follows:
a. Accounts receivable. The accounts receivable subsidiary ledger (often called the
“aged trial balance”) typically shows the balance owed by customer. Amounts owed
are typically divided into a current column and several past due columns.
b. Inventory. The inventory subsidiary ledger typically lists the quantity, unit cost, and
extended cost of each inventory part number. (Because of the time required to
maintain an inventory subsidiary ledger, some smaller companies do not maintain an
ongoing subsidiary ledger. Instead, they periodically prepare an inventory listing by
counting the inventory on-hand.)
c. Property and equipment. The property and equipment subsidiary ledger shows the
ending asset and accumulated depreciation balances for each fixed asset. The
subsidiary ledger may also show the current depreciation charge for each asset.
d. Accounts payable. The accounts payable subsidiary ledger lists the balance due
each vendor by invoice. Depending on the system, the ledger may also be
segregated by the payment due date.
205.09 Subsidiary ledgers are the key financial records used for managing each of these balance sheet
accounts on a day-to-day basis. Thus, it is crucial that accounting staff persons post individual
transactions accurately and on a timely basis to ensure that the subsidiary ledgers remain useful and in
agreement with the related general ledger balances.
General Ledger
205.10 As mentioned previously, summary journals group amounts by general ledger accounts so the
system can post and update the general ledger. Accounting personnel also update the general ledger by
preparing manual journal entries for transactions (such as prepaid amortization or period-end accruals)
that are not accumulated and posted automatically through summary journals.
205.11 The general ledger lists the period-end balance for each general ledger account. Depending on
the type of general ledger system, it may also show month-to-date or year-to-date activity totals posted to
each general ledger account.
205.12 General ledger accounts are comprised of assets, liabilities, and equity accounts (called balance
sheet accounts) and revenue and expense accounts (called income statement accounts). For the
general ledger to be “in balance,” the period’s total debits must equal the total credits. Also, the
revenues less expenses must equal the net income added to retained earnings.
2-6
Financial Statements
205.13 Financial statements simply represent a further summarization and grouping of period-end
general ledger amounts into designated financial statement captions (such as cash, trade receivables,
inventories, trade payables, revenues, and cost of sales). The accounting software’s report writer
package defines which general ledger accounts are grouped into which financial statement captions.
205.14 Common financial statements include a balance sheet, income statement, and statement of cash
flows. The balance sheet and income statement are taken directly from the corresponding general ledger
accounts. The cash flow statement is typically derived from the balance sheet and income statement.
210
PRIMARY ACCOUNTING PROCESSES
210.01 Accounting activities generally fall into one of several natural accounting processes (or cycles).
Accounting personnel may be responsible for all or only a part of a cycle. In either case, it is important
that they have at least a basic understanding of the complete cycle. Primary cycles include:






Sales, accounts receivable, and cash receipts.
Purchasing, accounts payable, and cash disbursements.
Payrolls.
Inventory and cost of sales.
Fixed assets and depreciation.
General ledger and financial statements.
Each cycle is briefly discussed below.
Sales, Accounts Receivable, and Cash Receipts
210.02 This process or cycle consists of selling goods or services and receiving payment from
customers. The accounting department’s role in this process generally consists of the following activities:
 Data entry (invoices). Entering the sales invoices (including any debit or credit
memos) into the accounting system to produce the sales journal.
 General ledger posting (invoices). Posting the sales journal to the aged trial
balance and the applicable general ledger accounts (debit to accounts receivable and
credit to sales).
 Data entry (customer remittances). Applying customer payments against
applicable open sales invoices to produce the cash receipts journal.
 General ledger posting (remittances). Posting the cash receipts journal to the aged
trial balance and the appropriate general ledger accounts (debit cash and credit
accounts receivable).
 Reconciliation. Keeping the aged trial balance in balance with the ending general
ledger balance.
 Account maintenance. Setting up new customer accounts and credit limits and
deleting/changing existing accounts.
210.03 A crucial part of this process is ensuring that invoices, remittances, and any adjustments are
posted accurately and on a timely basis. If the timing is delayed or transactions are posted inaccurately,
the aged trial balance will become unreliable for managing receivables, customer complaints will become
common place, and financial statement accuracy could diminish.
2-7
Overview of Accounting and QuickBooks
Purchasing, Accounts Payable, and Cash Disbursements
210.04 This process or cycle consists of the purchase of goods or services and the subsequent payment
of those goods or services. The accounting department’s role in this process generally consists of:
• Account coding. Ensuring that vendor invoices have been coded with the
appropriate general ledger account numbers based on the approved chart of
accounts. Proper account coding requires accounting personnel to have a strong
understanding of the company’s chart of accounts.
• Data entry (invoices). Entering the vendor invoice amounts (including any debit or
credit memos) into the accounting system to produce the purchases journal.
• General ledger posting (invoices). Posting the purchases journal to the accounts
payable subsidiary ledger and the various general ledger accounts. For instance,
recording a debit to the appropriate asset (inventory or fixed asset) or expense
accounts and a credit to accounts payable.
• Check preparation. Selecting invoices to pay and preparing checks for paying
specific vendor purchases to produce the cash disbursements journal.
• General ledger posting (checks). Posting the cash disbursements journal to the
accounts payable subsidiary ledger and the general ledger (debit to accounts payable
and credit to cash).
• Reconciliation. Keeping the accounts payable subsidiary ledger in balance with the
ending general ledger balance.
• Account maintenance. Setting up new vendor accounts and deleting old accounts.
210.05 Ensuring that vendor invoices have been recorded accurately and coded with the appropriate
general ledger account numbers are crucial steps in this process. Any undetected errors at this stage
could affect vendor payments, financial statement accuracy, and tax return amounts. Thus, accounting
personnel should exercise great care at this stage and follow established internal controls (see Section
215).
Payrolls
210.06 The payroll process consists of processing payrolls and remitting amounts due to employees,
government, and others (health insurers, retirement plan trustees, etc.). The accounting department’s
role in this process generally consists of the following activities:
 Time cards processing. Checking mathematical accuracy of time cards.
 Data entry. Entering time distribution by employee, including hours worked, time off,
and overtime hours into the accounting system to produce the payroll journal.
 General ledger posting (payroll). Posting the payroll journal to the general ledger.
For example, debit compensation expense and credit liability accounts for net payroll
and payroll taxes.
 Check preparation. Preparing and distributing employee payroll checks to produce
the payroll check register.
 General ledger posting. Posting the payroll check register to the general ledger.
For example, debit liability accounts and credit cash.
 Tax reports preparation and deposits. Preparing payroll tax reports and making
required tax deposits to state and federal agencies.
 Account maintenance. Setting up new employees, deleting terminated employees,
changing pay rates and tax rates, revising employee withholding amounts, etc.
2-8
210.07 Preparing timely and accurate paychecks is obviously important to accounting personnel, since
to do otherwise will often bring an immediate response from affected employees. Also, failing to file
accurate and timely payroll tax reports subjects the company and key employees (possibly even some
supervisory accounting personnel) to tax penalties.
Inventories and Cost of Sales
210.08 The inventory and cost of sales process consists of properly accounting for incoming and
outgoing inventory. The extent of the accounting department’s involvement in this area varies greatly with
the nature of the company’s business (retailer, wholesaler, or manufacturer) and the type of inventory
accounting system. In many small businesses, professional accountants (both internal and external) are
heavily involved in this area because of its complexity and importance to the business’s success.
210.09 The accounting department’s role in this process generally includes:
• Data entry (purchases). Entering inventory purchases is typically done as part of the
purchasing process discussed in Paragraphs 210.04-.05. In addition, posting the
purchases journal typically updates the inventory subsidiary ledger if one is
maintained.
• Cost of sales. As mentioned above, the method used to record cost of sales varies
greatly among small businesses. If a separate inventory subsidiary ledger is
maintained, cost of sales is often automatically recorded by the accounting system
(as part of the sales and accounts receivable process) when customer sales are
posted. If a separate subsidiary ledger is not maintained, cost of sales is often
recorded with a manual journal entry at month end by applying an estimated cost of
sales percentage to sales for that month. In any event, accounting personnel should
ensure that all recorded sales have a matching recorded cost in the same period.
• Inventory transfers. Adjusting the detailed inventory records (if any) and the general
ledger for transfers of inventory between locations or the disposal of excess,
obsolete, or damaged inventory.
• Reconciliation. Keeping the inventory subsidiary ledger in balance with the ending
general ledger balance.
• Account maintenance. Setting up new inventory parts in the system and changing
part numbers of existing inventory items.
210.10 Accounting for inventories and cost of sales is a complex area that varies greatly from one
company to the next. Because most accounting staff personnel have minimal involvement in this area,
this Guide does not provide in-depth discussion of this process. Accounting staff persons are
encouraged to seek the advice and help of the controller or outside accounting professional when
dealing with inventory and cost of sales accounting issues.
Fixed Assets and Depreciation
210.11 The fixed assets and depreciation process consists of recording fixed asset additions and
deletions and related depreciation. The accounting department’s role in this process generally includes:
 Purchases. Recording fixed asset purchases in the general ledger is typically done
as part of the purchasing and cash disbursement cycle discussed in Paragraphs
210.04-05. Purchases are usually posted to the general ledger by debiting the
appropriate fixed asset account and crediting accounts payable.
2-9
Overview of Accounting and QuickBooks
 Subsidiary fixed assets ledger. If the company’s fixed asset system is integrated
with the company’s accounting system, the fixed asset subsidiary ledger is generally
updated at the same time fixed asset purchases are posted to the general ledger.
Otherwise, additions and retirements typically must be reentered into a separate
stand-alone fixed asset/depreciation system.
 Depreciation. Calculating and recording depreciation for each asset is typically done
by using an automated fixed assets/depreciation system. However, companies with
relatively few fixed assets sometimes use manual or automated spreadsheets to
track fixed assets and related depreciation. In addition, those companies make a
manual journal entry to record the depreciation provision. Companies generally must
make separate depreciation calculations for tax purposes.
 Retirements. Recording fixed asset retirements (sales, trade-ins, or disposals) is
typically posted to the general ledger via a manual journal entry.
Although this Guide does not contain a separate chapter on fixed assets, aspects of the fixed asset
process are covered in various chapters throughout the Guide.
210.12 Accounting personnel have two primary challenges in the fixed assets and depreciation area.
They must ensure that the subsidiary fixed assets ledger stays in balance with the general ledger control
account and that depreciation calculations comply with financial statement rules and ever-changing tax
requirements.
General Ledger and Financial Statements
210.13 The general ledger process consists of posting the period’s transactions to the general ledger and
preparing financial statements. The accounting department’s role in this process generally includes the
following activities:
 Posting summary journal entries. Entries from summary journals (purchases,
sales, cash receipts, cash disbursements, payroll, etc.) are typically posted by the
system throughout the month as batches of transactions are processed.
 Preparing manual Journal entries. Preparing and posting manual journal entries
varies depending on the type of entry. The entries may be either recurring journal
entries that must be made each month or adjusting journal entries that are made as
needed to correct any errors that are detected.
 Generating the trial balance. The trial balance is simply a numerical listing of all
general ledger accounts in account number order. Accounting personnel generate the
general ledger trial balance to ensure total debits equal total credits.
 Reconciling subsidiary ledgers and supporting workpapers. As discussed
previously, comparing general ledger control accounts with subsidiary ledgers
(accounts receivable, inventory, property and equipment, and accounts payable) and
any supporting workpapers (bank reconciliation, investment schedule, prepaid
expense schedule, etc.) is crucial to ensuring the accuracy of the general ledger.
Accounting persons should investigate out-of-balance situations and prepare
adjusting journal entries when needed.
 Closing out. Closing out the general ledger involves making an entry to zero out all
income statement accounts for the period (month or year) and posting the offsetting
entry to the balance sheet’s retained earnings account. After making this entry, the
balance sheet should be in balance (in other words, assets should equal liabilities
plus equity).
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 Producing the financial statements. Producing the financial statements is done
after the general ledger has been prepared and is in balance. As mentioned in
Paragraph 205.14, computer-generated financial statements typically include a
balance sheet and an income statement.
210.14 Accounting personnel’s main concern in preparing the general ledger and financial statements is
ensuring that all entries have been accurately posted. A careful review of the trial balance and
preliminary general ledger and a comparison to subsidiary ledgers and supporting workpapers will often
reveal additional adjusting journal entries that are needed to correct errors.
215
BASIC INTERNAL ACCOUNTING CONTROLS
215.01 Although accounting staff persons are typically not directly involved with ensuring appropriate
internal accounting controls exist, a basic understanding of small business controls is helpful in carrying
out day-to-day duties. This knowledge will also help accounting staff persons better understand why they
are asked to perform certain procedures.
215.02 This section discusses the following general categories of internal accounting controls:





Segregation of duties.
Restricted access.
Document controls.
Processing controls.
Reconciliation controls.
Segregation of Duties
215.03 Segregation of duties involves allocating bookkeeping tasks among personnel so that one
individual does not have the ability to make an accounting error (either intentionally or unintentionally)
and also cover it up.
215.04 The principle of segregation of duties implies that the person with physical access to cash or
other moveable assets (investments or inventory) should not also be involved with the related
recordkeeping. For example, the person opening the mail and depositing customer remittances should
not also be responsible for maintaining the accounts receivable subsidiary ledger. In addition, the person
responsible for writing checks should not also have responsibility for maintaining the accounts payable
subsidiary ledger. Whenever possible, bank accounts should be reconciled by someone with no other
cash receipt or disbursement functions.
215.05 Unfortunately, the limited number of accounting personnel in most small businesses often makes
it difficult to adequately segregate incompatible duties. In this situation, the services of other
nonaccounting personnel, such as the receptionist or even the business owner, can sometimes be used
in a limited capacity to provide some segregation. Also, a closer involvement in the day-to-day affairs by
the small business owner and controller often partially compensates for a lack of segregation of duties.
Restricted Access
215.06 Restricted access is a control category closely related to segregation of duties. Not only should
bookkeeping duties be segregated whenever possible, but physical access to valuable and moveable
assets should be restricted to only authorized personnel.
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Overview of Accounting and QuickBooks
215.07 For example, access to warehouse and other inventory should be restricted to only those people
with responsibility for maintaining inventory. In almost all instances, salespersons should not have
access to inventory locations. Also, inventory should not be shipped from the warehouse unless
accompanied by appropriate shipping documents. In addition, unused checks and petty cash should be
kept in a locked filing cabinet in a secured area.
Document Controls
215.08 Since source documents initiate the recording of transactions, it is essential that adequate
controls exist to ensure that the accounting system captures all source documents. Source document
controls principally include using prenumbering documents and accounting for the numerical sequence of
those documents.
215.09 Common prenumbered source documents include company checks, receiving reports, purchase
orders, sales invoices, debit and credit memos, shipping documents, and customer receipts for “over the
counter” sales. For retail businesses, a cash register is another basic tool for controlling cash receipt
source documents and currency.
Processing Controls
215.10 Once documents enter the accounting system, processing controls help ensure that the
documents are processed accurately. Common processing controls include:
 Batch controls. Preparing batch control totals of key source document amounts to
ensure the amounts are entered into the accounting system accurately. For example,
accounting persons may run an adding machine tape of total remittances received
from customers for the day. After entering the remittances into the accounts
receivable system, they compare the adding machine tape total to the total generated
by the system to ensure all remittances were accurately entered.
 Source document matching. Comparing information on the various source
documents to ensure they match. For example, this control might include comparing
quantities and part numbers on the receiving reports/packing slips and purchase
orders with the vendor invoice, and comparing unit prices on the purchase order with
the vendor invoice. For customer shipments, this control might include comparing
quantities and part numbers on sales orders and shipping documents with customer
invoices, and comparing prices on sales orders and price lists with customer invoices.
 Clerical accuracy of documents. Checking the mathematical accuracy of financial
data on key source documents, such as vendor invoices, customer invoices, and time
cards. For example, accounting personnel may recalculate the extended prices on
invoices by multiplying the quantity by the unit price.
 General ledger account code checking. Checking to ensure that amounts on
source documents (such as vendor invoices) were coded with the appropriate
general ledger account numbers before entering them into the accounting system.
Processing controls are designed to catch errors before they are posted to the general ledger.
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Reconciliation Controls
215.11 Reconciliations consist of reconciling selected general ledger control accounts to subsidiary
ledgers. Thus, in contrast to processing controls, they are designed to detect errors after transactions
have been posted and the general ledger has been run.
215.12 Accounting persons commonly reconcile accounts receivable, property and equipment, and
accounts payable subsidiary ledgers. Inventory is also commonly reconciled if the company maintains a
perpetual inventory subsidiary ledger. Monthly reconciliations of bank accounts are also essential
controls over cash balances.
220
BOOKKEEPING SKILLS EVALUATION
220.01 Knowledge and ability are key factors to assess when hiring accounting personnel. If the
company is primarily looking for a data entry person, that person’s bookkeeping knowledge may be less
important. However, if a company is seeking a full-charge bookkeeper, that individual must grasp all
aspects of the bookkeeping function. Properly matching the company’s needs with the applicant’s skills
will greatly improve the success of the hiring process.
220.02 Applicants are identified through various sources, including referrals from employees, customers,
suppliers, and business associates; unsolicited applications; employment agencies; and advertisements.
The sources used depend on how quickly the position must be filled and the company’s past success in
attracting applicants.
220.03 Once applicants have been screened and interviewed, their past experience and skills, as
presented on their resumes and disclosed during the interview process, should be verified. Two common
techniques for verifying and evaluating skill levels include:
 Reference checking.
 Pre-employment testing.
Each technique is briefly discussed below.
Reference Checking
220.04 Applicants will typically provide a list of personal references and former employers that the
company may contact. Although references may appear to be good sources of information about an
applicant, the company should remember that:
 Personal references are hand-picked by the applicant. Thus, the company should
expect to hear mainly positive comments about the applicant.
 Many federal and state employment laws have been enacted to protect the rights of
present and former employees. Often, employers are hesitant to provide candid
information about former employees because of fear of a possible employment
lawsuit.
220.05 Information requested from former employers should concentrate on the applicant’s work duties
and performance, attendance record, dependability, cooperation, and other job-related matters. The
information should confirm what has already been provided by the applicant.
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Overview of Accounting and QuickBooks
Pre-employment Testing
220.06 To more objectively assess an applicant’s abilities, some companies require applicants to take a
skills test. If such tests are used, they should be given to all applicants and be relevant to the specific job.
In other words, the skills tests should assess only those abilities that the applicants will need for the
position.
220.07 If the company is primarily looking for someone with strong data entry skills, most statesponsored employment commission agencies administer data-entry tests for a reasonable fee.
225
INTRODUCING QUICKBOOKS
225.01 This Guide is an introduction to QuickBooks. Its main objective is to introduce you to the basic
features in QuickBooks. You’ll learn about the types of information you need to track in your business,
and you’ll see how to enter that information and track it in QuickBooks. By the time you complete the
Guide, you’ll have a good idea of all that QuickBooks offers, you’ll be familiar with the most common
tasks, and you’ll know where to find information about more advanced features.
225.02 Although most small business owners are worried about revenue, running a business involves a
lot of other tasks. Depending on the type of business, you need to invoice customers, record payments
from customers, pay your own bills to outside vendors, manage inventory, and analyze your financial
data to see where you need to focus your next efforts. QuickBooks is a tool you can use to automate the
tasks you’re already performing as a business owner or to set up a new business.
225.03 When you’re working in QuickBooks, you’ll spend most of your time using a form, a list, or a
register. Since these are so basic to QuickBooks, we’re going to spend a few minutes introducing them.
Using Forms
225.04 You record most of your daily business transactions on a QuickBooks form, which looks just like a
paper form. Here’s an example of the form you use when you want to record a bill from and write a check
to one of your vendors.
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The form is intuitive—you already know how to fill out a form. But after you provide the information on a
QuickBooks form, QuickBooks does the accounting for you in the background. For example, when you
record a bill and then write a check (using the Pay Bills window) to pay for the business expense,
QuickBooks enters transactions in your accounts payable register to show the expense you incurred and
the payment you made. (Accounts payable is the money owed by your business to vendors.) It also
records the check in your checking account, keeping your records up to date, and providing a running
balance of what you owe at any time.
Using Lists
225.05 The list is another basic QuickBooks feature. You fill out most QuickBooks forms by selecting
entries from a list.
225.06 QuickBooks has lists where you can store information about customers, vendors, employees,
items or services you sell, and so on. Lists save you time and help you enter information consistently and
correctly.
225.07 When you’re filling out an invoice form and you select a customer name from the Customer:Job
list, QuickBooks not only fills in the name but also fills in the address, the payment terms, and the
customer’s sales tax, based on the information previously entered about that customer.
Here’s an example of the Customers & Jobs list in the Customer Center.
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Overview of Accounting and QuickBooks
QuickBooks lets you complete a variety of activities from lists, using the menu buttons located at the top
of each list. For example, to fill out an invoice for a customer, first select the customer from the
Customers & Jobs list, and then choose Invoices from the New Transactions menu button.
Using Registers
225.08 In addition to forms and lists, you’ll also work with registers in QuickBooks. Just as you use your
paper checkbook register to see a record of all the transactions in your checking account—checks you’ve
written, other withdrawals you’ve made from your account, and deposits—a QuickBooks register
contains a record of all the activity in one account. Almost every QuickBooks account has its own
register.
Here’s an example of the register for an accounts receivable account.
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The register shows information about invoices written to customers—the date of the invoice, the date it’s
due, the name of the customer, and the amount. It also shows payments you’ve received against your
invoices. The right column of the register gives you a running balance of all your accounts receivable, so
you always know how much you’re owed.
230
GETTING AROUND IN QUICKBOOKS
230.01 QuickBooks maximizes your work space and gives you quick access to the features and reports
that you use most. In this section you’ll learn how to do the following:





Find information to help you get started using QuickBooks
Manage your open windows
Compare windows side by side
Customize navigation features
Use Customer, Vendor, and Employee Centers
Finding Information to Help You Get Started
230.02 If you’re new to QuickBooks, the QuickBooks Learning Center window displays when you open a
company file. This window guides you through the steps you need to complete after you’ve set up your
company file. To display the QuickBooks Learning Center window, choose QuickBooks Learning Center
from the Help menu.
230.03 If you’re upgrading from a previous version, QuickBooks displays the What’s New window. This
window contains information about new features and explains how to find what you need to start working
with the latest version.
Managing Your Open Windows
230.04 To give you more room to work on the task at hand, QuickBooks displays one window at a time.
When you open a window, it appears in front of other windows that you previously opened.
230.05 The Open Window list keeps track of the windows that are open. Use the Open Window list to
switch between windows while you work. To switch to another open window, just click the title of the
window that you want to display.
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Overview of Accounting and QuickBooks
To show or hide the Open Window list:
 From the View menu, choose Open Window List.
If the list is currently displayed, a checkmark appears to the left of the menu item.
230.06 For comparison purposes, you may wish to display more than one window at a time. You can
easily switch between viewing one window at a time and viewing multiple windows. When you choose
Multiple Windows from the View menu, QuickBooks tiles the windows in the main area. You can then
move and resize the windows as needed.
To view multiple windows:
 From the View menu, choose Multiple Windows.
Using the Menu Bar
230.07 You can find all of the QuickBooks commands on the menu bar.
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Many commands available on the menu bar can be added to the icon bar.
Using the Icon Bar
230.08 Another feature that makes it easy to get around in QuickBooks is the icon bar. It comes preset
with shortcuts to several windows, such as Create Invoices and Enter Bills. By including the features and
reports you use most, you can manage your business more quickly than ever.
230.09 In addition to deciding which features to add to the icon bar, you can add or remove icons,
change the order in which the icons display, insert spaces between icons, and edit icons by changing the
icon text, graphic, or tooltip.
230.10 For instructions on how to customize the icon bar, search the onscreen Help for icon bar, and
then choose “Using the Icon Bar” from the list of topics that displays.
230.12 QuickBooks Centers — one each for Customers, Vendors, Employees, and Reports — give you
quick access to common tasks. Each Center gathers in a single place all of the relevant transactions as
well as other information, such as names and addresses of customers, vendors, or employees.
 The Customer Center gives you access to all of your customers and jobs, contact
and billing information for each customer, and customer transactions. Here you can
quickly find and print customer contact information, what your customers bought in
the past, what invoices they've paid, the balance they owe, notes you want to keep
about a customer, and more. You can also quickly access transactions for all your
customers in one place, such as sales receipts, received payments, and statement
charges.
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Overview of Accounting and QuickBooks
 The Vendor Center gives you quick access to all of your vendors, their contact and
billing information, and vendor transactions. The Vendor Center displays information
about all of your vendors and their transactions in a single place. Here you can add a
new vendor, add a transaction to an existing vendor, or print the vendor list or
transaction list. You can also edit a vendor's information or edit a note for the vendor.
 The Employee Center gathers information for each of your employees, including
contact information, social security number, and payroll transactions. Here you can
add a new employee, add a transaction to an existing employee, or print employee
and transaction information. You can also edit an employee's information or edit a
note for the employee. If you have a QuickBooks Payroll subscription, you can
perform payroll-related tasks, such as pay your employees and payroll tax liabilities.
The Employee Center also contains a separate Payroll Center where you can
manage your payroll and tax information.
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230.13 Each Center has two tabs (the Employee Center also contains the Payroll Center in a separate
tab if your company has employees).
230.14 The first tab contains the list of your Customers, Vendors, or Employees. Use this tab to view and
edit information for a single customer, vendor, or employee.
230.15 The Transactions tab lists the relevant transaction types for that Center. Use this tab to view
transactions across all Customers, Vendors, or Employees.
230.16 You can customize how your information is displayed in the Customer, Vendor, or Employee
Center. For example, you might choose to view only open invoices for this fiscal year, or you may want to
view only the Open Balance column for all of your customers.
230.17 You can also run some common reports from within each Center.
Making the Home Page Your Starting Point
230.18 The QuickBooks Home page provides a big picture of how your essential business tasks fit
together. Tasks are organized into logical groups (Customers, Vendors, Employees, Company, and
Banking) with workflow arrows to help you learn how tasks relate to each other and to help you decide
what to do next.
230.19 The workflow arrows indicate a logical progression of business tasks in QuickBooks. However,
these arrows do not restrict you from doing tasks in a different order, or an order that works better for
your business needs.
230.20 As you use QuickBooks, you can always return to the Home page by clicking Home.
The Home page looks like the following. (The icons that appear on the Home page vary depending on
how your company was set up in the EasyStep Interview.)
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Overview of Accounting and QuickBooks
Using the Workflow Diagram
230.21 To start a task, click the icon for the task you want to do. For example, to create an invoice, click
the Invoices icon. Each icon includes a ToolTip so you can learn about the QuickBooks task associated
with that icon. To open a ToolTip, place your mouse pointer over the icon.
230.22 Clicking most of the icons on the Home page takes you directly to the window for that task. Some
icons also include a drop-down arrow. Clicking an arrow opens a menu with choices for different
business tasks. Click the task you want to do.
Making the Home Page Work for You
230.23 In addition to the workflow diagram, the Home page provides other company information and
access to other tasks in the right-hand pane. From the right-hand pane, you can:
 Review the current balances of your bank accounts
The Account Balances list provides quick access to all of your bank and credit card
accounts. To open the register for an account, double-click anywhere in the row of the
account you want to view. To hide the list of accounts and balances, click the close
button in the top-left corner of the Account Balances list.
Account Balances are shown or hidden automatically based on individual user
permissions.
 Change the appearance of the Home page
From the Customize list you can customize which icons appear on the Home page and
set other QuickBooks preferences by clicking the “Customize Home page and set
preferences” link. Additionally, you can click the “Add Services to QuickBooks” link to
learn about add-on services you can purchase from Intuit by going to the Business
Services page. If you choose to sign-up for these services, appropriate icons will be
added to the workflow on your Home page.
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235
ALL THE ACCOUNTING YOU NEED TO KNOW
235.01 QuickBooks doesn’t require users to learn or understand accounting jargon. However, it does use
some common business terms.
Your Chart of Accounts
235.02 When you keep books for a company, you want to track where your income comes from, where
you put it, what your expenses are for, and what you use to pay them. You track this flow of money
through a list of accounts called the chart of accounts.
There are two types of accounts:
 balance sheet accounts, such as checking and savings
 accounts used to group transactions for reporting purposes, such as income and
expense accounts
235.03 The chart of accounts is a complete list of your business’ accounts and their balances.
To display the chart of accounts:
1. From the Lists menu, choose Chart of Accounts.
QuickBooks displays the chart of accounts for Rock Castle Construction Company.
2. Scroll through the Rock Castle Construction chart of accounts. Notice that the list
displays balance sheet accounts first, followed by income accounts and expense
accounts.
Assets
235.04 Assets include both what you have and what other people owe you. The money people owe you
is called your accounts receivable, or A/R for short. QuickBooks uses an accounts receivable account to
track the money owed you.
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Overview of Accounting and QuickBooks
235.05 The rest of your company’s assets may include checking accounts, savings accounts, petty cash,
fixed assets (such as equipment or trucks), inventory, and undeposited funds (money you’ve received
from customers but haven’t yet deposited in the bank).
235.06 When setting up your company file in QuickBooks, please note that even though checking,
savings, and petty cash are all company assets, you’ll set them up as “bank” type accounts in
QuickBooks.
Liabilities
235.07 Liabilities are what your company owes to other people. The money you owe for unpaid bills is
your accounts payable, or A/P for short. QuickBooks uses an accounts payable account to track the
money you owe different people for bills.
235.08 A liability can be a formal loan, an unpaid bill, or sales and payroll taxes you owe to the
government.
235.09 When setting up your company file in QuickBooks, note that even though unpaid bills are
liabilities, you’ll set them up as accounts payable type accounts in QuickBooks.
Equity
235.10 Equity is the difference between what you have (your assets) and what you owe (your liabilities):
Equity = Assets – Liabilities
235.11 If you sold all your assets today, and you paid off your liabilities using the money received from
the sale of your assets, the leftover money would be your equity.
235.12 Your equity reflects the health of your business, since it is the amount of money left after you
satisfy all your debts. Equity comes from three sources:
 Money invested in the company by its owners
 Net profit from operating the business during the current accounting period
 Retained earnings, or net profits from earlier periods that haven’t been distributed to
the owners
235.13 Of course, you as the owner can also take money out of the business. Such withdrawals, called
owner’s draws, reduce the business equity.
235.14 If you have a sole proprietorship (where the existence of the business depends solely on your
efforts), you can check the value of your owner’s equity by creating a QuickBooks balance sheet.
Cash Versus Accrual Bookkeeping
235.15 When you begin your business, you should decide which bookkeeping method to use. The
bookkeeping method determines how you report income and expenses on your tax forms. Check with
your tax advisor or the Internal Revenue Service (IRS) before choosing a bookkeeping method for tax
purposes.
Cash Basis
235.16 Many small businesses record income when they receive the money and expenses when they
pay the bills. This method is known as bookkeeping on a cash basis. If you’ve been recording deposits of
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your customers’ payments but haven’t been including the money customers owe you as part of your
income, you’ve been using cash basis. Similarly, if you’ve been tracking expenses at the time you pay
them, rather than at the time you first receive the bills, you’ve been using cash basis.
Accrual Basis
235.17 In accrual-basis bookkeeping, you record income at the time of the sale, not at the time you
receive the payment. Similarly, you enter expenses when you receive the bill, not when you pay it.
235.18 Most accountants feel that the accrual method gives you a truer picture of your business
finances.
How Your Bookkeeping Method Affects QuickBooks
235.19 Whether you use the cash or accrual method, you enter transactions the same way in
QuickBooks.
235.20 QuickBooks is set up to do your reports on an accrual basis. For example, it shows income on a
profit and loss statement for invoices as soon as you record them, even if you haven’t yet received
payment. It shows expenses as soon as you record bills, even if they’re unpaid.
235.21 You can see any report (except transaction reports) on a cash basis by changing the reporting
preference. (From the Edit menu, choose Preferences. In the Preferences window, click Reports &
Graphs in the left panel, and then click the Company Preferences tab.)
Important: When you create reports in QuickBooks, you can switch between cash and accrual reports at
any time, regardless of which bookkeeping method you have chosen for tax purposes.
Measuring Business Profitability
235.22 Two of the most important reports for measuring the profitability of your business are the balance
sheet and the profit and loss statement (also called an income statement). These are the reports most
often requested by CPAs and financial officers. (For example, banks request both documents when you
apply for a loan.)
The Balance Sheet
235.23 A balance sheet is a financial snapshot of your company on one date. It shows:




What you have (assets)
What people owe you (accounts receivable)
What your business owes to other people (liabilities and accounts payable)
The net worth of your business (equity)
To see an example of a balance sheet:
1. From the Reports menu, choose Company & Financial.
2. From the submenu, choose Balance Sheet Standard.
The Profit and Loss Statement
235.24 A profit and loss statement, also called an income statement, shows your income, expenses, and
net profit or loss (equal to income minus expenses). The QuickBooks profit and loss statement
summarizes the revenue and expenses of your business by category (first income, then expenses).
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Overview of Accounting and QuickBooks
To see a profit and loss report:
1.
2.
3.
4.
5.
Click Reports on the menu bar.
Click Report Center.
In the list on the left, choose Company & Financial.
In the “Profit & Loss” section, click Standard.
Scroll the report window to see all parts of the report.
The Statement of Cash Flows
235.25 Another report that your accountant may be interested in is the statement of cash flows report. A
statement of cash flows shows your receipts and payments during a specific accounting period.
To see a sample statement of cash flows report:
1.
2.
3.
4.
Click Reports on the menu bar.
Click Report Center.
In the list on the left, choose Company & Financial.
In the “Cash Flow” section, click Statement of Cash Flows.
Looking At the Journal Entries for Transactions
235.26 In traditional accounting, transactions are entered into a general journal in which the total amount
in the Debit column equals the total amount in the Credit column, and each amount is assigned to an
account on the chart of accounts. This accounting method is known as double-entry accounting. For dayto-day transaction entry, QuickBooks uses familiar forms (invoices, bills, checks).
235.27 QuickBooks also has a General Journal Entry window that you can use for special transactions
(such as selling a depreciated asset) or for all transactions if you prefer the traditional system.
235.28 Also, when you enter a transaction directly into an asset, liability, or equity account register,
QuickBooks automatically labels the transaction “GENJRNL” in the register and “General Journal” on
reports that list transactions.
To see the general journal entry for a transaction:
1. In any sales form, press Ctrl-Y.
2. Click
and in the Columns field, select Debit and Credit. Then click OK.
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3. In the transaction journal that appears, check the Debit and Credit columns to see the
accounting.
In the Customer and Vendor Centers, you can also view a journal entry for a transaction. Locate the
customer or vendor transaction. Right-click the transaction and choose View Transaction Journal.
240
EXITING QUICKBOOKS AND MOVING BETWEEN COMPANY FILES
Exiting QuickBooks
240.01 Unlike most other Windows programs, QuickBooks doesn’t require you to save your data before
exiting. It does an automatic save while you’re working with QuickBooks and every time you leave the
program.
To exit QuickBooks:
 From the File menu, choose Exit.
If no other applications are open, QuickBooks returns you to the Windows desktop.
240.02 To prevent or minimize data loss, you should make regular backup copies of your QuickBooks
company data. In the event of a data loss you can restore your data from the backup copy. To make a
backup copy, from the File menu, choose Back Up.
Moving Between Company Files
240.03 If you work with several companies, you’ll be working with multiple QuickBooks company files.
You can change from one company file to another at any time, but you can have only one company file
open at a time.
240.04 QuickBooks provides an easy way to find and open a company file that you’ve worked with
before.
To open a previously opened file:
1. From the File menu, choose Open Previous Company.
2. From the submenu, choose the company file you want to open.
240.05 You can increase the number of company files that QuickBooks will display in the submenu.
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Overview of Accounting and QuickBooks
To increase the number of company files displayed:
1.
2.
3.
4.
245
From the File menu, choose Open Previous Company.
Choose “Set number of previous companies.”
Enter the number of company files you want QuickBooks to display (up to 20).
Click OK.
CREATING A QUICKBOOKS COMPANY
Creating a QuickBooks Company
245.01 A QuickBooks company contains all the financial records for a single business. Before you can
use QuickBooks, you need to tell QuickBooks about your business so that it can set up your company
file. Setting up your company file properly is the most important thing you can do to help yourself manage
your business efficiently and with confidence.
How Many Companies Should You Set Up?
245.02 If you operate a business enterprise, the IRS expects you to clearly show all sources of income
and to document any business expenses you claim as deductions. For tax purposes, therefore, it’s
usually best to set up a separate QuickBooks company for each business enterprise you report on your
tax forms.
About the EasyStep Interview
245.03 The EasyStep Interview walks you through the process of setting up your entire business on
QuickBooks. The setup process is easy; the EasyStep Interview should take you only about 10 minutes
to complete. When you set up your company file, QuickBooks will ask you for a number of details about
your company.
Navigating Through the Interview
 Click Next to display the next window in the Interview.
 Click Prev to display the previous window in the Interview.
 Click Leave to leave the Interview and return to QuickBooks. The next time you open
the company file, QuickBooks remembers the information you have already entered
and returns you to the EasyStep Interview where you left off.
Starting the EasyStep Interview
245.06 To begin adding a new company:
1. Start QuickBooks.
2. Select “Create a new company” or choose New Company from the File menu.
QuickBooks displays the EasyStep Interview window.
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250
ENTERING COMPANY INFORMATION
250.01 When you use the EasyStep Interview to create a new QuickBooks company, QuickBooks asks
you questions about the type of business you own. It uses your answers to get you started quickly, by
setting up the appropriate accounts and lists.
250.02 In this Guide, you’ll learn how to create a new QuickBooks company for a business named
Lockhart Design. Margaret Lockhart is the sole proprietor of this interior design firm. Most of her income
comes from consulting services, but she also sells products such as fabrics and room accessories to
clients.
To create a new QuickBooks company file:
1. At the first Welcome window for the EasyStep Interview, click Start Interview. The
“Enter Your Company Information” window appears.
2. In the Company Name field, type Lockhart Design and press Tab. When you press
Tab, QuickBooks automatically enters the same name you typed into the Legal Name
field. QuickBooks uses the company name on all reports.
3. Press Tab and enter 94-1234567 as the Tax ID number.
4. Type the following information in the street address, city, state, and zip fields.
1239 Bayshore Road
Middlefield, CA 94432
QuickBooks prints this company address on checks, invoices, and other forms.
5. Now enter the following information in the Phone number and Fax number fields:
Phone: 650-555-1234
Fax: 650-555-5678
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Overview of Accounting and QuickBooks
6. Next enter the email and Web addresses for Lockhart Design.
Email: margaret@samplename.com
Web Site: lockhart_design@samplename.com
Your screen should resemble the following.
7. Click Next.
The “Set up your administrator password” window appears.
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8. Click Next.
The “Create your company file” window appears.
9. Click Next to save the company file.
10. Click Save to accept the default filename of “Lockhart Design.”
QuickBooks creates the company file.
255
CUSTOMIZING QUICKBOOKS FOR YOUR BUSINESS
255.01 The customization section of the EasyStep Interview is where you indicate:
 Your industry and what you sell
 How and when your customers pay you
 How you pay your bills
255.02 Based on your answers, QuickBooks sets preferences for the company file. The preferences
enable certain features of the QuickBooks program.
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Overview of Accounting and QuickBooks
Choosing Your Company Industry
255.03 When you create a new QuickBooks company, you can select a company type that most closely
matches your type of business, and QuickBooks sets up accounts and lists that are appropriate for your
type of company.
255.04 Your industry selection is used by the interview to ask questions and recommend features that
work best for your business.
255.05 QuickBooks will recommend features that can best meet your business needs, such as:




Enabling sales tax for retail businesses
Using estimates in QuickBooks for some service-based businesses
Managing inventory in QuickBooks for wholesalers and manufacturers
Creating income and expense categories
255.06 Even if you own a type of company that isn’t specifically listed, you should select the one that’s
closest. Margaret Lockhart does consulting, as well as retail sales, so we’ll select a Retail company type.
To choose the company industry:
1. On the “Customizing QuickBooks for your business” window, click Next.
QuickBooks displays the “Select your industry” window.
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2. Scroll down the list until you find Retail: Non-store retailers and select it.
Although Lockhart Design receives most of its income from consulting, not from retail
sales, the Retail company type will give us most of the accounts we need. She’ll need
to modify the chart of accounts later to include an income account for Consulting
Income.
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Overview of Accounting and QuickBooks
3. Click Next.
Indicating What You Sell
255.07 You need to indicate what your business sells. In general, businesses either sell products or
services, or both. Margaret Lockhart provides consulting services as well as selling products, such as
fabrics.
To indicate what you sell:
1. On the “What do you sell?” window, click “Both services and products.”
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2. Click Next.
Entering Sales Information
255.08 For retail companies, you need to indicate how you want to enter sales. QuickBooks uses this
information to set recommendations for a retail-type business. Margaret Lockhart does not do retail sales
on a daily basis, so she will record her sales as they occur.
To indicate how you enter sales:
1. On the “How will you enter your sales in QuickBooks?” window, click “Record each
sale Individually.”
Your screen should look like this:
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Overview of Accounting and QuickBooks
2. Click Next.
3. On the “Do you sell products online?” window, click “I don’t sell online and I am not
interested in doing so.”
Margaret Lockhart has no plans to sell online.
Entering Sales Tax Information
255.09 This part of the EasyStep Interview asks whether you charge sales tax. You should turn the sales
tax setting off only if you never charge sales tax. Margaret Lockhart typically charges sales tax, so we’ll
turn on sales tax in her company file.
To set up QuickBooks to track sales tax:
1. Click Next to move to the “Do you charge sales tax?” window.
2. Click Yes for the question, “Do you charge sales tax?”
Margaret Lockhart collects one sales tax for one tax district, paid to only one tax
agency.
3. Click Next.
QuickBooks automatically creates a current liability account, called Sales Tax
Payable, that keeps track of the sales tax you collect in your business.
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Creating Estimates
255.10 If you provide any type of estimate or bid—even a verbal quote—there are many reasons to use
estimates in QuickBooks.
 You can use the QuickBooks estimate form to prepare professional-looking itemized
estimates, bids, quotes, or proposals for your customers. You can customize a
QuickBooks estimate to look and say exactly what you want it to.
 When it's time to bill your customer, you can easily create an invoice from the
estimate with just one click. QuickBooks then creates an invoice using information
from your estimate.
 When you need to know how accurate your estimates are, you can create reports that
compare your estimated costs and revenue against your actual costs and revenue.
 Creating estimates in QuickBooks will allow you to easily compare your actual costs
against what you estimated. This will let you see how accurate your estimates are.
 You can track which estimates are still active and easily update each estimate as you
continue to negotiate with your customers.
255.11 Margaret Lockhart creates proposals for her customers for their interior design projects, so she
needs to enable estimates for her company.
To create estimates for your business:
1. On the “Do you want to create estimates in QuickBooks?” window, click Yes.
2. Click Next.
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Overview of Accounting and QuickBooks
Note: On the next window, if you are using a QuickBooks: Premier Edition product,
QuickBooks asks if you want to track sales orders. Click Yes, and then click Next.
Using Sales Receipts
255.12 If your customers pay you in full at the time of purchase, use a sales receipt in QuickBooks to
track the sale.
You can use a sales receipt to:





Track each sale
Calculate sales tax
Print a sales receipt
Create a summary of sales income and sales tax owed
Summarize daily or weekly sales on a sales receipt
255.13 Margaret Lockhart’s interior design business is not actually a retail store, so she does not typically
use sales receipts. She generally includes such sales on an invoice that she sends to her customers that
might include, for example, both design services and products.
To set up sales receipts:
1. On the “Using sales receipts in QuickBooks window, click No.
Even though QuickBooks recommends that a retail-type business use sales receipts,
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Margaret Lockhart does not operate a full retail establishment.
2. Click Next.
Choosing Remaining Preferences
255.14 The next series of windows ask “yes or no” questions that enable or disable different QuickBooks
features, based on your company needs. Simply click Yes or No, then click Next to move forward in the
Interview. For Lockhart Design, complete the preferences by giving the following responses:
For this item...
Billing statements
Progress invoicing
Bill tracking
Inventory
Credit cards
Track time
Employees
Select...
No
Yes
Yes
No
Accept
Yes
No
255.15 Answering the series of questions about your business helps customize QuickBooks to meet your
specific business needs. Next, you’ll set up your accounts.
260
SETTING UP YOUR BUSINESS ACCOUNTING
260.01 Next, QuickBooks helps you set up the basic accounting you’ll use to track your business,
referred to as your chart of accounts. To set up the chart of accounts, you need to:
 Determine the start date of your business
 Enter account balances
 Decide how you want to categorize your income and expenses
260.02 The chart of accounts is the framework used to categorize the information and transactions used
to create reports. By using a chart of accounts and creating reports, you’ll always know the current state
of your business.
260.03 The chart of accounts is made up of five types of accounts common to all businesses—the
income and expense accounts used by the Profit and Loss Statement, and the asset, liability, and equity
accounts used by the Balance Sheet. Each time you enter a transaction, QuickBooks will prompt you to
categorize it into one of these five types of accounts.
Choosing a Start Date
260.04 Before you start entering your company’s financial data, you need to choose a QuickBooks start
date. This is the starting point you want to use for all your QuickBooks accounts. The start date is the
date for which you give QuickBooks a financial snapshot of your company assets and liabilities.
260.05 Once you decide on a start date, you enter all your company’s transactions since that date. That’s
why you should choose a start date that’s not too far back in the past for you to handle. Many business
owners like to use the last day of a financial period as their start date, such as the end of last fiscal year,
last quarter, or last month. You need to enter all historical transactions from the day after your start date
up through today. For example, if you decide on a start date of March 31, you’d enter your historical
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Overview of Accounting and QuickBooks
transactions from April 1 up through today.
To choose a start date:
1. On the “Using accounts in QuickBooks” window, click Next.
The “Enter your start date” window appears.
2. In the Start date field, enter 12/31/2007, and then click Next.
Entering Bank Accounts and Opening Balances
260.06 The bank accounts sections of the EasyStep Interview is where you enter any bank accounts you
want to track and enter opening balances.
260.07 The balance sheet accounts in the QuickBooks chart of accounts start with an opening balance of
zero. Before you begin working in QuickBooks, you need to enter an opening balance for each balance
sheet account as of your start date.
260.08 The opening balance is important because QuickBooks can’t give you an accurate balance sheet
(what your company owns and what it owes) without it. An accurate balance sheet gives you a true
picture of your company’s finances. Also, if you start with an accurate balance as of a specific date, you
can reconcile your QuickBooks bank accounts with your bank statements, and your QuickBooks
checking accounts will show the actual amount of money you have in the bank.
260.09 The easiest way to determine an account’s opening balance is to work from an accurate balance
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sheet. If you have a balance sheet as of your start date, you can take the opening balance from there.
During the EasyStep Interview, you can enter opening balances for bank accounts only. You’ll learn later
how to enter opening balances for accounts after you’ve completed the EasyStep Interview.
260.10 Let’s assume Margaret Lockhart wants to enter an opening balance for her checking account.
The opening balance for a QuickBooks bank account is the dollar amount in the bank on the start date.
This amount can be determined two ways: using the ending balance on the last bank statement on or
immediately prior to the start date, or using the bank account balance from a balance sheet prepared by
an accountant. Margaret has a recent bank statement for this account, so we’ll use that method.
To enter the checking account opening balance:
1. On the “Add your bank account” window, click Yes.
2. Click Next.
3. Type Checking as the name of the account.
4. For “When did you open this bank account?,” click Before.
Your screen should look like this:
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Overview of Accounting and QuickBooks
5. Click Next.
6. In the “Enter your bank statement information,” enter 12/28/2007 as the Statement
ending date.
7. In the Statement Ending Balance field, type 8359.00.
Your screen should look like this:
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8. Click Next.
9. When QuickBooks asks if you want to add another bank account, click No. Then click
Next.
Reviewing the Chart of Accounts
260.11 The chart of accounts lists balance sheet accounts, income accounts, and expense accounts.
When you create a new QuickBooks company, you select a company type that most closely matches
your type of business, and QuickBooks sets up a chart of accounts for you.
260.12 The chart of accounts is the framework used to categorize the information and transactions used
to create reports. By using a chart of accounts and creating reports, you’ll always know the current state
of your business.
260.13 The chart of accounts is made up of five types of accounts common to all businesses—the
income and expense accounts used by the Profit and Loss Statement, and the asset, liability, and equity
accounts used by the Balance Sheet. Each time you enter a transaction, QuickBooks will prompt you to
categorize it into one of these five types of accounts.
260.14 Because you chose an industry from the list earlier in the Interview, QuickBooks has already
created income and expense accounts for your company. Next, you’ll view the preset income and
expense accounts.
To review the chart of accounts:
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Overview of Accounting and QuickBooks
1. In the “Review expense accounts” window, scroll through the preset expense
accounts to get an idea of what is included, and then click Yes (that you want to use
these accounts).
2. Click Next to go to the next window.
3. In the “Review income accounts” window, scroll through the preset income accounts
to get an idea of what is included, and then click Yes (that you want to use these
accounts).
4. Click Next to go to the next window.
5. Click Finish to complete the EasyStep Interview.
260.15 After you have completed the EasyStep Interview, use the information in the help options
described later in this chapter to help you make changes and adjustments to your company file.
265 COMPLETING COMPANY FILE SETUP
265.01 After you have created your company file using the EasyStep Interview, you can begin using
QuickBooks to run your business. However, there are some additional tasks you might need do to make
sure the company file is properly set up and that the data is complete.
265.02 QuickBooks is based on four key concepts: Customers, Vendors, Accounts, and Items. If you
take two minutes now to understand these basic concepts, you'll be able to get started quickly and
correctly with your company information.
 Customer: A customer is anyone who pays you. This can mean patients, donors,
members, legal or consulting clients, or your typical retail customer.
 Vendor: A vendor is anyone you pay, except for employees. This can mean
subcontractors, utility companies, your landlord, tax agencies, or suppliers.
 Account: There are two types of accounts—real world accounts, such as checking
accounts, and income and expense accounts that you use to group transactions for
reporting purposes. For example you may want to create expense accounts to track
office supply purchases separately from advertising costs. All accounts are listed on
your chart of accounts. If you choose a tax form, you can associate accounts with tax
lines, which would make preparing for tax time easier.
 Item: An item is anything you want to put on an invoice. This includes parts, services,
labor, discounts, and taxes.
265.03 This section covers how to set up customers, vendors, and items, and how to choose a tax form
and add an income account.
Adding Customers
265.04 In order to bill customers with QuickBooks, you need to add your customers. By entering details
about the people and companies you do business with, you can personalize their bills, send invoices
easily, and quickly view the status of their accounts. You can add new customers at any time.
Note: You can also add customers and vendors as you perform everyday tasks. For example, if you
enter the name of a new customer when filling out an invoice, QuickBooks will prompt you to enter
information about this customer. You can choose from two quick setup options: Quick Add and Set Up.
Quick Add adds the name to the list and you add details later. Set Up lets you enter the details right
away.
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To add a customer:
1.
2.
3.
4.
Click Customers on the menu bar.
Click Customer Center.
Click the New Customer & Job menu button, and then choose New Customer.
In the Customer Name field, enter the name of the customer as you'd like it to appear
on your Customers & Jobs list. Type Smith, Lee, and then press Tab.
You want the list to show last names first.
5. Press Tab in the Opening Balance field to leave this field blank.
The Opening Balance field tells you how much each customer owes you on your start
date so that when you enter the rest of your transactions from your start date to
today, all balances since your start date will be accurate.
For now, leave this field blank. Lockhart Design is planning to set up one or more jobs
for this customer. QuickBooks will calculate and track the overall balance for this
customer from the balances you enter for the individual jobs.
6. In Address Info tab, click in the First Name field and type Lee.
7. Press tab and type M. as the middle initial and in the Last Name field, type Smith.
8. Press Tab to go to the Address field, and then press Enter after Lee M. Smith.
9. Type 43 Hampshire Blvd and press Enter.
10.
Type East Bayshore, CA 94327.
11. Click the Copy button to copy the address to the Ship To field. Click OK in the Add to
Ship To Address Information window.
You can have and use more than one Ship To address per customer or job, but Lee
Smith uses only one address.
Your screen should resemble the following graphic.
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Overview of Accounting and QuickBooks
12. Click OK to add this customer.
The Customer Center appears, with the Customers & Jobs list along the left side.
Note: The Customers & Jobs list is the same list as the Customer:Job list. It is called
Customers & Jobs on the Customer Center, and it is called Customer:Job on forms. It
is sometimes also referred to as simply the Customer list.
Adding a Job
265.05 You do not need to add jobs to the Customers & Jobs list if your company never does more than
one job or project per customer. Jobs in QuickBooks are optional. If you often perform multiple jobs for
the same customer, you can use jobs in QuickBooks to track the activity for each job separately. That
way, you can create reports that show the income and expenses for each job.
Lockhart Design wants to track jobs for Lee Smith.
To add a job for a customer:
1. In the Customers & Jobs list, right-click Smith, Lee and choose Add Job.
The New Job window looks similar to the Customer window. QuickBooks has already
filled in several fields for you for Lee Smith.
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2. In the Job Name field, type Patio, and press Tab.
3. In the Opening Balance field, type 862 and press Tab.
You want to keep track of the balances for each job. QuickBooks calculates and
tracks the overall balance for this customer from the balances you enter for the
individual jobs. You want to keep track of the balances for each job.
Note: The information QuickBooks fills in comes from your customer's record. If you
make any changes here, the changes affect only this job. For example, if your
customer's billing address is different for this job, you can enter the job address
without affecting the customer's main address.
4. Enter 12/31/2007 in the As Of field to indicate that this was the balance outstanding
for this job as of the QuickBooks start date.
5. Click the Job Info tab and choose “In Progress” from the Job Status drop-down list.
Job status information is for your records—it gives you a way to keep track of each
job. When you create a customer list report, QuickBooks includes the status of each
job on the report. You can also see the status of a job by clicking a job in the
Customers & Jobs list and looking in the Job Information area.
6. For the Start Date, type 12/15/07 and press Tab.
7. In the Projected End date, type 3/15/07 and press Tab.
The dates help you track how long each job takes and how well you are able to
estimate the length of a job. When you create a customer:job list report, you can add
columns that show the start date, your projected end date, and the actual end date for
each job.
Your screen should resemble the following graphic:
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Overview of Accounting and QuickBooks
8. Click OK.
The job now appears under Smith, Lee in the Customers & Jobs list.
9. Close the Customer Center.
Adding Vendors
265.06 In order to pay your bills with QuickBooks, you need to add your vendors. Nearly everyone you
pay, other than employees, are vendors.
265.07 You can add new vendors at any time. QuickBooks uses the Vendors list to hold information
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about the people and companies you do business with; for example, this list could include the phone
company, your office supplies vendor, and your tax board.
To add a vendor:
1.
2.
3.
4.
Click Vendors on the menu bar.
Click Vendor Center.
Click New Vendor in the button bar.
In the Vendor Name field, enter the name of the vendor as you'd like it to appear on
your Vendor list. Type Fay, Maureen Lynn, CPA, and then press Tab.
5. In the Opening Balance field, type 350, which is the amount you owed this vendor as
of the start date. Press Tab.
6. In the As Of field, enter 12/31/07.
7. In Address Info tab, click in the First Name field and type Maureen.
8. Press tab and type L. as the middle initial and in the Last Name field, type Fay.
9. Press Tab to go to the Address field, and then press Enter after Maureen L. Fay.
10. Type 200 Royal Rd. and press Enter.
11. Type Bayshore, CA 94326.
12. Click in the “Print on Checks As” field, and type Maureen Fay.
Your screen should resemble the following graphic.
13. Click OK to add this vendor.
The new vendor appears on the Vendor list.
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Overview of Accounting and QuickBooks
14. Close the Vendor Center.
About Customer and Vendor Types
265.08 Customer and vendor types let you categorize your customers and vendors in ways that are
meaningful to your business. For example, you could set up your customer types so that they indicate
which industry a customer represents, a customer's geographic location, or how a customer first heard
about your business. You could set up your vendor types so that they indicate a vendor's industry or
geographic location. For example, you might create the type Painters with the subtypes Exterior and
Interior.
 Commercial photographers might use customer types to record a customer's primary
interest: graduation, portraiture, weddings, and so on.
 Building contractors might use vendor types to classify their subcontractors by
geographical location so they can use the ones closest to each job.
265.09 You can create reports and do special mailings that are based on your customer and vendor
types. For example, if you use customer types to categorize your customers by location, you could print
mailing labels for all the customers in a particular region.
Setting Up Additional Accounts
265.10 During the EasyStep Interview, you added one checking account for Lockhart Design. There are
two basic types of accounts: balance sheet accounts, such as savings or checking, and accounts used to
group transactions for reporting purposes, such as income and expense accounts. Income and expense
accounts track the sources of your income and the purpose of each expense. When you record
transactions, you usually assign the amount of the transaction to one or more income or expense
accounts.
265.11 In the EasyStep Interview, you also selected “Retail:Non-store retailer” as the industry for
Lockhart Design. QuickBooks created a chart of accounts based on the retail industry. However,
Margaret Lockhart also receives income from design consulting. She needs to modify the chart of
accounts to add an income account for consulting.
265.12 Before adding a new account, you should select the tax form used to file taxes for your business.
Selecting a tax form allows you to map accounts to tax lines.
Choosing a Tax Form
265.13 When you create a new account, you can associate a tax line on which you would report the
income or expenses tracked by this account.
265.14 An account's tax line associates each income and expense account with the appropriate tax form
and line on your company income tax return. You'll see tax lines for the tax form you choose and for
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schedules and other forms typically filed with that tax form. This makes preparing income taxes easier
and quicker, because it enables you to create tax reports to assist your accountant or to export and
import your tax data into ProSeries, TurboTax, TurboTax Business, or Lacerte tax programs.
Associating a tax line with each account lets you:


Import tax data into our TurboTax or ProSeries tax products.
Create tax reports in QuickBooks that help you prepare tax forms. The reports show
the amounts to fill in for each tax line on the tax forms.
Note: If you don’t select an income tax form to use, the Tax Line drop-down list will not appear when you
add a new account (or edit an existing one).
To choose a tax form:
1. From the Company menu, choose Company Information.
QuickBooks displays the Company Information window.
2. From the Income Tax Form Used drop-down list, choose “Form 1040 (Sole
Proprietor).”
Margaret Lockhart is the owner and only employee of her interior design firm.
3. Click OK.
Now, when you create or edit a new account, you can associate a tax line from Form
1040 (Sole Proprietor) forms and schedules with the account.
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Overview of Accounting and QuickBooks
Adding a New Account
265.15 You may need to add one or more of the following accounts:
 Income accounts to track new sources of income
 Expense accounts to track new types of expenses
 Bank accounts when you open new checking, savings, or money market accounts at
your bank
 Credit card accounts when you acquire new credit cards
 Other kinds of balance sheet accounts to track specific assets, liabilities, or equity
265.16 For example, you may need to add a fixed asset account to track the depreciation of a new
equipment purchase, a long term liability account to track a business loan, or an equity account to track
the investment from a new business partner.
265.17 A complete list of your business’ accounts and their balances appear in the chart of accounts.
You use a chart of accounts to track how much money your company has, how much money it owes,
how much money is coming in, and how much is going out.
For Lockhart Design, you’ll add an income account for her consulting income.
To add an income account:
1.
2.
3.
4.
5.
From the Lists menu, choose Chart of Accounts.
Click the Account menu button and choose New.
In the New Account window, choose Income from the Type drop-down list.
Click in the Name field, and type Consulting.
From the Tax Line drop-down list, choose “Sch C: Other business income.”
The Tax Line field appears because you selected a tax form used for the business.
Your screen should resemble the following graphic.
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6. Click OK, and then close the Chart of Accounts.
Adding Items
265.18 In QuickBooks, an item is anything that your company buys, sells, or resells in the course of
business, such as products, shipping and handling charges, discounts, and sales tax (if applicable). You
can think of an item as something that shows up as a line on an invoice or other sales form.
265.19 Items help you fill out the line item area of a sales or purchase form quickly. When you choose an
item from your Item list, QuickBooks fills in a description of the line item and calculates its amount for
you.
265.20 While they provide a quick means of data entry, a much more important role for items is to handle
the behind-the-scenes accounting. When you create an item, you link it to an account; when the item is
used on a form, it posts an entry to that account and another entry to the appropriate accounts
receivable, accounts payable, checking, fixed asset, or other account.
265.21 When creating items, consider how much detail you want on your invoices or statements and set
up items with that level of detail in mind. For example, if you are a seamstress who creates and sells
home accessories, you can set up a single item and charge a flat rate for a certain size of couch pillow,
or you can break that pillow down further into labor and materials.
265.02 QuickBooks provides several different types of items. Some—such as the service item or the
inventory part item—help you record the services and products your business sells. Others—such as the
subtotal item or discount item—are used to perform calculations on the amounts in a sale.
For Lockhart Design, you’ll set up a service item for billing the time used for initial consultation for a
design project. You’ll assign it to the new Consulting income account.
To add an item:
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Overview of Accounting and QuickBooks
1. From the Lists menu, choose Item List.
QuickBooks displays the Item List.
2.
3.
4.
5.
Click the Item menu button, and choose New.
In the New Item window, choose Service from the Type drop-down list.
Click in the Item Name/Number field and type Initial Design Consultation.
In the Description field, type Initial design consulting.
The description will appear on sales forms when you use the item.
6. Click in the Rate field, and type 40.
7. In the Tax Code field, choose “Non-Taxable Sales” from the drop-down list.
8. In the Account field, choose “Consulting” as the income account.
Your screen should resemble the following graphic.
9. Click OK to add the new item to the Item List.
The item now appears in the Item List.
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10.
Close the Item List.
Entering Historical Transactions
265.03 If your QuickBooks start date is before today’s date, you also need to enter past transactions so
that you have complete financial records from the start date forward. It is important to enter historical
transactions in this order:
1.
2.
3.
4.
5.
6.
All sales (sales receipts, invoices, or statement charges)
Customer payments received for outstanding invoices after the start date
Bills received since the start date
Bills paid since the start date
Deposits made to any of the accounts since the start date
Any other checks written (other than bills) since the start date
Learning More About the Company Setup Process
265.04 When you are setting up your own company in QuickBooks, you may want to view the videos
available in the Learning Center to help you finish setting up your own company file. The information
provided in the videos gives you an overview of the program and more detailed information about using
specific parts of the product.
To open the Learning Center:
 From the Help menu, choose QuickBooks Learning Center.
For more information, choose Access Support Resources from the Help menu.
270
GETTING HELP WHILE USING QUICKBOOKS
270.01 QuickBooks provides extensive help in various formats. When you have questions, QuickBooks
provides:
 Step-by-step instructions. These are available from the onscreen Help and How Do I
menu.
 A search engine that provides you with a list of topics related to the word or phrase
you enter in the Ask field.
 Conceptual explanations of how to apply QuickBooks to your particular business
situation.
Finding a Topic in the Onscreen Help Index
270.02 Suppose you want to find out how to add a new customer. You can type what you’re looking for in
the Help Index, and QuickBooks displays a list of topics.
To find a topic in onscreen Help:
1. From the Help menu, choose QuickBooks Help, and then click the Index tab.
2. Type customers.
QuickBooks selects the first occurrence of the word “customers” in the index. You can
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Overview of Accounting and QuickBooks
see there is a topic for “customers, adding new.”
3. Double-Click “Customers, Adding New.”
QuickBooks displays the topic in the screen to the right.
4. Close the Help window.
Finding Answers from the How Do I Menu
270.03 Throughout QuickBooks, you’ll find windows with a drop-down menu called How Do I. This menu
provides quick access to information and instructions for the current window.
To use the How Do I menu:
1. From the Customers menu, choose Create Invoices.
QuickBooks displays the Create Invoices window.
2. From the How Do I menu, choose “Design an invoice for my business.” Then choose
“Include my company logo.”
QuickBooks displays a Help window on how to add a company logo to an invoice form.
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3. Close the Help window and the invoice.
275
USING QUICKBOOKS LISTS
275.01 QuickBooks lists organize a wide variety of information, including data on customers, vendors,
inventory items, and more. Lists save you time by helping you enter information consistently and
correctly. When you store information on a list, you enter it once and never need to retype it. Think about
how much information you use more than once in your business:
 Names, addresses, and other information about customers who purchase from you
on a regular basis
 Contact information for vendors from whom you purchase your supplies
 Descriptions and prices for products or services you sell again and again
275.02 Simply enter repetitive information into a list once, and then use it over and over on checks, on
invoice forms, and other daily transactions. You don’t have to enter all the information for your company
lists before you begin working with QuickBooks. You can add information to lists as you go along.
275.03 Lists are the framework of QuickBooks. Use lists to fill out most QuickBooks forms. For example,
to pay a bill, choose a name from your vendor list on the Enter Bills form. QuickBooks enters the list
information on the form for you. This saves you time and prevents typing errors. You can also change the
information directly on the form if necessary.
275.04 Although most lists are easy to set up in QuickBooks, some lists—such as the Chart of Accounts,
Items, and Class lists—require careful planning.
The way you set up and edit lists depends on the list type:
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Overview of Accounting and QuickBooks
 QuickBooks Centers: Your Customers & Jobs, Vendors, and Employees lists are
available in the Customer, Vendor, and Employee Centers, respectively. Click the
appropriate Center button on the toolbar to go to a QuickBooks Center. Then click the
tab for your list. To enter information, click New Customer, New Vendor, or New
Employee at the top of the center.
 List Windows: Other lists, such as the Chart of Accounts and Item List, appear in
separate windows. To view one of these lists, go to the Lists menu and click the list
you want. To enter information in these lists, use the menu button at the bottom of the
list.
Managing Lists
275.05 Lists are easy to manage in QuickBooks. You can sort lists, combine (merge) list items, rename
list items, delete list items, make list items inactive, and print lists.
Sorting Lists
275.06 You can sort many QuickBooks lists manually or alphabetically. To sort a list manually, simply
use the mouse to drag a list item to its new location. Lists that you can sort this way are the Chart of
Accounts, Customers & Jobs, Class, Customer Type, Vendor Type, Job Type, and Memorized
Transaction lists.
275.07 If you have changed the order of a list by dragging items and then decide you’d rather have an
alphabetically sorted list, QuickBooks has a Re-sort List command. In the chart of accounts, the Re-sort
List command sorts alphabetically within account type; in the Item list, the Re-sort List command sorts
alphabetically within item type.
Sorting Lists Manually
275.08 Sort a list manually, and then re-sort it to put it back in alphabetical order.
To sort a list manually:
1. From the Lists menu, choose Chart of Accounts.
QuickBooks displays the chart of accounts for Rock Castle Construction.
2-58
2. Click the diamond to the left of the Owner’s Draw subaccount of Owner’s Equity.
The mouse pointer becomes a four-directional arrow.
3. Click and hold the mouse button, and drag the pointer upward until you see a dotted
line directly below Owner’s Equity.
4. Release the left mouse button to drop the account in the new position.
The Owner’s Draw account is now directly under the Owner’s Equity account.
Now you can use the Re-sort List command to return the list to alphabetical order.
5. To re-sort the list alphabetically, click the Account menu button, and select Re-sort List.
QuickBooks asks you to confirm that you want to return the list to its original order.
6. Click OK.
QuickBooks re-sorts the chart of accounts alphabetically by account type.
7. Close the chart of accounts.
Sorting Lists in Ascending or Descending Order
275.09 Depending on the type of business you have, you may want to order your list entries in a certain
way. For example, perhaps you’d like to see people who owe you money at the top of your Customers &
Jobs list. Sort the Customers & Jobs list in descending order by customer balance.
To sort a list in descending order:
1. Click Customers on the menu bar.
2. Click Customer Center to display the Customer Center and Customers & Jobs List.
Click the right arrow to the right of View to expand or collapse the Customers & Jobs
List.
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Overview of Accounting and QuickBooks
3. Click the arrow to the right of the View drop-down list to expand the Customers &
Jobs list.
The Customers & Jobs list now shows details about the customers and jobs.
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4. Click the Balance Total column heading.
Notice that an arrow pointing up appears on the heading and the list is sorted in
ascending order by customer balance.
5. Click the column heading again.
Notice that the arrow now points down and the list is sorted in descending order with
the customers with the highest balances at the top of the list.
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Overview of Accounting and QuickBooks
6. To return to the order you started with, click the large diamond to the left of the Name
column heading.
7. Click the arrow to the right of the View drop-down list to collapse the Customers &
Jobs list.
If you don’t collapse the Customers & Jobs list, the next time you open the Customer
Center, the center opens with the expanded Customers & Jobs list.
8. Close the Customer Center.
Merging List Items
275.10 In most lists, you can combine two list items into one. For example, you may find that you’ve been
using two customers (because of different spellings) when you really need only one on your Customers &
Jobs list. You can merge list items in the Chart of Accounts, Item, Customers & Jobs, Vendor, Employee,
and Other Names lists.
Important: After you merge list items, you cannot separate them. When working in your own company
file, we recommend that you back up your data before merging list items.
275.11 Suppose you want to merge Hughes Electric with C.U. Electric. To merge them, you edit the
incorrect name to match the spelling of the correct name.
To merge items on a list:
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1. From the Vendors menu, choose Vendor Center.
QuickBooks displays the Vendor Center.
2. Double-click the entry for Hughes Electric.
QuickBooks displays the Edit Vendor window.
3. In the Vendor Name field, type C.U. Electric. (This is the vendor name you want to merge
with.)
4. Click OK.
QuickBooks asks if you would like to merge the names.
5. Click Yes.
QuickBooks merges the two names, and you now have only C.U. Electric in the Vendor list.
6. Close the Vendor Center.
Note: You cannot merge items on the Fixed Asset Item list. In addition, if you use
assembly items in QuickBooks: Premier Edition products, you cannot merge them
with other assembly items or with any other type of item.
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Overview of Accounting and QuickBooks
Renaming List Items
275.12 You can rename any list item. When you make the change, QuickBooks automatically modifies all
existing transactions containing the item.
Tip: If you don’t want to change existing transactions, add a new name or item instead.
To rename a list item in the chart of accounts:
1. From the Lists menu, choose Chart of Accounts to display the chart of accounts for
Rock Castle Construction.
2. In the chart of accounts, select Checking.
3. Click the Account menu button, and choose Edit Account.
QuickBooks displays the Edit Account window.
4. In the Name field, type Master Checking Account.
5. Click OK.
QuickBooks changes the account name in the chart of accounts.
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6. Close the chart of accounts.
Deleting Items and Making List Items Inactive
275.13 You can delete list items only if you have not used them in any transactions. If you try to delete a
list item that is used in a transaction, QuickBooks displays a warning that the item can’t be deleted. If you
don’t want to use a list item but you can’t delete it, you can make it inactive.
To make a list item inactive:
1. On the Home page, click the Customers button (along the left side of the Home
page).
QuickBooks displays the Customers Center, including the Customers & Jobs list.
2. Select Milner, Eloyse in the list. (Select her name, not the job.)
3. Right-click the name and choose Make Customer:Job Inactive. (You can also click
Edit Customer and then select the “Customer is inactive” checkbox.)
Notice that Eloyse Milner (and the job for her room addition) no longer appears on the
Customers & Jobs list. (The customer and job item is only removed from the list—
transactions associated with this customer and job will still show in reports.)
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Overview of Accounting and QuickBooks
4. To see inactive list items, choose “All Customers” from the View drop-down list.
QuickBooks displays all the list items again, but the Xs signify that this customer is
still inactive. (You make the customer active again by right-clicking the name and
choosing Make Customer:Job Active.)
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Printing a List
275.14 You can print a QuickBooks list for reference, or you may print a list to a file to use in your word
processor or spreadsheet. QuickBooks prints the Customers & Jobs list as it appears on the screen, for
example, if the Customers & Jobs list is expanded and sorted by balance total, QuickBooks prints the
expanded list sorted by balance total; if the list is collapsed, QuickBooks prints just the customer name,
the balance total, and active status.
To print the Customers & Jobs list:
1. In the Customer Center, click the Print menu button, and then choose Customer &
Job List.
QuickBooks displays a message telling you that you can also print list information
from the Reports menu.
If you are printing the expanded Customers & Jobs list, click the Print button.
2. Click OK to bypass the List Reports message.
QuickBooks displays the Print Reports window, which displays the name of your
printer and printer port.
You can select to print to a printer or to a file.
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Overview of Accounting and QuickBooks
3. Click Print.
Note: This is a fairly long list, so if you don’t want to print it now, click Cancel.
4. Close the Customer Center.
To print information on one customer:
1. In the Customers & Jobs list, select the customer whose details you want to print.
2. Click the Print menu button, and then choose Customer & Job Information.
275.15 If you want to print information for selected customers only, you can generate and filter
the Customer Contact report for those customers. You can also modify the report to include the
columns that you want.
To print information for selected customers:
1. From the Reports menu, choose List, and then choose Customer Contact List from
the submenu.
2. Click Customize Report.
3. Click the Filters tab.
4. Select Customer in the Filter list.
5. In the Customer field, choose Multiple customers/jobs.
6. Make sure Manual is selected and then click to put a checkmark next to those
customers for which you want to print contact information.
7. Click OK to close the Select Customer:Job window.
8. Click OK to close the Customize Report window.
9. Print the report.
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Processing Sales and Receipts with QuickBooks
3
Table of Contents
Section
Description
Page
300
Introduction .......................................................................................................... 3-1
305
System Considerations ........................................................................................ 3-2
310
Processing Mail Receipts ..................................................................................... 3-4
315
Processing Over-the-counter Receipts ............................................................... 3-10
320
Processing Sales Invoices ................................................................................... 3-17
325
Completing Period-end Activities ........................................................................ 3-19
330
Working with the QuickBooks Customer Center ................................................ 3-21
335
Adding QuickBooks Custom Fields .................................................................... 3-28
340
Entering QuickBooks Sales Information ............................................................. 3-28
345
Receiving QuickBooks Payments and Making Deposits ................................... 3-28
350
Reconciling QuickBooks Checking Accounts .................................................... 3-36
TOC 3-1
Processing Sales and Receipts with QuickBooks
3
300 INTRODUCTION
300.01 Processing cash receipts, and to a lesser extent sales invoices, are major activities of most small
business accounting departments. Not only must accounting personnel handle and deposit incoming
cash promptly, but they must also process it accurately to effectively manage the company’s cash flows
and maintain good customer relations.
300.02 This chapter provides accounting personnel step-by-step guidance for processing cash receipt
and sales transactions, both in a traditional small business that extends trade credit and in a small retail
business that receives cash over the counter. The chapter assumes the small business’s accounting
function is computerized.
300.03 The guidance in this chapter is useful to full-charge bookkeepers as well as accounting personnel
involved in selected accounting and bookkeeping areas. The chapter helps existing cash receipts
personnel fine-tune their processing activities and provides newly-hired or cross-trained employees with
a solid foundation for processing cash receipts.
300.04 The chapter includes the following major sections:
 System Considerations. Section 305 briefly discusses three aspects of accounting
systems—the type of accounts receivable subsidiary ledger, an order-entry system, and
a retailer’s point of sale system—that impact how cash receipts are processed.
 Processing Mail Receipts. Section 310 covers the processing of customer remittances
received through the mail. The section includes opening the mail, making the deposit,
applying remittances to customer accounts, handling remittance exceptions and credit
memos, posting the transactions, and filing the documents.
 Processing Over-the-counter Receipts. Section 315 covers the processing of a retail
business’s over-the-counter receipts. It includes making the deposit, auditing the daily
cash-register report (DCR), handling credit card sales, and filing the documents.
 Processing Sales Invoices. Section 320 provides a brief overview of sales invoice
processing for those small business accounting departments that have responsibilities in
this area. However, this function is now frequently handled by order entry personnel
outside the accounting department.
 Completing Period-end Activities. Section 325 discusses activities that are performed
after each month end in preparation for closing the general ledger and preparing
financial statements. Activities include reconciling the bank account and accounts
receivable subsidiary ledger, reviewing the aged trial balance, and properly “cutting off”
or ending month-end transactions.
 Working with the QuickBooks Customer Center. Section 330 discusses working with
the QuickBooks Customer Center including (1) working with the Customers & Jobs list,
(2) adding new customers, (3) providing additional customer information, and (4)
providing customer payment information.
 Adding QuickBooks Custom Fields. Section 335 discusses adding QuickBooks
Custom Fields including (1) adding custom fields for customers, vendors, and
employees and (2) adding custom fields for items.
 Entering QuickBooks Sales Information. Section 340 discusses entering QuickBooks
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Processing Sales and Receipts with QuickBooks
sales information including (1) using sales forms in QuickBooks, (2) filling in a sales
form, (3) memorizing a sale, (4) entering a new service item, (5) using multiple price
levels, (6) reminding customers of overdue payments, (7) processing sales orders, and
(8) tracking backorders.
 Receiving QuickBooks Payments and Making Deposits. Section 345 discusses
receiving QuickBooks payments and making deposits.
 Reconciling QuickBooks Checking Accounts. Section 350 discusses reconciling
QuickBooks checking accounts including (1) a reconciliation overview, (2) marking
cleared transactions, (3) viewing cleared checks in the register, and (4) Locating specific
transactions
305
SYSTEM CONSIDERATIONS
305.01 As mentioned previously, the chapter assumes that accounting personnel using this Guide are
working with QuickBooks computerized accounting system. However, even though a company is
computerized, the nature of a business’s activities will sometimes dictate system variations unique to that
type of business. Those system variations often impact how cash receipt transactions are processed.
305.02 Three system variations that are covered in this section include:
 Credit sales: open item vs. balance forward systems.
 Order-entry system.
 Retailers: point of sale system.
The first two generally apply to traditional businesses that extend trade credit, and the last type applies to
retailers.
Credit Sales: Open Item vs. Balance Forward Systems
305.03 Most accounting systems offer businesses two options for tracking unpaid customer invoices: the
open item method (which is generally more costly to maintain) or the balance forward method.
a. Open item method. The open item method tracks all open items for each customer.
Invoices are the primary method used to notify and bill customers for purchases.
b. Balance forward method. The balance forward method keeps details of only the
current period’s activity and groups all other open items into a single beginning
balance amount. Statements are the primary method used to notify customers of
purchases.
305.04 Small businesses that recurrently sell goods (rather than services) to commercial customers
typically use the open item method since commercial customers generally record and pay for purchases
using invoices (as opposed to statements). Retailers and other companies that sell to individual
consumers or provide a regular service to individuals or commercial accounts often use the balance
forward method.
305.05 The open item method requires accounting personnel to apply remittances to specific unpaid
invoices, whereas the balance forward method allows accounting personnel to apply remittances to the
aggregate unpaid balance. If the balance forward system is used in the wrong type of company,
however, accounting personnel must constantly invest extensive clerical time researching the
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composition of the beginning balance-forward amounts.
305.06 The discussion in this chapter focuses principally on the open item method since it is the most
common in small businesses, and its cash application process is more complex.
Order-entry System
305.07 Many small businesses today use an order-entry system for entering sales invoices. An orderentry system works similarly to a retailer’s point of sale system discussed below. As an order is received
from a customer (typically over the phone), it is entered into the on-line system by the order person and
posted to the invoice register before taking the next order. In contrast to a batch-processing mode, an
order-entry process allows order personnel to access current inventory quantities and other information
at any time.
Retailers: Point of Sale (POS) System
305.08 Small retailers have traditionally used a stand-alone electronic cash register to capture over-thecounter sales. Today, many retailers are converting to point of sale (POS) terminals to improve
processing efficiency. Since cash receipts processing and related transactions can be affected by the
type of system used, the following paragraphs briefly discuss and contrast the two types of systems.
 Stand-alone electronic cash register. The traditional electronic cash register’s
primary purpose is to classify cash receipts by type and provide a total of each day’s
sales transactions. The register requires accounting personnel to prepare manual
journal entries to record each day’s sales transactions.
 Point-of-sale (POS) terminal. A POS terminal is essentially a computer terminal
disguised as a cash register. A key difference between the traditional cash register
and a POS is that a POS is typically linked to the company’s accounting system
(inventory, accounts receivable, and general ledger). Thus, when individual sales are
entered, the POS system updates the inventory records for each item sold. The POS
also generates daily journal entries that may be posted manually or automatically to
the company’s general ledger.
305.09 The primary advantages of a POS system over a traditional cash register are that the POS
eliminates duplicate processing tasks and automates certain tasks (such as the cash register
closeout/reconciliation process) that were previously performed manually.
310
PROCESSING MAIL RECEIPTS
310.01 Mail receipts processing is often the single most time-consuming task performed by small
business accounting personnel. The process typically includes applying a high volume of remittances
against the related customer invoices and dealing with customers to resolve various remittance
exceptions. If remittances are not applied accurately and promptly, complaints will come quickly from
both external customers and internal credit and collection personnel.
310.02 This section covers small business processing of mail receipts. It includes a complete step-bystep process that begins with the task of opening the mail and ends with posting the cash receipt
transactions to the general ledger and filing the related documents. More specifically, it covers each of
the following tasks:
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Processing Sales and Receipts with QuickBooks








Opening the mail.
Making the deposit.
Applying remittances to customer accounts.
Handling remittance exceptions.
Reducing future remittance exceptions.
Processing debit or credit memos.
Posting receipts to general and subsidiary ledgers.
Filing remittance documents.
This section applies to small businesses that extend traditional trade credit to their customers. Retail
businesses that receive over-the-counter receipts are covered in Section 315.
Opening the Mail
310.03 The first step in processing mail receipts naturally begins with opening the mail, controlling and
safeguarding the receipts are the company’s most important concerns at this stage. When performing
this function, small businesses should consider the following recommendations:
 Use secretary/receptionist. Whenever possible, the company should assign
someone with no other cash receipt or processing duties to receive, open, and sort
the mail. This practice improves the company’s internal controls by segregating the
asset custody function from the recordkeeping function. In most small businesses, the
secretary or receptionist can fill this role.
 Restrictively endorse checks. The secretary or receptionist should separate
customer remittances from other mail (junk mail, vendor invoices, etc.) and
immediately restrictively endorse all checks. In other words, the back of each check
should be stamped with appropriate wording to preclude a lost or stolen deposit from
being cashed. Typically, the stamp indicates that the check is “for deposit only” and
includes the company’s name and bank account number.
 Forward remittance advices. The secretary/receptionist should forward the
customer remittance advices (not the actual checks) to accounting personnel. If
remittance advices are missing or incomplete, copies of the related checks should
also be made and forwarded to accounting personnel.
 Prepare duplicate deposit slips. The secretary or receptionist should prepare the
original deposit slip along with a duplicate copy. The deposit slip should typically list
the amount and customer names for each check included in the deposit. At a
minimum, an adding machine tape of the customer checks should accompany the
deposit. (The secretary/receptionist should retain the duplicate deposit slip and a
copy of the adding machine tape for later comparison to the validated deposit slip.
They should then be forwarded to the accounting department.)
Making the Deposit
310.04 The next step in processing mail receipts consists of making the deposit. The following are two
aspects of making the deposit that small businesses should follow:
 Make the deposit daily. Typically, an office manager or some other trustworthy
nonaccounting employee will take the deposit to the bank. Deposits should be made
daily whenever possible. In addition, deposits should be made before the bank’s daily
cutoff time (say, 2:00 p.m.) in order to receive credit from the bank for the deposit on
that day.
 Obtain and verify the validated deposit slip. The person making the deposit should
3-4
have the bank validate the deposit slip and return it to the secretary/receptionist. The
secretary/receptionist should compare the validated deposit slip amount with the
duplicate deposit slip amount to ensure all monies were actually deposited. The
deposit slips should then be forwarded to the accounting personnel.
Applying Remittances to Customer Accounts
310.05 Accounting personnel use the remittance advices and other supporting documentation received
from the receptionist/secretary to apply the receipts to each customer’s outstanding balance. The
process can become tedious and time consuming, particularly when remittance exceptions are common.
The following paragraphs discuss the general cash application process, followed by Paragraphs 310.11.26 that show how to deal with various remittance exceptions.
310.06 Batch Daily Remittances before Processing. Batch processing is the most common approach
used by small businesses for applying remittances to customer accounts. After receiving the daily
remittance advices from the secretary/receptionist, accounting personnel simply assemble the
remittances in a manageable bundle and prepare an adding machine tape of the total remittances
(“batch control total”). Limiting each batch to between 25 and 50 receipts will help reduce the time spent
researching input errors.
310.07 The batch control total’s purpose is to help ensure that all remittances were entered accurately.
After entering each batch of remittances into the computer, the system will typically calculate a batch
control total. If the manual and computer-generated totals agree, the data entry person gains some
assurance that remittances were accurately entered. In some systems, the data entry person must enter
the manually-calculated batch control total into the computer and may not finish the data entry until the
total agrees with the system-generated total. Accounting personnel should then agree the batch-total to
the cash receipts journal and the related validated deposit slip.
310.08 Cash application persons often use a batch cover sheet to document batch processing steps. The
cover sheet contains a unique batch identifying number and has space to document steps taken in
processing the batch and recording the batch total. The batch cover sheet is physically attached to the
bundle of remittance advices.
310.09 Apply Remittances to Customer Accounts Accurately. Accurately entering remittances is
crucial to maintaining the integrity of the accounts receivable subsidiary records. Batch control totals help
ensure that all remittances were accurately entered into the system. However, batch control totals
generally do not provide assurance that receipts were applied to the proper invoices or even that
payments were applied to the proper customer’s account. The cash application process varies
depending on whether the small business uses a balance forward or an open item subsidiary ledger.
(The two systems are also briefly discussed at Paragraphs 305.03-.06).
 Balance forward system. The cash application process is much simpler for
companies using balance forward systems. The data entry person simply calls up
each customer’s account and applies the payment in total to the outstanding account
balance (not to specific invoices).
 Open item system. The cash application process is more difficult for companies
using an open item aged trial balance. In this case, the data entry person must call up
the specific customer’s account and match up payment amounts to specific
outstanding invoices. In most small businesses, the matching process is performed
manually, but some computer programs now include an automatic application feature
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Processing Sales and Receipts with QuickBooks
that allows the system to apply a large percentage of remittances automatically. For
example, by simply entering the customer number and cash receipt amount, the
system can search the customer’s file and apply the payment to the appropriate
outstanding item.
Unfortunately, the cash application process is often not nearly as straightforward as the above discussion
may imply. Paragraphs 310.11-.23 discuss in more detail the various exceptions and difficulties that tend
to crop up when applying cash receipts.
310.10 Enter Batches in a Batch Control Log. Once data entry is complete, the data entry person
should record the batch control total (see Paragraphs 310.06-.08) and selected other processing
information into a batch control log. Typically, the data entry person records the data-entry date, the
person who entered the batch, and the batch control total. Accounting personnel subsequently compare
the control log to the cash receipts journal to ensure all entered receipts were posted1 (see Paragraph
310.33).
Handling Remittance Exceptions
310.11 If payments from customers always matched up with specific outstanding invoices, remittance
processing would be simple. Unfortunately, remittance exceptions are common. Cash application
persons must clearly identify remittance exceptions for prompt follow-up and resolution. Otherwise,
unresolved exceptions will quickly grow, reducing the usefulness of the accounts receivable aged trial
balance for collection purposes. The following paragraphs describe how cash application persons should
handle common remittance exceptions.
310.12 Cash Discounts Taken. Invoices are typically recorded at their gross amounts, even if the
company offers customers an early payment discount. Thus, when customers claim a discount when
remitting payment, the difference between the gross invoice amount and the payment must be adjusted
off.
310.13 Accounts receivable systems typically allow cash application persons to write off cash discounts
taken (often even unearned discounts) as part of cash application processing. The discount amount is
simply designated as a discount, and the system credits the invoice amount and debits the applicable
expense account. When customers take unearned discounts, however, cash application persons should
be given clear guidance by the company on how to handle the discounts. For example, the company
should instruct cash application employees about whether it will allow unearned discounts to be granted
and whether or not customers should be contacted when discounts are taken improperly.
310.14 Unauthorized Deductions Taken. Besides taking unearned discounts, customers will frequently
initiate other claims by deducting the amounts from the check. Common claims include freight disputes,
quantity shortages, and price adjustments.
310.15 Some accounts receivable systems will allow cash receipts personnel to adjust the customer’s
account during the cash application process and make the corresponding general ledger adjustment. To
1
The term “posting,” as used in this chapter, means instructing the computer to update the accounting
records (summary journals, subsidiary ledgers, or general ledger) for transactions entered during batch
processing. Prior to “posting,” transactions entered during batch processing remain in a temporary
suspense file.
3-6
maintain control over unauthorized deductions, however, adjustments generally should not be made until
a properly approved debit or credit memo has been prepared (see Paragraphs 310.27-.28). Thus, cash
application personnel should post only the net payment amount against the related invoice. The
remaining portion of the invoice should remain open until the claim can be properly resolved.
310.16 Unmatched Remittances. Customers will frequently send payments without indicating how the
payment should be applied. Remittances that cannot be readily matched to outstanding invoices
generally should be temporarily posted to the customer’s account as an unapplied credit (payment on
account). In other words, personnel should not apply the payment to specific invoices until the customer
is contacted and indicates how the payment should be applied. At that time, accounting personnel should
then match the unapplied credit to the appropriate outstanding invoices.
310.17 Unidentified Remittances. Occasionally, payments will be received from companies that do not
appear to be customers. For example, if a customer is a subsidiary of another corporation, a cash
application person might have difficulty identifying payments made by the parent company on behalf of
the subsidiary. These remittances should generally be posted temporarily to a “dummy customer
account” in the aged trial balance until cash application persons identify the customer. Once identified,
the posting to the dummy account should be promptly reversed and posted to the proper customer’s
account.
310.18 Deposits or Advance Payments. Customers sometimes will make advance payments or
deposits. These payments should be handled similarly to unmatched remittances. Cash application
persons should temporarily post them to the customer’s account as an unapplied credit (payment on
account) until the related invoice amount is entered.
310.19 Overpayments. Customers will occasionally overpay an invoice. When this occurs, cash
application persons should apply the payment against the invoice and designate the remaining
overpayment as an unapplied credit (payment on account) until the customer can be contacted.
310.20 Small Dollar Differences. Customers will often pay amounts that differ slightly from the
company’s recorded invoice amount. In those situations, cash application persons should be authorized
by the company to write off any insignificant differences while processing the remittances. In other words,
the cash application person should be able to directly post the write-off adjustment while in the
remittance processing mode without having to prepare a journal entry or obtain further approvals. The
company should set a preapproved dollar limit (say, differences of less than $1) for direct write-offs.
310.21 Returned Checks. Checks that are returned from the bank because of insufficient funds
represent “negative” receipts and generally require special treatment by cash application persons. Cash
application persons should typically process returned checks separately. In other words, they should not
be included with the normal cash receipts batch processing.
310.22 Banks typically notify companies of returned checks either by phone or through the mail. When
the company is notified of a returned check, it can request the bank to resubmit the check a second time
for collection. (This request can be automatic. In other words, the company can instruct the bank to
return the checks only after they have been sent through the bank collection system twice.) If the bank is
unable to collect the check, the company then processes and records the returned check.
310.23 The exact method the company uses to process a returned check will vary depending on the
system. Some systems only permit the company to enter a returned check as a negative cash receipt
(similar to entering a debit memo). Alternatively, systems that maintain a transaction history file of paid
3-7
Processing Sales and Receipts with QuickBooks
invoices and cash receipts will often allow cash application persons to call up the original check posting
and effectively reverse it. In other words, the original invoice is reinstated (debit to accounts receivable)
and cash is credited. In all cases, however, cash applications persons must enter the returned checks
through the accounts receivable subsidiary ledger to ensure the general ledger and subsidiary ledger
remain in balance.
Reducing Future Remittance Exceptions
310.24 Not only should small businesses establish procedures to ensure that remittance exceptions are
resolved timely, but they should also strive to minimize the number of future exceptions. To correct a
problem, however, management must first know the problem’s cause. When cash application exceptions
arise that require further follow-up and action, the cash application person should immediately document
them on a log. The log will help ensure the exceptions are promptly resolved and will provide information
to help reduce future exceptions.
310.25 Cash application persons may use the Cash Remittance Exception Log for this purpose. The log
will quickly show exceptions that have not been resolved by internal action or follow-up with the
customer. In addition, the log reveals both the type and frequency of exceptions.
310.26 Once the exceptions have been identified in the log, determining the cause is generally
straightforward. Problems can be caused internally, such as by pricing or other clerical errors, or
externally, such as when customers do not follow sales terms and policies or fail to include remittance
information with payments. In either case, educating the appropriate company employees and customers
will frequently correct the problems and reduce future exceptions.
Processing Debit or Credit Memos
310.27 The cash application process is clearly a common source for identifying remittance exceptions
that require adjustments to customer accounts. Credit, collection, and sales personnel are another
common source in small businesses. Regardless of the source, however, the company should require
that all proposed adjustments be subject to an appropriate review and approval process.
310.28 Thus, cash application and other data entry persons normally should not adjust customer
accounts during processing without first obtaining a properly approved debit or credit memo. In addition,
appropriate supporting documentation, such as receiving reports indicating returned goods, should
accompany all debit or credit memos before processing them. The specific policies and procedures will
generally be set by the owner or controller.
Posting Receipts to General and Subsidiary Ledgers
310.29 After entering remittances and other adjustments into the system, the cash application person
must instruct the computer to post the individual transactions to the accounts receivable ledger and cash
receipts summary journal. Depending on the system, the summary journal totals will subsequently be
posted to the appropriate general ledger accounts automatically or through a manual journal entry.
310.30 Consider Backing Up Files before Posting. Depending on the accounting software features
and the number of data entry persons, accounting personnel may wish to back up affected data files
before posting transactions. This backup procedure is a safety measure in case the computer was to fail
during the posting process. If the system fails during posting, it sometimes becomes difficult determining
where the system left off when it failed.
310.31 However, this backup procedure may not be necessary depending on the circumstances. Backing
3-8
up is generally not needed because of recovery procedures in many newer software packages. These
recovery procedures allow the system to restart processing at the precise point it left off when the system
failed.
310.32 Post Each Batch Promptly. Cash application persons generally should instruct the computer to
post batches after each batch is processed or at least at the end of each day. Frequent posting will
ensure the subsidiary ledger and general ledger reflect the most recent activity. Also, if the computer
system is subject to power outages or other system failures that may damage existing files, frequent
posting will help ensure previously entered data is not lost.
310.33 Compare Cash Receipts Summary Journal to Batch Control Log. After posting the cash
receipts, the cash remittance person should record in the cash receipts batch control log (see Paragraph
310.10) the number of the cash receipts journal to which the batch was posted. That person should also
agree the totals of posted batches (per the cash receipts batch control log) to the cash receipts journal. If
they agree, the cash application person knows that all cash receipts entered were posted to the cash
receipts journal. In that case, that person should document the agreement in the last column of the cash
receipts batch control log. If the totals do not agree, the difference must be located and corrected.
Filing Remittance Documents
310.34 After remittance batches have been entered and posted, they should typically be filed
chronologically in a filing cabinet or storage box by week or month, depending on the volume. Each
drawer or box should clearly show which days are included to allow easy retrieval when later questions
arise. If the batches are initially filed in filing cabinets, they should be transferred to storage boxes
annually. Each box should be clearly labeled with a destruction date.
315
PROCESSING OVER-THE-COUNTER RECEIPTS
315.01 The small business accounting department’s role in processing retail over-the-counter receipts is
often very different from its role in processing mail receipts. The differences stem primarily from how the
customers pay for their purchases. Retail customers typically make purchases by using cash, checks, or
credit cards, compared to commercial customers who typically use trade credit to purchase goods. Also,
the retailer’s accounting department is often in a location physically separate from the retail store(s),
which usually requires store personnel to perform some of the traditional “bookkeeping” activities.
315.02 This section discusses the small business accounting department’s role in processing over-thecounter receipts. It covers the following key areas:





Making the store deposit.
Auditing the daily cash-register report (DCR).
Recording store receipts in the general ledger.
Handling credit card sales.
Filing the retail cash receipt documents.
Making the Store Deposit
315.03 In contrast to commercial businesses that receive mail remittances from customers at a central
location, retailers typically receive payment from customers at a retail store that is physically located
away from the company’s accounting department (corporate office). Thus, the receiving and depositing
of cash is often handled by store personnel. in addition, most retail businesses require the store cashier
3-9
Processing Sales and Receipts with QuickBooks
to “reconcile” cash per the cash register at least daily before making the deposit.
315.04 Anytime a cash register is closed out, either because of a shift change or store closing, the
cashier typically reconciles the actual cash with the expected cash. In other words, the cashier counts
the cash in the register and reconciles it to the register’s recorded sales and other transactions. The
cashier usually documents this reconciliation process on a form commonly referred to as a daily cashregister report (DCR).
315.05 After completing the DCR the store manager (or other designated employee) typically completes
a deposit slip, takes the deposit to the bank, and receives a validated deposit slip. The store manager
then forwards the DCR, validated deposit slip, cash register tape, and any other related documents (such
as sales receipts, cash withdrawal vouchers or invoices, etc.) to the accounting department for
processing.
“Auditing” the Daily Cash-register Report (DCR)
315.06 The DCR often serves as the primary document used by accounting personnel to control store
cash and record daily sales transactions. Because of its importance in a retail environment, accounting
personnel typically verify its accuracy by “auditing” it. The following presents a sample DCR and typical
audit procedures.
315.07 Sample DCR. As mentioned previously, a DCR simply reconciles actual cash in the register with
expected cash. Any unresolved differences are shown as a “cash over or short,” as reflected in Part A of
the sample DCR form at Exhibit 3-1.
315.08 The DCR consists of three basic parts. The first part is the actual sales to cash reconciliation and
the other two parts provide supporting detail for items in the first part. Each part is briefly described
below.
 Part A—Reconciliation of Register Sales to Actual Cash. This section of the DCR
begins with sales per the register and reconciles that amount to the actual cash to be
deposited. It adjusts sales and sales taxes for overrings/underrings to arrive at a net
sales amount. Sales (including sales tax) are then adjusted for customer refunds,
credit sales and collections, any miscellaneous receipts, and other cash amounts
paid out. To facilitate general ledger account coding, Part A also includes account
numbers for the transactions.
 Part B—Detail of Actual Cash in Register. This section provides the details of cash
in the register, including any credit card slips. It deducts the fixed cash fund amount
to arrive at the net deposit. The amounts should agree to the bank deposit slip except
for credit card sales transmitted electronically for deposit. The net deposit amount is
transferred to Part A.
3-10
Exhibit 3-1
Sample Daily Cash-register Report (DCR)
Store: ABC Retail Outfit
Register No.: 1
Prepared by: D. Thomas
Date: 6/20/X4
Manager’s Signature:
Ending Register Reading: 123,790
PART A—RECONCILIATION OF REGISTER SALES TO ACTUAL CASH
Description
Sales
Tax
1 Gross sales per register
658.00
51.00
+
2 Net voids: underrings (+) overrings (-)
-26.00
-2.00
+/3 Net sales
632.00
49.00
=
CR # 400
CR # 205
G/L Accounts
4 Customer refunds:
5
Sales amount refunded
DR # 490
6
Sales tax amount refunded
DR # 205
Total customer refunds (per Part C)
=
7 Sales on account
DR # 121
8
Total cash sales
=
9 Receipts on account (ROAs) (per Part C)
CR # 121
+
10 Miscellaneous income (per Part C)
CR # 623
+
11 Paid outs (per Part C)
DR # (see below)
=
12
Total expected cash
=
13
Cash over (+) short (-) (line 14—line 12)
14
Actual cash to deposit (from line 26)
15
16
17
18
19
20
21
22
23
24
25
26
PART B—DETAIL OF ACTUAL CASH IN REGISTER
Coins
Bills
Checks
Subtotal
Fixed cash fund amount
Cash deposit amount
Credit card slips:
MasterCard/Visa
Discover
American Express
Total credit card deposit
Total deposit (To line 14)
27
28
29
30
31
32
33
34
35
Total
709.00
-28.00
681.00
-19.00
-2.00
-21.00
225.00
435.00
100.00
15.00
14.00
536.00
CR or DR # 627
+/-
-6.00
DR # 105
=
530.00
+
+
+
=
=
25.00
280.00
95.00
400.00
-100.00
300.00
+
+
+
=
=
150.00
80.00
0.00
230.00
530.00
PART C—OTHER TRANSACTIONS (Refunds, Paid Outs, Misc. Income, or ROAs)
Description (Customer or Vendor Name,
Transaction Type/
Receipt No., etc.)
General Ledger A/C #
Amount
David O’conner (Rec. No. 144515)
Refund
21.00
John Smith (Rec. No. 144523)
ROA
100.00
XYZ Vending (Rec. No. 144575)
Misc. Income
15.00
ABC Supplies (Office pads)
Paid Outs (DR # 728)
14.00
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Processing Sales and Receipts with QuickBooks
 Part C—Other Transactions Listing. This section lists the details of certain less
common transactions, such as receipts on account, miscellaneous income, and paid
outs. The total for each type of transaction is taken to Part A.
The DCR should be signed by the preparer and the store manager. In addition, the closing register
reading (used to derive the number of closeouts since the previous day’s DCR) should be documented at
the top of the form.
315.09 DCR Audit Procedures. In general, the accounting department’s DCR audit consists of:
 Reviewing the DCR for each register so that errors and improperly processed
transactions by individual sales personnel can be identified and addressed.
 Reviewing documentation supporting transactions (such as voids, refunds, paid outs,
etc.) to determine their accuracy and to ensure that they have been properly
approved by the store manager.
 Compiling daily gross and net sales totals and other statistics, such as departmental
sales and returns.
 Verifying sales commissions, sales tax collections, and cash over and short amounts.
 Checking general ledger account codings.
Recording Store Receipts in the General Ledger
315.10 The DCR is the primary source document used by accounting personnel to record retail store
receipts and other daily transactions in the general ledger. As shown in the sample DCR at Exhibit 3-1,
the DCR includes general ledger account numbers for common transactions. Where necessary,
accounting personnel may write down account numbers for less common transactions (such as paidouts) in Part C.
315.10 Accounting for specific retail store transactions is discussed in the following paragraphs.
References are to specific lines in the DCR in Exhibit 3-1.
 Sales (line 3). The general ledger sales account should be credited for the total sales
amount shown in Part A, line 3. (As discussed below, the sales amount may also
include sales taxes depending on whether or not the cash register rings taxes up
separately.) Also, some companies may wish to break down sales by product line or
cost center. The totals for these amounts may be obtained directly from the cash
register tape (assuming the register provides this option) or by adding up sales
receipts.
 Sales taxes (line 3). The process for recording sales taxes varies. If the register
rings up sales taxes separately, the net sales tax amount per the register tape will
appear on line 3 of the DCR. Accounting personnel should simply record that amount
to the sales tax payable account in the general ledger when the DCR is processed.
Alternatively, if sales taxes are not rung up separately at the register, the sales
amount (line 3) probably also includes sales taxes. In that case, accounting personnel
will manually calculate the sales tax amount and then debit the sales account when
the sales tax liability is recorded or paid.
 Customer refunds (lines 5 and 6). When store personnel make refunds to
customers, a sales returns account is debited for the net sale amount on line 5 and
the sales tax payable account is debited for the related sales tax amount shown on
line 6. (If merchandise is returned, store personnel will typically send a receiving
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




report to the accounting department explaining the return’s details. If the merchandise
is saleable, accounting personnel will typically debit inventory and credit cost of sales.
If the merchandise will be returned to the vendor for credit, accounting personnel will
usually debit a receivable account or the trade payable account and credit cost of
sales.)
Accounts receivable (lines 7 and 9). If the store offers in-house credit to customers
(or employees), accounts receivable should be debited for any sales on account
listed on line 7. In addition, accounts receivable should be credited for any collections
on account listed on line 9. If an accounts receivable subsidiary ledger is maintained,
accounting personnel may use the sales invoices (signed by the customer) and
information in Part C for updating the individual customer accounts.
Miscellaneous receipts (line 10). Stores will occasionally receive other minor cash
receipts. Those amounts are typically shown on line 10 and recorded to
miscellaneous income. If a miscellaneous receipt amount is significant, accounting
personnel should review the nature of the receipt and record it to a different general
ledger account if necessary.
Paid outs (line 11). Stores occasionally take cash from the register to make
payments to vendors and others. The total of the “paid outs” is included on line 11,
and the individual paid out amounts and appropriate general ledger accounts are
listed in Part C. Obviously, the appropriate general ledgers accounts to debit will
depend on the nature of each paid out. Depending on the situation, the account
numbers may be entered either by the store manager or by the accounting personnel.
Cash over or short (line 13). The cash over or cash short amount on line 13 is
recorded as either a credit (cash over) or debit (cash short) to the cash over/short
general ledger expense account.
Cash (line 14). Accounting personnel will debit the cash account for the net cash
deposit shown on line 14. Alternatively, if there are numerous credit card sales, some
retail shops prefer to record credit card deposits to a separate general ledger cash
account to allow easier tracking. In that case, the separate cash general ledger
accounts may be shown in Part B, lines 20 and 25.
315.12 In addition to recording store transactions as described above, if the company has multiple
stores, each store should be coded to a separate profit center in the general ledger. This approach
allows tracking of individual store profitability and comparisons among stores. Most general ledger
systems allow a two-digit store code to be added to general ledger accounts (such as 400.01, 400.02,
etc.) for cost or profit center reporting.
Handling Credit Card Sales
315.13 For many small business retailers, a significant percentage of the DCR’s receipts come from
third-party credit cards (MasterCard, Visa, Discover, American Express). Retailers typically send credit
card sales to the credit card company either by depositing the credit card receipts in the company’s
normal daily deposit or by transmitting the charges electronically through a credit card terminal located at
the store.
315.14 In either case, accounting for the receipts is generally identical to any other cash sale. Accounting
personnel simply debit cash and credit sales, although they may wish to record credit cash receipts to a
separate general ledger cash account for tracking purposes (see Paragraph 315.11). The retailer’s main
concerns are ensuring that charges are submitted to the credit card processor accurately and that the
retailer’s bank account is properly credited for the daily deposit. The procedures performed by
accounting department personnel will typically vary depending on which method is used to submit the
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Processing Sales and Receipts with QuickBooks
charges to the credit card company. Both methods are described in the following paragraphs.
315.15 Reconciling “Deposited” Credit Card Sales. Retailers that deposit credit card transactions
manually complete a charge slip for each transaction and deposit the charge slips in the daily store
deposit. Accounting personnel typically rely on the month-end bank reconciliation to ensure the company
obtains the appropriate funds from the credit card processor. In other words, accounting personnel
simply agree the deposit per the monthly bank statement with the corresponding amount in the cash
receipts journal. If the amounts agree, accounting personnel are assured that the company received the
appropriate credit from the credit card company.
315.16 Reconciling “Electronically-transmitted” Credit Card Sales. Retailers that transmit credit card
charges electronically to the credit card processor also rely on the monthly bank reconciliation process to
ensure the company’s bank account is properly credited for each day’s charges. However, an interim
reconciliation procedure is often needed to ensure that amounts were entered into the terminal
accurately and charges were properly transmitted to the credit card processor. For example, common
credit card processing mistakes made by store personnel include:
 Obtaining electronic credit authorization for a customer’s charge from the credit card
company but forgetting to actually transmit the charge.
 Completing a manual charge slip to be signed by the customer but entering the wrong
amount into the terminal.
315.17 Retailers that choose to detect and correct those types of errors before the monthly bank
reconciliation process often perform daily or weekly reconciliations of the retailer’s records to the
processor’s records. The process merely consists of comparing the company’s total credit card
transmitted amount to the processor’s total for each day. If the total’s do not agree, the retailer must
compare its individual charges (based on duplicate credit card slips attached to the DCR) with those of
the processor’s to identify the differences.
315.17 The retailer may obtain the processor’s list of charges for each day through the mail or directly
from the terminal if it has a printing capability. If the list is obtained by mail, accounting personnel
typically perform the reconciliation. If the processor’s list is printed from the terminal, the store personnel
should be required to perform the reconciliation, make any corrections, and attach the printed list to the
DCR submitted to the accounting department.
315.18 Recording Chargebacks and Fees. In addition to ensuring that the retailer receives proper
credit for charge transactions, the accounting department must record other credit card transactions,
such as chargebacks and processing fees as discussed below.
 Chargebacks. Federal law gives credit card customers the right to dispute charges
within a certain time period by requesting a “charge-back.” When a customer
requests a chargeback, the credit card processor notifies the retailer by mail and
charges the disputed amount against the retailer’s bank account until the dispute is
resolved. The accounting department should make a general ledger adjustment to
credit the cash account and debit a chargebacks receivable account. If the dispute is
subsequently resolved in the retailer’s favor, the entry will be reversed. If the dispute
is resolved in the customer’s favor, the chargeback receivable should be written off to
sales or the appropriate expense account. (If chargebacks are numerous, accounting
personnel should maintain a workpaper that lists each chargeback and its final
3-14
disposition. The workpaper total should agree to the chargeback general ledger
balance.)
 Processing fees. Credit card processors typically provide retailers with weekly or
monthly statements that summarize daily charges for the period, as well as any
chargebacks and processing fees. Accounting personnel should use this statement to
record the processing fee expense by debiting the expense account and crediting
cash. If the statements are not received on a timely basis, the expense amount will
show as a reconciling item during the monthly bank reconciliation. Occasionally, the
company may be forced to estimate the processing fee amount (based on the volume
of charges for the month) and record an accrued liability at month end.
Filing the Retail Cash Receipt Documents
315.20 After DCRs have been processed and audited, they should typically be chronologically filed in a
box or filing cabinet in the accounting department. Each drawer or box should clearly show which days
are included to allow easy retrieval when later questions arise. If the DCRs are initially filed in filing
cabinets, they should usually be transferred to storage boxes every quarter or so.
315.21 Each box should be clearly labeled with a destruction date. In most cases, the DCRs should be
retained for three years from the company’s federal tax return filing date. However, the company’s
controller, in consultation with the company’s attorney, usually determines how long DCRs should be
retained.
320
PROCESSING SALES INVOICES
320.01 Accounting personnel in most small businesses have little direct involvement with processing
sales invoices. Typically, key data (such as unit prices, sales tax exemptions and rates, and credit status)
are stored in the computer and automatically accessed when preparing sales orders or customer
invoices. Data entry is often handled by sales order personnel outside the accounting department.
320.02 In less sophisticated accounting systems, however, accounting department personnel may still
perform certain basic functions relating to invoice preparation and processing. For example, functions
might include entering quantities shipped, checking sales prices and any discounts, and computing sales
taxes. The extent of accounting personnel involvement and the processing procedures generally decline
if the company uses an on-line, order-entry system (see Paragraph 305.07) for taking and entering sales
transactions.
320.03 Because some accounting departments still have involvement in this area, the following
paragraphs briefly discuss each major aspect of invoice processing. This section does not address
companies that manually prepare invoices, although the batch processing procedures would generally
apply.
Entering Sales Orders
320.04 The process of entering sales orders and generating customer invoices varies depending on
whether the company uses a batch processing mode or an on-line, order-entry system (see Paragraph
305.07). In either case, designated personnel must ensure that sales tax exemption certificates for new
customers, if applicable, are on file. Also, if the company sells to out-of-state customers, personnel
generally must identify customers by state/locale for state income tax and sales tax purposes.
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Processing Sales and Receipts with QuickBooks
320.05 Batch Processing. In a batch processing mode, customer orders or shipping documents are
accumulated in batches (say, 25-50 orders per batch) and entered at one time. Batch control totals are
typically prepared to ensure all orders are entered and entered accurately.
320.06 The batch totals are typically calculated by running an adding machine tape of key items, such as
shipped quantities, number of line items, or extended sales order dollars (if known). After the entire batch
has been entered, the computer typically generates a batch total, which the order-entry person compares
to the manually-calculated batch total. (If the computer does not generate a batch total, accounting
personnel should retotal the figures on the edit listing to ensure they agree with the original batch total.)
320.07 To further control each month’s sales orders batch processing, data entry persons should enter
certain information from each batch in a batch control log. Typically, information in the log should include
the date and person who entered the batch, the batch total, and the corresponding sales journal number.
If the batch total was based on the extended sales prices, accounting personnel should subsequently
compare the batch total (total debit to accounts receivable) to the sales journal to ensure all sales were
posted. Since the sales journal total may be net of sales taxes, it may be necessary to add back sales
taxes to tie to the debit to accounts receivable.
320.08 On-line, Order-entry Processing. If the company uses an on-line, order-entry system, batchcontrol sheets and logs are typically not used. Instead of accumulating and processing invoices in
batches, an on-line, order-entry system usually processes each order as it is received. Thus, in an online, order-entry system, order taking personnel must be extremely careful to ensure each order’s
information is entered accurately. For orders entered over the phone, order entry persons typically repeat
the order information back to the customer to ensure it was entered accurately.
Posting Sales Invoices
320.09 After orders have been entered into the system, sales invoices must be generated and amounts
must be posted to the sales journal, the accounts receivable subsidiary ledger, and the general ledger.
Again, the process typically varies depending on whether the company uses batch or order-entry
processing.
320.10 Batch Processing. If the company uses batch processing, accounting personnel should instruct
the computer to post the batch totals to the sales journal and the individual invoices to the accounts
receivable subsidiary ledger and sales history files. Depending on the system, the general ledger
subsequently may be updated automatically or through a manual journal entry.
320.11 On-line, Order-entry Processing. If the company uses on-line, order-entry processing, the
individual invoices are posted to the accounts receivable subsidiary ledger and sales history files as each
invoice is entered and accepted into the computer. Depending on the system, the general ledger may be
updated automatically or through a manual journal entry.
Filing the Sales Documents
320.12 Sales documents typically include the customer’s purchase order, a prenumbered sales order
form, a picking list, a prenumbered packing slip, a bill of lading, and a prenumbered sales invoice.
Typically, an original invoice and one copy are generated. The following two types of files generally
should be maintained:
 Numerical file. The first type of file consists of separate numerical files of any
prenumbered documents, such as the sales order form, packing slip, and sales
3-16
invoice.
 Customer file. The second type of file consists of separate files for each customer.
That file contains each customer’s sales invoices with all attached supporting
documentation (customer purchase order, sales order form, picking list, packing slip,
and bill of lading).
The company should typically retain the documents for at least three years after filing the company’s
year-end federal income tax return.
325
COMPLETING PERIOD-END ACTIVITIES
325.01 After processing and posting sales and cash receipts for the period, accounting personnel should
then perform certain period-end procedures in preparation for closing out the general ledger. These
procedures will provide added assurance that all transactions for the period have been recorded. The
procedures generally include the following:




Reconciling the bank accounts.
Reconciling the subsidiary ledger to the general ledger.
Reviewing the accounts receivable aged trial balance.
Making a proper period-end cutoff.
This section provides step-by-step guidance that accounting personnel may use to perform these
procedures.
Reconciling the Bank Accounts
325.02 The bank statement reconciliation process is a very effective after-the-fact internal control tool.
Moreover, the process is crucial to many small businesses since their accounting systems are often
cash-driven. Not only will the reconciliation help detect errors (both the company’s and the bank’s) that
may have occurred during the period, but it also reveals any bank debits and credits that have not yet
been recorded in the company’s general ledger. Also, banking regulations generally require companies
to notify their banks of any banking errors affecting their accounts within a certain time period or the bank
cannot be held liable. Thus, small business accounting personnel should take steps to ensure the bank
reconciliation is performed timely and accurately each month.
325.03 Who Should Perform the Bank Reconciliation and When? Bank reconciliations ideally should
be performed by someone with no other cash functions. If such a person is not available, the company
should select someone with the least amount of access to receiving or disbursing cash.
325.04 Bank reconciliations should be performed as soon as possible after the bank statements are
received from the bank. The bank statements should be received by the person responsible for receiving
mail and should be forwarded unopened to the assigned bank reconciliation person.
325.05 How to Reconcile the Bank Statement. The bank reconciliation is a relatively straightforward
process that involves reconciling the balance per the bank statement with the balance per the company’s
cash account balance per the general ledger. Differences are typically caused by:
 Items recorded by company but not by bank. Deposits in transit and outstanding
checks typically cause this difference. The deposits and checks have been recorded
by the company but have not yet been received and recorded by the bank. Since
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Processing Sales and Receipts with QuickBooks
these differences are simply caused by a timing situation, adjustments to the
company’s general ledger are not needed. These differences account for the vast
majority of reconciling items on monthly bank reconciliations.
 Items recorded by bank but not by company. These differences typically consist of
transactions created by the bank that have not yet been recorded by the company.
Common examples include bank service charges, interest earnings on time deposits,
returned checks, and direct deposits and withdrawals. Occasionally, these items will
also include checks or deposits that the company failed to record. These differences
typically require accounting personnel to make a manual general ledger entry to
increase or decrease the cash account with an offsetting entry to the appropriate
general ledger account.
325.06 Some small business accounting software packages include a bank reconciliation feature that
accounting personnel may use to automate much of the reconciliation process. For accounting packages
that do not offer this feature, accounting departments may use the reconciliation form shown at Exhibit 32 to reconcile their bank accounts.
325.07 The reconciliation form is divided into two sections. The section on the left-hand side reconciles
the ending bank statement balance to the adjusted general ledger balance. The right-hand side
reconciles the unadjusted ending general ledger balance to the adjusted bank balance. When
completed, the ending balance on each side should be the same. Each section is briefly discussed
below:
 Left-hand section. This section begins with the ending bank statement balance. It
then adjusts the bank balance for items recorded on the company’s general ledger
but not by the bank. In other words, deposits in transit are added and outstanding
checks are deducted from the bank statement balance to arrive at an adjusted
general ledger (and adjusted bank) balance. Deposits in transit and outstanding
checks consist of deposits in the cash receipts journal and checks in the cash
disbursements journal that have not yet appeared on the bank statement.
 Right-hand section. This section begins with the company’s unadjusted general
ledger cash balance at the end of the period. It then adjusts that balance for items on
the bank statement (such as bank service charges or interest earnings credited to the
account) but not recorded in the general ledger. After adding or deducting these
items, the resulting balance is the adjusted bank (and adjusted general ledger)
balance. The last column may be used to indicate general ledger account numbers
for preparing the required journal entry for each of the right-hand section’s reconciling
items.
As mentioned above, the adjusted balances at the bottom of the left- and right-hand sections should be
equal if the reconciliation was properly completed. Accounting personnel should prepare journal entries
to adjust the general ledger (and subsidiary ledgers if applicable) for the reconciling items on the righthand section of the form. Occasionally, accounting personnel may also discover that deposits or checks
appearing in the left-hand section were recorded to the wrong general ledger cash account. If that
occurs, they should be added or deducted (as appropriate) from each section’s adjusted balances at the
bottom of the form and an adjusting journal entry should be made.
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Exhibit 3-2
Bank Reconciliation Form
RECONCILIATION OF BANK STATEMENT TO G/L
$ 25,300.00
Ending Bank Statement Balance as of 1/28/x4
RECONCILIATION OF G/L TO BANK STATEMENT
$ 15,790.00
Unadjusted General Ledger Balance at End of Period
Items in G/L, Not on Bank Statement
Add deposits in transit (attach list if needed):
1/28/x4
Items on Bank Statement, Not in G/L
Add unrecorded deposits and other bank credits:
Interest earnings on C.D. #587
+
+
+
+
+
+
+
Total deposits in transit
Deduct outstanding checks (attach list if needed):
Total outstanding checks
Adjusted G/L (and bank) balance
=
$ 1,250.00
$ 2,265.00
$ 4,785.00
$
$
$
$
$
$ 11,485.00
$
$
$
$
$
$
$
$
$
$
$
$ 22,115.00
Total unrecorded deposits and other bank credits
Deduct unrecorded checks and other bank debits:
Bank service charge
LOC interest
Total unrecorded checks and other bank debits
Adjusted bank (and G/L) balance
G/L A/C #. to
Adjust
CR. A/C #:
+
+
+
+
+
+
+
$ 1,700.00
$ 5,486.00
$
$
$
$
$
$7,186.00
-
$ 128.00
$ 733.00
$
$
$
$
$
$
$
$
$ 861.00
$ 22,115.00
=
# 805.xx
# 125.xx
DR. A/C #:
# 733.xx
# 865.xx
$
$
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Processing Sales and Receipts with QuickBooks
Reconciling the Subsidiary Ledger to the General Ledger
325.08 Reconciling the accounts receivable subsidiary ledger (or aged trial balance) to the accounts
receivable account in the general ledger is crucial to most small businesses. If differences between the
aged trial balance and subsidiary ledger are not resolved, either the company’s financial statements or
billing statements mailed to customers (or both) are misstated. If differences go back beyond the current
month, locating and resolving the individual differences becomes increasingly difficult and timeconsuming.
325.09 As part of the reconciliation process, accounting persons should make the following two
comparisons (reconciliations):
 Recalculate the general ledger balance. Small businesses can gain some
assurance that cash receipts journals and sales journals were posted to the general
ledger by recalculating the accounts receivable general ledger balance. Accounting
persons recalculate the ending general ledger balance by starting with the beginning
general ledger balance, adding totals per the sales journals, deducting totals per the
cash receipts journals, and adjusting for any other transactions posted to the general
ledger.
 Compare the subsidiary ledger to the general ledger. Accounting persons should
compare (reconcile) the subsidiary ledger or the aged trial balance to the general
ledger. If the two balances do not agree, accounting persons must identify and
resolve the differences. Frequently, differences are caused by entries posted to the
general ledger accounts receivable from manual journal entries or sources other than
the cash receipts or sales journals.
Reviewing the Accounts Receivable Aged Trial Balance
325.10 Accounting personnel should review the aged trial balance at the end of each period as a regular
part of the monthly closeout process. The reviewer should quickly scan each page looking for obvious
errors or anything else unusual. Common examples might include significant individual credits or
accounts with overall credit balances, unusually large debits in the current period, or large balances
slipping into the older aging categories. Accounting personnel should investigate any unusual items and
make any necessary corrections to the aged trial balance and general ledger.
Making a Proper Period-end Cutoff
325.11 To accurately present net income and other line items in the financial statements, accounting
personnel should perform certain procedures to ensure all sales (and only those sales) for the current
period are recorded. Steps that accounting personnel should take to ensure a proper period-end cutoff
include the following:
 Obtain the last invoice and shipping document number for the month. At the
end of the last business day of each period, accounting personnel should document
the last sales documents (invoices and shipping forms) used. They should examine
both the last document used and the next unused document to verify that they were
used/unused. This procedure helps ensure that only sales for the current period are
recorded.
 Obtain copy of shipping log at month end. If the company keeps a log of all
merchandise shipped, accounting personnel should obtain a copy of the log for the
last business day of the period and the first business day of the next period.
Accounting personnel should subsequently check the last five or so shipments at the
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end of the period and the first five or so shipments at the beginning of the next period
to ensure invoices were prepared and sales were recorded in the proper period.
 Process all debit and credit memos due. Accounting personnel should ensure that
all customer debit or credit memos (returned goods, price adjustments, etc.) have
been recorded. Locating unprocessed debit or credit memos will vary depending on
the company’s internal procedures. For example, if the company maintains a log of
cash application exceptions (see Paragraphs 310.24-.26), accounting personnel may
review this log to identify any unresolved exceptions. Accounting personnel can also
review the file of unmatched receiving reports at period end to identify goods returned
by customers for which credit has not yet been issued.
 Account for numeric sequence of documents. Accounting personnel should
review the numeric sequence of sales-related documents (invoices, shipping
documents, and sales orders) issued during the month to identify any out-ofsequence or missing numbers. This procedure may help identify unrecorded sales or
sales recorded in the wrong period. Accounting personnel should refer to the last
document number list discussed above when performing this procedure.
 Review open sales order file. Accounting personnel should also consider reviewing
the open sales order file to identify any old or significant sales orders that have not
yet been filled or that may have been filled but not yet invoiced.
325.12 The above steps help ensure that sales are recorded in the appropriate period. It is equally
important that accounting personnel ensure that the related costs belonging to each sale are recorded in
the same period as the sale. Without a proper matching of costs to sales in each period, net income can
be significantly overstated. For example, if a $10,000 sale is recorded at the end of the period, but the
related $8,000 cost of sale is delayed until the following period, the company’s income statement will
overstate gross profit by $8,000.
325.13 Most accounting systems are designed to automatically record the related cost of sales for all
sales recorded through the sales journal. In other words, as items sold to a customer are entered into the
accounts receivable system for invoicing, the items are also flagged in the inventory system. When the
items sold are posted to accounts receivable and sales, inventory and costs of sales are also posted.
Since the entry for recording inventory and cost of sales is often system-generated, accounting
personnel are primarily concerned with recording cost of sales for any sales recorded outside the normal
process. Thus, accounting personnel should review any sales recorded to the general ledger through
manual journal entries or other nonstandard methods to ensure the related costs of sales have been
recorded.
330
WORKING WITH THE QUICKBOOKS CUSTOMER CENTER
330.01 The Customer Center stores names, addresses, and other information about your customers. It
also holds information about the jobs or projects you may want to track for each customer.
Adding New Customers
330.02 Add a new customer to the Customers & Jobs list.
To add a new customer:
1. Click Customer Center in the navigation bar.
QuickBooks displays the Customer Center, which includes the Customers & Jobs list.
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Processing Sales and Receipts with QuickBooks
The Customer Center lets you add, edit, and get reports on your customers. Each
customer in the list can have multiple jobs (you may call them projects or accounts).
Notice that this Customers & Jobs list already has quite a few entries.
2. Click the New Customer & Job menu button (at the top of the Customer Center), and
select New Customer.
QuickBooks displays the New Customer window.
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The New Customer window is where you enter all the information about a new
customer, including billing and shipping addresses, contacts, credit limit, and
payment terms. QuickBooks uses the information you enter to complete invoices,
bills, and receipts. When you’re setting up your company file, you use this window to
record customers’ opening balances.
3. In the Company Name field on the Address Info tab, type Godwin Manufacturing, and
then press Tab.
Notice that QuickBooks fills in the Customer Name field and the first line of the Bill To
field with the information you typed in the Company Name field. QuickBooks displays
the name listed in the Customer Name field in the Customers & Jobs list. By default,
QuickBooks sorts the list alphabetically.
Tip: If you are entering individual names, you may want to use last name, first name
in the Customer Name field so that your Customers & Jobs list displays the names
with the last name first. This is useful for alphabetical sorting of lists and reports.
4. In the Bill To field, click at the end of the company name line and press Enter.
5. Type 376 Pine Street, and then press Enter.
Notice that you press Tab to move between fields, but you press Enter to move from
one line to the next within a field.
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Processing Sales and Receipts with QuickBooks
6. On the next line of the Bill To field, type Bayside, OR 64326.
7. Click Copy to have QuickBooks copy the billing address to the Ship To field.
Each of your customers can have multiple shipping addresses. You can also set
which address to use as the default address. The default address for each customer
is used on sales forms, letters, labels, and in Shipping Manager.
8. Click OK to use this address as the Godwin Manufacturing ship to address.
9. Continue filling out the customer information by providing the following information:




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Contact: John Godwin
Phone: 325-555-9841
Fax: 325-555-0012
Alt Contact: Tracy Heldt
Note: If you use plan to e-mail invoices or statements to customers using the Send
Forms feature, use this window to enter your customers’ e-mail addresses.
Providing Additional Customer Information
330.03 You’ve just completed the Address Info tab for a new customer. The Additional Info tab is where
you can provide other important information, such as customer type (if you want to categorize your
customers in some way), payment terms, and sales tax information.
To add additional information to a customer record:
1. Click the Additional Info tab.
QuickBooks displays the Additional Info tab of the New Customer window.
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Processing Sales and Receipts with QuickBooks
2. In the Type field, type Industrial.
The Type field lets you track customers in any way that is meaningful for your
business. For example, if you run ads on television, radio, and in print, and you want
to know which advertising method brings you the most customers, you can assign
customers a “type” (TV, Radio, or Print) and run reports that tell you which referral
source is most effective. Rock Castle Construction uses the Type field to categorize
customers by the type of service provided.
3. Press Tab.
QuickBooks tells you that Industrial is not currently on the Customer Type list and
asks if you wish to add it.
4. Click the Quick Add button to add the customer type to the list.
Quick Add lets you set up the item with a minimum amount of data. If you click Set
Up, you can enter more detailed information, but that interrupts the process of
creating a new customer.
5. In the Terms field, type Net 30.
6. In the Tax Code field, select Non from the drop-down list.
7. In the Tax Item drop-down list, select Out of State.
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Your screen should now look like this.
Providing Customer Payment Information
330.04 The Payment Info tab is where you enter customer account numbers and credit limits.
QuickBooks remembers each customer’s credit limit and warns you when a customer is about to exceed
it. You can also record information about each customer’s preferred payment method. For customers
who pay by credit card, you can enter credit card numbers and expiration dates.
To add payment and credit information to a customer record:
1. Click Payment Info.
2. In the Credit Limit field, type 2000.
3. In the Preferred Payment Method drop-down list, choose Check.
When you finish, your window should look like this.
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Processing Sales and Receipts with QuickBooks
4. Click OK to add the customer and close the New Customer window.
QuickBooks displays the Customers & Jobs list with Godwin Manufacturing added.
5. Close the Customer Center.
335
ADDING CUSTOM FIELDS
335.01 QuickBooks lets you add custom fields to the Customers & Jobs, Vendor, Employee, and Item
lists. Custom fields give you a way to track additional information specific to your business. For example,
you can add a field for pager numbers to your Vendor and Employee lists, a field for customers’ birthdays
to your Customers & Jobs list, and fields for units of measurement, color, and size to your Item list.
335.02 When you add the custom fields to your sales forms or purchase orders, the fields are prefilled
with the information for that specific customer, employee, vendor, or item (if you specified a value for the
custom field when you added the customer, for example).
335.03 You don’t have to add the custom fields to your forms, however; you can also use custom fields
as a way to record information just for your use, such as a credit rating for each customer. QuickBooks
remembers the information you entered in the custom fields when you import and export data and when
you memorize transactions.
3-28
335.04 For each of the names lists (customer, vendor, and employee), you can add up to seven custom
fields, including fields that are on more than one list. For example, if you add a custom “Birthday” field for
customers and vendors, QuickBooks counts it as one field used for each—for a total of two custom
fields. You can add up to five custom fields for the Item list. (Custom fields for the Item list are tracked
separately from custom fields for the customer, vendor, and employee lists.)
335.05 After you add custom fields, you can use them on invoices, credit memos, sales receipts,
purchase orders, estimates, and sales orders (QuickBooks: Premier only).
Adding Custom Fields for Customers, Vendors, and Employees
335.06 You can enter information in the custom fields only through the New or Edit windows (for
example, the New Customer or Edit Customer windows). You can display information from the custom
fields on forms as well as add custom fields to reports.
First, look at the custom fields that Rock Castle Construction has already added to its Customers & Jobs,
Vendor, and Employee lists. Then, you’ll add two new custom fields.
To add custom fields:
1. Click Customer Center in the navigation bar.
QuickBooks displays the Customer Center.
2. In the Customers & Jobs list, select Cook, Brian.
3. Click the Edit Customer button.
QuickBooks displays the Edit Customer window.
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Processing Sales and Receipts with QuickBooks
4. Click the Additional Info tab.
QuickBooks displays the Additional Info tab in the Edit Customer window.
3-30
5. Click Define Fields.
QuickBooks displays the Define Fields window.
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Processing Sales and Receipts with QuickBooks
Notice that Rock Castle Construction has already set up custom fields in the
Customers & Jobs list for contract number, birthday, and spouse’s name. In the
Vendor list, they have set up a custom field for discount available. In the Employee
list, they have set up custom fields for the date of last raise and spouse’s name. Now,
you’ll add a custom field for pager numbers to the Customers & Jobs and Vendor
lists. You’ll also add a custom field to the Employee list that tracks the date of each
employee’s last review.
6. In the first blank Label field, type Pager Number.
7. Click the Customers:Jobs checkbox to select it.
8. Click the Vendors checkbox to select it.
9. In the next blank Label field, type Date of last review.
10. Click the Employees checkbox to select it.
Your Define Fields window should now look like this.
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11. Click OK.
12. If you see an informational message about using the custom fields in transactions by
turning them on in your custom templates, click OK.
QuickBooks has added the Pager Number field to the Edit Customer window.
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Processing Sales and Receipts with QuickBooks
13. In the Pager Number field, type 415-555-9876.
If you customize your sales forms to display the Pager Number field, this number
displays whenever you create a form for this customer. It also displays on reports
modified to display the Pager Number column.
14. Click OK to close the Edit Customer window.
15. Close the Customer Center.
Adding Custom Fields for Items
335.07 Now suppose that Rock Castle Construction wants to add another custom field to its Item list. The
company purchases several types of locking doorknobs. The Item list already has custom fields for Color
and Material, but now Rock Castle wants to add an additional field to track Style.
To add custom fields for items:
1. From the Lists menu, choose Item List.
QuickBooks displays the Item list, as shown below.
3-34
2. In the Item list, select Lk Doorknobs (a sub item of Hardware).
3. Click the Item menu button, and then choose Edit Item.
QuickBooks displays the Edit Item window.
Note: Notice the Manufacturer’s Part Number field. This part number is a unique
number or code assigned by the manufacturer to each of their items. Since purchase
orders are usually sent to the manufacturer, using the manufacturer’s part number will
ensure that your vendor knows exactly what is being ordered.
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Processing Sales and Receipts with QuickBooks
4. Click Custom Fields.
QuickBooks displays the custom fields already defined for this item.
5. Click Define Fields.
QuickBooks displays the Define Custom Fields for Items window.
6. In the “Use” column, click the first blank checkbox to select it. Then type Style in the
Label field.
7. Click OK to close the window.
If you see an informational message about using the custom fields in transactions by
turning them on in your custom templates, click OK.
8. In the “Custom Fields for Lk Doorknobs” window, type Round in the Style field.
9. Click OK to close the Custom Fields for Lk Doorknobs window, and then click OK to
close the Edit Item window.
10. Close the Item list.
340
ENTERING QUICKBOOKS SALES INFORMATION
Using Sales Forms in QuickBooks
340.01 Any time you make a sale in your business, you record it in QuickBooks on a sales form.
A sales form can be an invoice (when you expect payment to come later), a sales receipt
(when you expect payment at the time you make the sale), or a credit memo.
3-36
When to Use Different Types of Sales Forms
340.02 The type of sales form you use depends on whether you expect payment in the future or at the
time of the sale.
For Payment In the Future
340.03 If you expect to receive payment at some future date, you enter an invoice. The invoice lists the
customer’s name and address, along with an itemized list of how much that customer owes.
To display a completed invoice form in QuickBooks:
1. From the Customers menu, choose Create Invoices.
QuickBooks displays the Create Invoices window.
2. Click Previous to display the previously created invoice.
If you own a business that sells products, like Rock Castle Construction, your invoice
lists the products purchased by the customer, the amount charged for each item, and
any sales tax you need to apply. Notice that Rock Castle Construction’s invoice
charges for both products and services (such as labor).
A business that sells mainly services, such as a consulting firm, might use a different
type of sales form than the one shown above. QuickBooks lets you choose from three
different preset formats for your sales forms, or you can create your own customized
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Processing Sales and Receipts with QuickBooks
forms.
3. Close the Create Invoices window.
For Payment at the Time of Sale
340.04 If you receive full payment at the time you make a sale—either by cash, check, or credit card—
you fill out a sales receipt instead of an invoice. Like the invoice, the QuickBooks sales receipt includes
information about the items or services purchased, but it also includes information about how payment
was made.
To Display A Completed Sales Receipt In QuickBooks:
1. From the Customers menu, choose Enter Sales Receipts.
QuickBooks displays the Enter Sales Receipts window.
2. Click the Previous button to view the previously entered sale.
The sales receipt is similar to the invoice—both forms display customer information and
describe the items and services purchased. However, because payment is made at the time of
sale, the sales receipt has deposit information at the bottom of the window.
3. Close the Enter Sales Receipts window.
3-38
Using Statements to Bill Customers
340.05 Another option for billing customers is to send statements. Statements are ideal if you want to
accumulate charges before requesting payment, or if you assess a regular monthly charge. Billing
statements list the charges a customer has accumulated over a period of time.
340.06 You enter statement charges one by one, as you perform services for the customer. Later, you
print a billing statement that shows the previous balance, details of all new charges, payments received,
and the new balance. Billing statements are appropriate if you want to send monthly statements that
show the detail of new charges as well as the previous balance and payments received.
340.07 If you bill the same charge to a group of customers on a regular basis, you can set up
QuickBooks to enter the charges automatically when it's time to send out your statements. Any business
that bills a recurring charge on statements can use this feature. For more information, search the
onscreen Help index for memorized transactions, for statement charges.
Understanding Statement Limitations
340.08 In QuickBooks, statements have the following limitations:
 You can't record sales tax, percentage discounts, payment items, or group items as a
separate charge on a billing statement. To bill for any of these, you must use an
invoice.
 You cannot group related charges together and subtotal them (you can group and
subtotal charges on an invoice).
 A charge on a billing statement can represent only one item (in contrast, an invoice
can represent many items). This means you must enter a separate statement charge
for each service or product you sell.
 You cannot add custom fields (for lists or items) to the statement form.
You can include invoice detail on statements and include all open transactions as of a certain date.
Choosing a Template for Sales Forms
340.09 QuickBooks has four different templates for invoices: Intuit Service, Intuit Professional, Intuit
Product, and Custom.
 Use the Intuit Service Invoice template if you primarily sell services but occasionally
sell goods.
 Use the Intuit Professional Invoice template if you sell services and need a lot of room
for descriptions of your services.
 Use the Intuit Product Invoice template if you sell parts or products and need fields
relevant to shipping.
 Use the Custom Invoice template if you want to tailor a form to your type of business.
340.10 Each template has an onscreen version and a printed version. This lets you record all the sales
detail you need, but print only what you want customers to see. For example, if you use the Professional
Invoice template, the onscreen version shows the number of hours you’re billing the client as well as your
hourly rate; the printed version shows only the Description and the Amount fields.
340.11 You can save all QuickBooks sales and purchase forms as portable document format (PDF) files.
To save a form as a PDF file, display the form and then choose Save as PDF from the File menu.
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Processing Sales and Receipts with QuickBooks
Filling in a Sales Form
340.12 Suppose Rock Castle Construction wants to bill a customer for a portion of a kitchen remodeling
job. Because they expect payment to be made in the future—rather than cash on the spot—they need to
create an invoice.
Filling in the Customer Information
340.13 Filling in an invoice is just like filling in a paper form; you enter the customer information first,
followed by a description of the charges.
To enter customer information on an invoice:
1. From the Customers menu, choose Create Invoices. Notice that the new invoice
already has the current date (12/15/2007 in the sample file) entered in the Date field,
and the next invoice number assigned in the invoice # field.
2. In the Template field, select Custom Invoice from the drop-down list. O
3. In the Customer:Job field, click the arrow next to the drop-down list. QuickBooks
shows you a list of Rock Castle Construction’s existing customers and jobs.
4. Choose Jacobsen, Doug:Kitchen for the customer and job. Because this name has
already been entered on the Customer:Job list, QuickBooks knows the billing name,
the address, and the payment terms. It provides this information for you on the top
half of the form.
Filling in the Line Item Area
340.14 On the bottom half of the invoice, you list each service or product you’re selling on it own line,
along with the amount the customer owes for that item. Because information about individual items is on
separate lines, the lines are called line items.
340.15 In QuickBooks, you enter line items using the Item list, so you don’t have to type and retype lines
for services or products you sell frequently. For example, an architect would have one item for design
and another for construction supervision.
340.16 But items are not just products you sell or services you provide to clients. Line items can be
anything you might want to put in the detail area of an invoice, like a discount, a subtotal line, a markup,
or a sales tax calculation.
3-40
Rock Castle Construction has already entered the items for which it bills customers on its Item list.
To complete the line item area of an invoice:
1. In the Item field, type the letters rem (for Removal). QuickFill is an alternative to
choosing from a list. Whenever you’re in a field where you’ll use a list item, you can
start typing the first letter or two of the list item you want, and QuickBooks fills in the
field with the item that matches the letters you’re typing.
2. Press Tab.
When you press Tab to accept a QuickFill entry, QuickBooks fills in other information about
the item, like its description and rate. In this case, QuickBooks displays “Removal labor” in the
Description column and a rate of $35 per hour. All you have to do is enter the number of
hours.
3. Type 40 in the Quantity column.
4. Press Tab to have QuickBooks update the invoice total.
Completing the Sales Form
340.17 If you want to check the form before you print it, you can use the print preview feature in the
Create Invoices window.
To complete and record the invoice:
1. On the Create Invoices window toolbar, click the Print drop-down arrow, and then
choose Preview.
QuickBooks displays the invoice page as it will look when printed.
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Processing Sales and Receipts with QuickBooks
2. Click Zoom In and use the scroll bars to see the invoice items at greater magnification.
3. Click Close.
4. In the Create Invoices window, record the sale by clicking Save & Close.
340.17 QuickBooks records the invoice in your accounts receivable register. If this were a sales receipt,
QuickBooks would record the sale in your Undeposited Funds account until you deposit the money at the
bank, or record a deposit in the bank account you specified in the Enter Sales Receipts window. (The
option to select an account into which you want to deposit the payment is only available when the Sales
& Customers preference “Use Undeposited Funds as a default deposit to account” is turned off.)
The accounts receivable register keeps track of how much money your customers owe you.
To see the Accounts Receivable register:
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1. From the Company menu, choose Chart of Accounts.
QuickBooks displays the chart of accounts.
2. In the chart of accounts, double-click the Accounts Receivable account.
QuickBooks displays the accounts receivable register.
3. Select the sale we just recorded in the register (for Doug Jacobsen).
4. Double-click the entry. When you double-click an entry in a register, QuickBooks
displays the original form (in this case, the invoice).
Memorizing a Sale
340.18 Many of the sales you make in your business are ones you repeat again and again. For example,
you may have a standing monthly order from a customer, or you may perform essentially the same
services for more than one client. QuickBooks lets you memorize sales forms so that you don’t have to
retype the information.
To memorize the invoice:
1. Make sure you have the invoice you want to memorize displayed on your screen.
2. From the Edit menu, choose Memorize Invoice.3
QuickBooks displays the Memorize Transaction window.
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Processing Sales and Receipts with QuickBooks
3. Type a description that helps you recognize the memorized invoice, or keep the
default description QuickBooks has provided.
You can enter any description you like. Notice that you can also have QuickBooks
remind you when to use the memorized transaction (for an invoice you always send at
the end of the month, for example).
4. Click OK.
5. Close the Create Invoice, Accounts Receivable, and the Chart of Accounts windows.
When you memorize an invoice, QuickBooks adds it to the Memorized Transaction list.
To recall a memorized sale:
1. From the Lists menu, choose Memorized Transaction List.
QuickBooks displays the Memorized Transaction List window.
2. Double-click the transaction you just added.
QuickBooks displays the Create Invoices window, with the information you memorized
displayed on the form. It gives you a new invoice number and displays the current date. You
can modify the information as you wish, or just save the invoice as is.
3. Click Save & Close to record the invoice.
4. Press the Esc key to close the Memorized Transaction list.
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Entering a New Service Item
340.19 When you begin using your own QuickBooks company file, you’ll need to create your own line
items to include on your invoices.
340.20 Rock Castle Construction already has a service item called Repairs that it uses when it wants to
charge for general repair work. Suppose Rock Castle wants to add a subitem for plumbing repairs to the
Item list. (The company charges a higher rate for plumbing repairs, so it wants a separate item for it on
its Item list.)
To create a new service item:
1. From the Customers menu, choose Item List.
QuickBooks displays the Item list for Rock Castle Construction.
2. Click the Item menu button, and then choose New.
QuickBooks displays the New Item window.
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Processing Sales and Receipts with QuickBooks
Note: You must be using a QuickBooks: Premier or higher edition product to see
Inventory Assembly listed as an item type
3.
4.
5.
6.
7.
8.
9.
In the Type field, select Service from the drop-down list.
In the Item Name/Number field, type Plumbing.
Click the “Subitem of” checkbox to select it.
In the drop-down list below the “Subitem of” field, select Repairs.
In the Description field, type Plumbing repairs and maintenance and press Tab.
In the Rate field, type 55.
In the Tax Code drop-down list, select Non.
Now you need to assign this line item to one of Rock Castle Construction’s income
accounts.
10. In the Account field, select Construction:Labor from the drop-down list.
Your screen should look like the following figure.
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11. Click OK to add the new item to Rock Castle Construction’s Item list.
12. Close the Item list.
Now that the new item is on the Item list, Rock Castle Construction can invoice for plumbing repairs
separate from its general repair work. It can also create sales reports that show sales for general repairs
separate from sales for plumbing repairs.
Using Multiple Price Levels
340.21 You set up a new service item for Rock Castle construction and assigned a price to that item.
Sometimes businesses want to vary an item’s price based on who they are selling to. For example, Rock
Castle Construction charges different prices depending on whether it is selling to a residential or a
commercial customer.
340.22 You can associate price levels with specific customers so that each time you create an invoice (or
other sales form) for that customer, QuickBooks uses the appropriate price level when calculating rates
and amounts on the form. Price levels make it easy to use different rates on sales forms without having
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Processing Sales and Receipts with QuickBooks
to calculate percentage amounts manually. Price levels affect amounts for service, inventory, noninventory part, and inventory assembly items only. (Inventory assembly items are available in
QuickBooks: Premier and higher.)
340.23 In this section, you’ll create a new price level, associate it with one of Rock Castle’s customers,
and then create an invoice for that customer.
Creating New Price Levels
340.24 Rock Castle Construction charges its residential customers the base sales price it set up on its
Item list. The company charges its commercial customers 10 percent less than the base sales price.
Create a new price level for Rock Castle Construction to use to reduce the sales amount for its
commercial customers.
340.25 For each price level you create, you assign a name and percentage increase or decrease to the
item’s base sales price. You can create up to 100 price levels to use on invoices, sales receipts, and
credit memos.
To create a new price level:
1. From the Lists menu, choose Price Level List.
2. From the Price Level menu button, choose New.
3. In the Price Level Name field type Commercial.
Note: The Price Level Type field is selectable only with QuickBooks: Premier or
higher. If you’re using QuickBooks: Premier or higher, select “Fixed %” from the Price
Level Type drop-down list.
4. Leave “decrease” selected in the “This price level will” field, and then type 10 in the
percentage field.
Always enter the percentage as a positive number.
5. From the “Round up to the nearest” drop-down list, choose “1.00 minus .01.” This
option rounds all the prices to the nearest dollar amount minus one cent, for example,
$10.00 rounds to $9.99. With QuickBooks, you can round your prices to the nearest
whole cent, or you can precisely determine the amount by creating a user defined
option.
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Your window should look like the following.
6. Click OK.
Your screen should now resemble the following.
7. Close the Price Level list.
Associating Price Levels With Customers
340.26 When you assign price levels to customers, QuickBooks calculates rates and amounts on sales
forms based on the price level associated with that customer.
To associate a price level with a customer:
1.
2.
3.
4.
Click Customer Center on the navigation bar.
In the Customers & Jobs list, select Lew Plumbing - C.
Click Edit Customer, and then click the Additional Info tab.
From the Price Level drop-down list, choose Commercial.
Your screen should look like this.
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Processing Sales and Receipts with QuickBooks
5. Click OK to close the Edit Customer window and save your changes.
Using Price Levels on Sales Forms
340.27 In this section, you’ll create an invoice for the customer with whom you just associated the
Commercial price level to see how the price level affects amounts on the form.
To use a price level associated with a customer:
1. Make sure Lew Plumbing - C is selected in the Customers & Jobs list.
2. Click the New Transaction menu button and choose Invoices from the drop-down
menu.
3. Press Tab.
Notice that QuickBooks displays the name of the price level associated with this
Customer:Job in brackets above the Customer:Job drop-down list. (This nformation
will not be printed on the form.)
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4. Click in the Item column and choose Framing from the drop-down list. If you don’t see
the Item column, make sure you are using the Custom Invoice template
5. In the Quantity field, type 8.
6. Click below Framing in the Item field and choose Wood Door:Exterior from the drop-down list.
7. In the Quantity field, type 2 and then press Tab.
Your screen should look like this.
8. Keep the invoice open and choose Item List from the Lists menu.
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Processing Sales and Receipts with QuickBooks
9. In the Item list, go to Framing. Note that the price for framing is $55.00, but the rate
on the invoice is $49.99—10 percent less than the base sales price, rounded to the
nearest dollar minus one cent. QuickBooks has automatically reduced the rate on the
invoice by 10 percent and rounded the amount according to your price level setting.
Note: You can set up QuickBooks to round rates up to the nearest cent. You can set
the rounding option for a rate from the Price Level list. See “Creating new price levels”
on page 144.
10. In the Item list, scroll to the Wood Door:Exterior item and note that the base sales
price is $120—10 percent greater than the rate listed on the invoice using the
Commercial price level. It appears on the invoice as $107.99, including the discount
and rounding settings.
11. Close the Item list.
12. Record the invoice by clicking Save & Close.
Assigning Price Levels to Individual Line Items
340.28 In addition to associating price levels with customers, you can also use price levels on an
individual basis on sales forms. The following are some examples of when you might want to do this.
 You’ve associated a price level with a customer, but want to charge the base sales
price for an item on a sale to that customer.
 You want to use a price level for one or more items, but you don’t want to assign a
price level to the customer for whom you’re recording the sale.
To apply a price to a single line item:
 In a sales form with line items, click in the Rate column and select the price level you
want to use from the drop-down list that displays.
 When you move out of that field on the form, QuickBooks recalculates the amount and
balance due.
Note: If you use QuickBooks: Premier, you can refine your price levels even further by
setting price levels for select items. For example, you could give a particular customer
or group of customers an extra discount for a specific item or group of items as shown
in the following graphic.
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Reminding Customers of Overdue Payments
340.29 In this section, you’ll learn about two types of documents you can create to remind customers
about overdue payments.
340.30 The first method involves creating a letter to a specific customer directly from that customer’s
overdue invoice. Using this method, you can create a cover letter that summarizes information about the
original invoice and lists the outstanding balance. You can also have QuickBooks list all of the line-item
information. An additional option is to have QuickBooks format the letters to work with window
envelopes.
340.31 The second method involves generating reminder statements, which allow you to generate
documents that list recent invoices, credit memos, and payments received.
Creating Invoice Letters
340.32 Rock Castle has noticed that one of its customers has an invoice with a partial balance still
outstanding and wants to send a quick reminder. You create an invoice letter to remind the customer
about the unpaid balance.
To create an invoice letter:
1. From the Reports menu, choose Customers & Receivables, and then choose Open
invoices from the submenu.
2. In the report window, scroll down until you see the listings for Anton Teschner:Sun
Room.
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Processing Sales and Receipts with QuickBooks
3. Double-click on the line for invoice # 60.
4. In the Create Invoices window, click the down arrow next to the letter and envelope
icon to display the drop-down list.
5. Select Prepare an Invoice Letter, and then choose Cover Letter.
If you wanted to include all of the line-item detail from the invoice, you would choose
the Invoice Letter with Details option.
6. Click Next.
7. Type Tom Ferguson in the Name field and then type President in the Title field.
8. Click Next.
QuickBooks displays a letter containing summary information pulled from QuickBooks
about the unpaid balance on the invoice.
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9. In QuickBooks, click Cancel because you don’t need to print envelopes now.
10. From the Window menu, choose Close All.
Generating Reminder Statements
340.33 Reminder statements summarize a customer's account with a company by listing recent invoices,
credit memos, and payments received. You can use reminder statements when you bill through invoices
but want to remind your customers about delinquent payments.
340.34 Reminder statements are different than other “forms” in QuickBooks such as invoices, sales
receipts, or checks. Because QuickBooks already has all the information you need to create reminder
statements, you don't have to fill them out. Instead, you review the information that will appear on each
statement, decide whether to add finance charges, and print them.
Rock Castle uses invoices to bill its customers, but it sends reminder statements to customers with
overdue invoices. Generate statements to send to customers with outstanding balances.
Rock Castle wants to send reminder statements to all customers who have balances more than 30 days
past due.
To generate reminder statements:
1. From the Customers menu, choose Create Statements.
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Processing Sales and Receipts with QuickBooks
QuickBooks displays the Create Statements window.
2. In the Enter Statement Date and Type section of the window, select the “All open
transactions as of Statement Date” option.
3. Click to select the “Include only transactions over” checkbox.
4. Leave the number of days past due field entry at 30.
5. In the Select Customers section, select “All Customers.”
6. In the Select Additional Options section, click to select the “Show invoice item details
on statements” checkbox.
Your screen should look like the following graphic.
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7. Click Assess Finance Charges.
QuickBooks displays the Assess Finance Charges window.
8. Click Unmark All.
9. In the Assess column, click to put a checkmark in the row for the 155 Wilks job for
Pretell Real Estate.
Your screen should look like the following graphic.
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Processing Sales and Receipts with QuickBooks
10. Click Assess Charges.
11. Answer Yes when QuickBooks displays the message telling you that finance charges
have already been assessed today.
QuickBooks creates a finance charge invoice for Pretell Real Estate in the amount of
$22.08. This amount does not display on the current statement, but you can send the
finance charge invoice with the reminder statement.
12. Click Preview.
QuickBooks displays reminder statements for the three customers whose balances
are 30 days or more past due—including the details from the original invoices.
13. Click Close.
At this point you could generate and send the reminder statements to your
customers.
14. Close the Create Statements window.
Processing Sales Orders
340.35 Note: Sales orders are not available in QuickBooks: Pro. To proceed, you must be using
QuickBooks: Premier or a higher edition. The sales order feature lets you track orders from customers
and “set items aside.” You can also use sales orders to track back orders when a customer orders
something and you are out of stock. Using this feature, you can track the orders you need to fill without
affecting accounts receivable. Sales orders affect only inventory quantities—not values—until you
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actually sell the items.
340.36 When inventory items come in, you can create an invoice directly from the sales order. If only
some of the items have come in, you can invoice for those items, and use the sales order to create
invoices for the remaining items later. Once all items have been received and invoiced for, QuickBooks:
Premier closes the sales order.
Creating Sales Orders
340.37 Create an invoice from a sales order. You display a report to see if there are any open sales
orders. The report shows that there is an open sales order for Lumber for Fran Smallson. Rock Castle
now has sufficient quantity on hand to fill the customer’s order, so you can close the sales order and
invoice the customer.
340.38 If you’re using QuickBooks: Premier, you can also generate purchase orders directly from sales
orders by clicking the down arrow on the Create Invoices button in the Create Sales Order window, and
then selecting Purchase Order.
6
To create an invoice from a sales order:
1. From the Reports menu, choose Sales and then choose Open Sales Orders by Item.
QuickBooks displays the Open Sales Orders by Item report.
2. Double-click the sales order for Decking in the report window (Sales Order #2 for
Fran Smallson).
QuickBooks opens the sales order.
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Processing Sales and Receipts with QuickBooks
3. In the Create Sales Orders window, click Create Invoice menu button on the toolbar
and choose Invoice.
Creating the invoice from the sales order links the sales order and invoice, which
means that when you invoice the customer for items on the sales order, those items
are marked as closed.
QuickBooks displays the Create Invoice Based On Sales Order window.
4. Leave the “Create invoice for all of the sales order(s)” option selected, and click OK.
QuickBooks creates an invoice for the customer. In this case, all of the items the
customer order arrived, so you can close the sales order. If only some of the items
had come in, you could invoice for only those items and keep the sales order open
until any remaining items arrived. QuickBooks tracks which items are still open.
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5. In the Create Invoices window, click Save & Close.
6. Close the report window.
Tracking Backorders
340.39 Using certain industry-specific QuickBooks Editions, you can use sales orders to track items that
customers have ordered, but that are out of stock. Tracking backorders on sales orders, invoices, and
other sales forms shows exactly what still needs to be shipped out. Tracking backorders on purchase
orders shows what is still expected to be received from a vendor.
First create a sales order and create an invoice from that sales order. (The customer has ordered items,
but you don’t have sufficient quantities to fill the entire order.) Then, you’ll receive items into inventory
and track the remaining items on backorder.
Note: You must be using QuickBooks: Premier Accountant Edition, Retail Edition, Manufacturing and
Wholesale Edition, or Enterprise Solutions Editions.
To create a sales order:
1. From the Customers menu, choose Create Sales Orders.
QuickBooks displays the Create Sales Orders window.
2. In the Customer:Job drop-down list, select Roche, Diarmuid:Room Addition.
3. Click in the Item column and select Frames:Exterior Frame from the drop-down list.
4. In the Ordered column, click the Availability icon.
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Processing Sales and Receipts with QuickBooks
In the Current Availability window, you can get information about what is available in
inventory, what is listed on other sales orders, what’s reserved for assemblies, and
what’s on order.
Notice you have two exterior frames available. However, you need four exterior
frames to complete the room addition. So you’ll need to put the remaining two on
backorder.
5.
6.
7.
8.
Click Close, and then type 4 in the Ordered column.
Press Tab, and then click OK at the two messages that appear.
Type 40.00 in the Rate column.
Press Tab again to have QuickBooks update the total.
The sales order should look like the following:
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You can fill part of the order now because you have two exterior frames in stock, so
you’ll create an invoice from the sales order.
9. In the Create Sales Orders window, click Create Invoice menu button on the toolbar
and choose Invoice.
This links the sales order and invoice, which means that when you invoice the
customer for items on the sales order, those items are marked as closed. QuickBooks
displays the Create Invoice Based On Sales Order window.
10. Click “Create invoice for selected items” and click OK.
QuickBooks displays the Specify Invoice Quantities for Items on Sales Order(s)
window. When you create the invoice for selected items only, you indicate how many
of each item from the sales order you want to include on the invoice.
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Processing Sales and Receipts with QuickBooks
Note: You can click the “Show quantity available instead of quantity on hand”
checkbox to display the number of items in inventory plus the number of items on
purchase orders with vendors, minus the number listed on all other sales orders and
quantity on pending builds.
11. Make sure 2 appears in the To Invoice column and click OK to invoice for the two
exterior frames you have in inventory.
QuickBooks displays the invoice. On the invoice, QuickBooks lists how many of each
item has been invoiced previously and how many are included in the current invoice.
12. Click Save & Close.
QuickBooks creates an invoice for the two door frames in stock and puts the other two
on backorder.
The Open Sales Orders by Item report can help you track which items are on
backorder by showing the quantity ordered and the quantity invoiced. (To run the
report, choose Sales from the Reports menu, and then choose Open Sales Orders by
Item.)
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Receiving Items
340.40 Rock Castle Construction has just received 10 exterior door frames from Perry Windows & Doors.
Before you can invoice Diarmuid Roche for the door frames on backorder, you need to receive the items
into inventory.
To receive items into inventory:
1. From the Vendors menu, choose Receive Items.
2. In the Create Item Receipts window, choose Perry Windows & Doors from the Vendor
drop-down list.
3. Click No at the message that appears.
4. In the Item column, select Frames:Exterior Frame.
5. Press Tab twice to go to the Quantity column and type 10.6
6. Press Tab and QuickBooks updates the amounts.
Your screen should resemble the following graphic.
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Processing Sales and Receipts with QuickBooks
7. Click Save & Close.
Once you’ve entered the items into inventory, you have sufficient quantity on hand to
finish filling Diarmuid’s order.
To fill Diarmuid’s order:
1. From the Customers menu, choose Create Sales Orders.
2. Click the Previous button to display Diarmuid’s sales order.
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Notice that QuickBooks helps you track backordered items by adding a Backordered
column to sales orders. (Backordering always starts from sales orders.) In addition,
you’ll see Invoiced and Clsd columns. Once the sales order is either fully invoiced or
closed, the Backorder column no longer displays. The Invoiced and Clsd columns
always appear.
3. In the Create Sales Orders window, click Create Invoice menu button on the toolbar
and chooseInvoice. QuickBooks displays the Create Invoice Based On Sales Order
window.
4. Click “Create invoice for selected items” and click OK.
QuickBooks displays the Specify Invoice Quantities for Items on Sales Order(s)
window. When you create the invoice for selected items only, you indicate how many
of each item from the sales order you want to include on the invoice.
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Processing Sales and Receipts with QuickBooks
5. Make sure 2 appears in the To Invoice column and click OK to invoice for the two
exterior frames for Diarmuid’s room addition.
QuickBooks displays the invoice. On the invoice, QuickBooks lists how many of each
item has been invoiced previously and how many are included in the current invoice.
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You can customize invoices to display a Backordered column.
6. Click Save & Close to save the invoice and close the Create Invoices window.
7. From the Customers menu, choose Create Sales Orders.
8. Click the Previous button to display Diarmuid’s sales order.
Notice the sales order now indicates that it has been invoiced in full.
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Processing Sales and Receipts with QuickBooks
9. Close the Create Sales Order window.
Tracking Backorders on Purchase Orders
340.41 A backorder is the inventory on a purchase order that has not yet been received. In QuickBooks
this occurs when a purchase order has been sent, a partial shipment has been received, but you have
not received the final shipment. The items on the purchase order that have not yet been received are
considered to be on backorder.
340.42 Backordered and Rcv'd columns automatically appear after a purchase order has been partially
received.
Note: Customize your purchase order template if you want the Backordered column to be printed on the
purchase order.
345
RECEIVING QUICKBOOKS PAYMENTS AND MAKING DEPOSITS
Recording Customer Payments
345.01 If you’re receiving payment at the time of a sale, and you fill out a sales receipt, QuickBooks
records a customer payment. When you invoice a customer, and you receive payment later, you enter
the payment in the QuickBooks Receive Payments window.
345.02 The Receive Payments window lets you match up payments you receive with invoices you’ve
written. You’ll be working with the Receive Payments window in this session.
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Recording a Payment in Full for a Single Job
345.03 The simplest case is when a customer has one outstanding invoice for one job and sends you a
payment for the full amount. Suppose that Rock Castle Construction receives a check for $4735.73 from
Mike Violette for his workshop. Here’s how you’d enter the payment.
To record a payment in full:
1. From the Customers menu, choose Receive Payments.
QuickBooks displays the Receive Payments window.
The first step is to enter the name of the customer from whom you’ve received a
payment.
2. In the Received From field, select Violette, Mike: Workshop from the drop-down list.
QuickBooks displays the outstanding invoice for Mike Violette.
3. Press Tab to move to the Amount field.
4. In the Amount field, type 4735.73 and press Tab.
QuickBooks updates the amount in the Payment field to 4735.73, and applies the
payment to the one outstanding invoice.
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Processing Sales and Receipts with QuickBooks
5. In the Payment Method field, select Check from the drop-down list and then press
Tab.
When you enter a preferred payment method in a customer’s record, QuickBooks
pre-fills that information when you select the customer’s name in this window.
6. In the Check # field, type 6745.
7. Click Save & New.
This records the payment and clears the window so you can enter another one.
Entering a Partial Payment
345.04 Rock Castle Construction has also received a check for $1,000 from Ecker Designs. Ecker
Designs has two outstanding invoices and owes more than $6,000.
To enter a partial payment:
1. In the Received From field, select Ecker Designs: Office Repairs from the drop-down
list.
In the middle of the window, QuickBooks shows you the invoices still outstanding for
the job. In this case, there are two.
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2. Press Tab to move to the Amount field, and then type 1000. Then press Tab again.
QuickBooks automatically applies the payment you’ve entered to Ecker Design’s
oldest invoice.
To choose which invoice a payment applies to, rather than having QuickBooks apply
it to the oldest one, you can un-apply the payments and apply them as you wish. If
you always want to select the invoice yourself, turn off the Sales & Customers
preference “Automatically apply payments.”
3. Click Un-Apply Payment.
4. In the Payment column, type 1000 as the amount you want to apply to the second
invoice, and then press Tab.
5.
6.
7.
8.
In the Pmt. Method field, leave Check selected.
In the Check # field, type 5678.
Leave the “Leave this as an underpayment” option selected.
Click Save & New to record the partial payment and clear the window.
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Processing Sales and Receipts with QuickBooks
Applying One Payment to Multiple Jobs
345.05 Rock Castle Construction is working on several jobs for a customer, Brian Cook. Brian has
payments outstanding for four invoices. He wants to write one check to cover all outstanding payments.
Apply this single payment to invoices for multiple jobs.
To apply one payment to multiple jobs:
1. In the Receive Payments window, select Cook, Brian from the Received From dropdown list.
QuickBooks lists the open invoices for all of the jobs associated with Brian Cook.
2. Press Tab to move to the Amount field.
3. In the Amount field, type 7812.63 and then press Tab.
Notice that QuickBooks applies the payment to all outstanding invoices.
4. In the Pmt. Method drop-down list, confirm that Check is selected.
5. In the Check # field, type 375.
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Your window should look like this.
6. Click Save & New.
Entering Overpayments
345.06 If a customer sends you an overpayment, you simply enter the amount in the Receive Payments
window, and QuickBooks keeps track of the additional payment. When the customer has future invoices,
you can apply the overpayment to those amounts—you can even apply the credit directly to the invoice.
Suppose that Rock Castle Construction has received a payment of $12,500.00 from Pretell Real Estate
for the 75 Sunset Rd. job. The outstanding invoice for that job is $12,412.18.
To enter the payment:
1. In the Received From field of the Receive Payments window, select Pretell Real
Estate:75 Sunset Rd. from the drop-down list.
QuickBooks displays an invoice dated 12/01/2007 for $12,412.18.
2. Press Tab and type 12500 in the Amount field.
3. Press Tab again.
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Processing Sales and Receipts with QuickBooks
QuickBooks shows an overpayment amount of $87.82 and prompts you to choose
whether to leave the credit to be used later or to refund the amount to the customer.
You want to refund the overpayment.
4. Select “Refund the amount to the customer” option.
5. Click Save & New.
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6. In the Issue a Refund window, click OK.
Handling Down Payments or Prepayments
345.07 If a customer makes a payment before you’ve invoiced him for services (for example, he may be
making a down payment or paying a retainer fee), you can still record the payment at the Receive
Payments window. However, because you don’t have any invoices to which to apply the payment,
QuickBooks records the payment as an unused payment (just like an overpayment).
345.08 QuickBooks holds the unapplied amount with the customer’s name. The next time you enter that
customer in the Receive Payments window, QuickBooks displays the credit amount in the Unused
Credits area. The customer’s balance also reflects the credit amount.
345.09 Suppose Kristy Abercrombie wants Rock Castle Construction to do a kitchen remodeling job for
her. She’s sent Rock Castle Construction a check for $1,000 as an initial payment, but the company
hasn’t invoiced her yet.
To Enter the Down Payment You’ve Received:
1. In the Received From field, select Abercrombie, Kristy: Kitchen from the drop-down
list and then press Tab.
2. Type 1000 in the Amount field and then press Tab. QuickBooks displays the payment
as an overpayment.
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Processing Sales and Receipts with QuickBooks
3.
4.
5.
6.
7.
Leave the “Leave the credit to be used later” option selected.
In the Pmt. Method field, make sure Check is selected.
In the Check # field, type 4321.
Click Save & Close.
Click OK in the message that displays.
Later, Rock Castle Construction is ready to prepare its invoices and needs to invoice
Kristy for the labor the workers have already completed on the job.
To create an invoice for a customer who made a down payment:
1. From the Customers menu, choose Create Invoices. QuickBooks displays the Create
Invoices window.
2. In the Customer: Job field, select Abercrombie, Kristy: Kitchen from the drop-down
list.
3. QuickBooks displays the Available Estimates window. You don’t want to create the
invoice from the estimate listed, so click Cancel.
4. From the Template drop-down list, choose Custom Invoice.
5. Click in the Item column, select Removal from the Item drop-down list, and then press
Tab.
6. In the Quantity column, type 40 and press Tab.
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7. Click Apply Credits to apply the down payment amount made earlier towards this
invoice.
8. Click Yes at the message that displays.
QuickBooks opens the Apply Credits window displaying the credit you entered earlier.
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Processing Sales and Receipts with QuickBooks
9. This is the credit that you want to apply to the invoice, so click Done.
QuickBooks updates the invoice and displays the remaining balance due ($400) on
the invoice.
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QuickBooks applies the existing credit to the new invoice.
10. Click Save & Close to record the transaction.
Making Deposits
345.10 When you use the Enter Sales Receipt window (for a sales receipt where you receive payment on
the spot), the Receive Payments window (for payments on invoices), or a payment item on an invoice,
QuickBooks keeps track of the money you’ve received until you deposit it in the bank. When you receive
payments from customers, you can either deposit each payment directly into a QuickBooks bank account
or you can group payments together to be moved to that account at a later time. QuickBooks allows you
to choose the method you prefer for depositing payments. If you set the Sales & Customers preference
to always use the Undeposited Funds account as the default deposit to account, you do not see the
“Deposit to” option in the Receive Payments or Enter Sales Receipts windows.
345.11 It’s easier to reconcile your QuickBooks accounts with your bank statements when the accounts
display deposits the same way that your statements do. Use the following to help you decided how to set
the preference in your own business.
 If your bank statement shows a lump sum for a deposit, group payments with
other funds for later deposit using the Undeposited Funds account.
 If your bank statement shows each individual payment that was deposited,
deposit directly to an account.
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Processing Sales and Receipts with QuickBooks
Selecting Payments to Deposit
345.12 At your office, you might hold payments in a locked cash drawer or a cash register until you can
get to the bank; QuickBooks holds the amount in an asset account called Undeposited Funds. When
you’re ready to take your payments to the bank, you can record the deposit in QuickBooks, print a
deposit slip to bring with you, and enter cash back amounts.
To select payments to deposit:
1. From the Banking menu, choose Make Deposits. QuickBooks displays the Payments
to Deposit window, which lists the payments you have not yet deposited.
2. Click to select the payments you want to bring to the bank.
Select the payments you recorded from Mike Violette, Ecker Designs, Brian Cook,
Pretell Real Estate, and Kristy Abercrombie.
3. Click OK.
QuickBooks displays the Make Deposits window, which shows the payments you just
selected.
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4. In the Deposit To field, make sure that Checking is selected.
Note: If you have money to deposit that is not the result of a payment you received
for a sale, you can enter it in the detail area of the window. For example, if you
received a premium refund from your insurance vendor, you would enter it here.
QuickBooks updates the deposit total at the bottom of the window automatically. If
you wanted to print a deposit slip to take to the bank, you would click Print. The
Printable Deposit Slips that you can order to work with QuickBooks work only with
deposits of cash and checks.
5. Click Save & Close to record the deposit.
How QuickBooks Handles the Deposit
345.13 QuickBooks updates the Undeposited Funds account to show that you’ve made a deposit. It also
adds the deposit to your checking account register.
To view the Undeposited Funds account:
1. From the Lists menu, choose Chart of Accounts.
2. In the chart of accounts, double-click the Undeposited Funds account.
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Processing Sales and Receipts with QuickBooks
QuickBooks displays your deposits and reduces the balance in the account by the
amount of the deposits.
3. Close the account register window.
Now you can look at the deposit transaction in the checking account.
4. In the chart of accounts, double-click the checking account.
QuickBooks has entered the deposit as a transaction in the checking account register
and has updated the balance of your checking account.
5. Close the checking account register and the chart of accounts.
Getting Cash Back From a Deposit
345.14 In the Make Deposits window, you can enter information about any cash you took out of the
deposit when you are recording the deposit.
To record getting cash back from a deposit:
1. From the Banking menu, choose Make Deposits.
QuickBooks displays the Payments to Deposit window.
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In the Payments to Deposit window, select the payment from Doug Jacobsen.
2. Click OK.
3. In the Make Deposits window, type Petty Cash in the “Cash back goes to” field and press Tab.
4. When QuickBooks displays a message telling you that Petty Cash is not on the account list,
click Set up.
QuickBooks displays the New Account window with the name preset to Petty Cash.
5. Make sure Bank is selected in the Type drop-down list, and then click OK to return to
the Make Deposits window.
6. In the “Cash back amount” field, type 200 and press Tab.
QuickBooks displays the deposit subtotal amount ($2000.00) and the total less the
cash back amount ($1800.00).
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Processing Sales and Receipts with QuickBooks
7. Click Save & Close.
QuickBooks records the Deposit Total amount in your checking account and the cash
back amount in your Petty Cash account.
8. To see the effect on these accounts, choose Chart of Accounts from the Lists menu.
9. Close the chart of accounts.
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350
RECONCILING QUICKBOOKS CHECKING ACCOUNTS
350.01 Reconciling is the process of making sure that your checking account record matches the bank’s
record.
An Overview of QuickBooks Reconciliation
350.02 When you keep your records with QuickBooks, you don’t have to worry about addition or
subtraction errors like you do when you’re using a paper check register. Even so, it is important to get in
the habit of reconciling your QuickBooks bank accounts on a monthly basis. This helps you avoid
overdraft charges for bad checks, gives you a chance to spot possible bank errors, and helps you keep
more accurate financial records.
350.03 Your bank sends you a statement for each of your accounts each month. The statement shows
all the activity in your account since the previous statement:
 The opening balance for your bank account (amount in your account as of the
previous statement)
 The ending balance for your bank account (amount in your account as of the closing
date for the statement)
 The amount of interest, if any, you’ve received for this statement period
 Any service charges assessed by the bank for this statement period
 Checks that have cleared the bank
 Deposits you’ve made to the account
 Any other transactions that affect the balance of your account (for example, automatic
payments or deposits or ATM withdrawals or deposits)
350.04 When you receive a statement from your bank or from a credit card company, you need to
reconcile the statement with your QuickBooks records. You can reconcile any QuickBooks bank account,
including accounts for savings and money market funds. The goal of reconciling is to make sure that your
QuickBooks records and the bank’s statement agree about your account balance.
Marking Cleared Transactions
350.05 To begin reconciling an account, you need to tell QuickBooks which account you want to
reconcile. Then you can provide information from the top part of your bank statement.
To reconcile your account:
1. From the Banking menu, choose Reconcile.
QuickBooks displays the Begin Reconciliation window.
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Processing Sales and Receipts with QuickBooks
2.
3.
4.
5.
6.
In the Account field, make sure Checking is selected.
In the Statement Date field, type 12/15/2007.
In the Ending Balance field, type 34592.98.
In the Service Charge field, type 14.00.
In the Service Charge Date field, type 12/15/2007.
Your screen should resemble the following.
7. Click Continue.
QuickBooks displays the Reconcile - Checking window.
You can select which columns you want to display by clicking Columns to Display.
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8. Select Mark All.
QuickBooks places a checkmark to the left of all items.
If you need to make a correction to a transaction before you reconcile the account, highlight
the transaction, and click Go To. QuickBooks takes you to the transaction and allows you to
return to the reconciliation without losing your work.
9. In the Checks, Payments and Service Charges section, click to clear the checkmarks for all
items with dates later than 12/12/2007.
10. Repeat the process in the Deposits and Other Credits section—click to clear the checkmarks
for all items with dates later than 12/12/2007.
Your screen should resemble the following figure.
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Processing Sales and Receipts with QuickBooks
11. Click Reconcile Now.
QuickBooks displays the Select Reconciliation Report window.
Note: If you see the Reconcile Adjustment window instead, click Return to Reconcile
and make sure that you have cleared all the checkmarks for all items with dates later
than 12/12/07. Use the scroll bars to see all the items.
12. In the Select Reconciliation Report window, make sure “Both” is selected, and then click
Display.
13. Click OK at the message that QuickBooks displays.
QuickBooks displays both the reconciliation summary and reconciliation detail reports. It’s a
good idea to save each reconciliation report, but for the purposes of this section viewing the
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reports is sufficient.
14. Close the report windows.
Because QuickBooks: Pro overwrites the previous reconciliation report with data from the latest
reconciliation, you may want to print a copy of the report, print the report to a file, or save the report in
PDF format in case you need to reference it again. (To save a report in PDF format, with the report
displayed, choose Save as PDF from the File menu.)
Note: If you’re using QuickBooks: Premier, you can print the reconciliation reports for all previous
reconciliations.
In addition to the summary and detail reports (which you can view as PDF files), there is an additional
report option: the Reconcile Discrepancy report. The Reconcile Discrepancy report shows changes and
deletions made to previously reconciled transactions, making it easier to find discrepancies. This report is
useful when the beginning balance that QuickBooks shows is different than the ending balance from the
bank statement for the previous period. (To generate the report, choose Reconcile from the Banking
menu, click Locate Discrepancies, and then click Discrepancy Report.)
If the last reconciliation was in error, by clicking Undo Last Reconciliation in the Locate Discrepancies
window, you can undo it without having to identify and manually clear each affected transaction.
Viewing Cleared Checks In the Register
350.06 Now you know that the balance in your QuickBooks check register is accurate as of the latest
bank statement. The next time you look at the check register, you’ll see a checkmark in the Cleared
column next to each reconciled transaction.
Open the Checking account register to see the cleared checks.
To viewed cleared checks in the register:
1. From the Banking menu, choose Use Register.
QuickBooks displays the Use Register window.
2. Click OK to accept Checking.
3. Scroll through the register to view the cleared items.
Your register should resemble the figure below.
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Processing Sales and Receipts with QuickBooks
Notice that QuickBooks displays a checkmark next to all cleared items.
4. Close the Checking account register.
Locating Specific Transactions
350.07 You can use the QuickBooks Find command to search for specific checks you’ve written. For
example, suppose you want to find all checks greater that or equal to $500.00 that you’ve written during
the current year.
To use the Find feature:
1.
2.
3.
4.
5.
6.
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From the Edit menu, choose Find and then select the Advanced tab.
Select Transaction Type from the Choose Filter list.
Select Check from the list of transaction types.
Select Date from the Choose Filter list, and then choose “This Calendar Year-to date.”
Select Amount from the Choose Filter list, and then click >= (greater than or equal to).
Enter 500.00 and click Find.
Processing Purchases and Payments with QuickBooks
4
Table of Contents
Section
Description
Page
400
Introduction .......................................................................................................... 4-1
405
Processing Invoices ............................................................................................. 4-2
410
Recording Invoices in the Accounting System .................................................. 4-8
415
Disbursing Cash ................................................................................................... 4-11
420
Completing Period-end activities ........................................................................ 4-15
425
Special Issues in Processing Purchases ............................................................ 4-17
430
Working with the QuickBooks Vendor Center .................................................... 4-23
435
Entering and Paying Bills in QuickBooks ........................................................... 4-27
440
Writing a QuickBooks Check ............................................................................... 4-36
445
Entering a Handwritten Check in QuickBooks ................................................... 4-38
450
Tracking Credit Card Transactions in QuickBooks ............................................ 4-40
TOC 4-1
Processing QuickBooks Purchases and Payments with QuickBooks
400
4
INTRODUCTION
400.01 One of the bookkeeping staff’s most important jobs is processing and recording purchases. The
bookkeeper should follow practices that protect the business’s cash from misuse while preserving good
relations with its suppliers. The purchase activity often produces the greatest number of general ledger
entries, so a strong knowledge of the computerized accounting system as well as financial and tax
accounting is needed to properly record transactions. The bookkeeping staff must clearly document how
the business classified a purchase for taxes because purchase transactions are often the focus of state
and federal tax audits.
400.02 This chapter discusses purchasing activities. These activities include the following:
 Processing Invoices. Section 405 explains the bookkeeping personnel’s activities
when receiving the invoices and obtaining authorization for payment.
 Recording Invoices In the Accounting System. Section 410 describes the
bookkeeping staff’s recalculating the invoice, assigning accounting codes,
documenting the invoice processing, and entering invoices into the computerized
accounting system.
 Disbursing Cash. Section 415 presents guidance when selecting invoices to pay and
issuing checks.
 Completing Period-end Activities. Section 420 details four types of activities the
bookkeeping staff should perform at the end of the accounting period: reconciling
internal records, reconciling to outside vendor records, reviewing the accounts payable
listing, and “cutting off’ accounts payable.
 Special Issues in Processing Purchases. Section 425 explains the business’s
obligation to gather and process information about vendors.
 Working with the QuickBooks Vendor Center. Section 430 discusses working with
the QuickBooks Vendor Center including adding new vendors and providing additional
vendor information.
 Entering and Paying Bills in QuickBooks. Section 435 discusses entering and
paying bills in QuickBooks including (1) handling bills in QuickBooks, (2) using
QuickBooks for accounts payable, (3) entering bills, and (4) paying bills.
 Writing a QuickBooks Check. Section 440 discusses how you write a check in
QuickBooks.
 Entering a Handwritten Check in QuickBooks. Section 445 discusses how you
enter a handwritten check in QuickBooks.
 Tracking Credit Card Transactions in QuickBooks. Section 450 discusses how you
track credit card transactions in QuickBooks including (1) entering credit card charges,
(2) reconciling a credit card statement, (3) marking cleared transactions, and (4)
paying a credit card bill.
400.03 This chapter assumes that the bookkeeping staff is using a computerized accounting system and
that the majority of purchases are on credit and supported by invoices. In general, an invoice is the bill
for one purchase transaction. A statement is a listing of all the invoices created and remaining unpaid as
of a certain date. Usually, businesses choose to record purchases and schedule disbursements based
on invoices rather than statements to check the accuracy of the vendor’s statement and records,
schedule payments to take advantage of each invoice’s credit terms, and accurately record the
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Processing Purchases and Payments with QuickBooks
purchase in the period it occurred.
405
PROCESSING INVOICES
405.01 The bookkeeping staff’s activities when processing invoices are more complicated and important
than they may at first appear. The activities include:
 Receiving the invoice.
 Obtaining payment authorization.
 Updating vendor information.
The following paragraphs discuss these activities in detail.
Receiving the Invoice
405.02 A business generally should distribute mail containing invoices directly to the bookkeeping staff,
who then take control over the processing of the invoice. To help implement this practice, persons
authorized to make purchases should be instructed to ask vendors to send the bill to “accounts payable,”
“bookkeeping,” or “accounting department.” The bookkeeping staff also should instruct the person who
sorts the mail to recognize the invoice envelopes of the company’s recurring vendors. In a business with
a large volume of vendors, the bookkeeping staff should prepare a list of the company’s vendors for the
mail sorter’s reference.
405.03 As an alternative, the business may have the mail person initially distribute the invoice to the
department supervisor or manager responsible for the purchase. For example, a trucking firm’s fuel
invoices could be routed directly to the supervisor of fleet operations. The disadvantage of this procedure
is that, because no one else knows that the invoice was received, invoices may easily become lost or
delayed in payment. As bookkeepers know, most operating department personnel aren’t eager to
process “paperwork.” For this reason, controllers often decide to send ordinary invoices directly to the
bookkeeper and to send only those invoices from a few vendors who represent exceptional situations
directly to an operating department.
405.04 Gathering Invoices Not in the Accounting Department. In spite of the company’s efforts to
distribute invoices directly to the bookkeeping staff, invoices may come directly to the supervisor or
manager who initiated the purchase. For example, when the controller buys a tax book, the invoice may
be attached to the book shipped directly to the controller. Usually these invoices are incidental and do
not create a great problem. However, to ensure the business records all purchases and liabilities in the
proper accounting period, the bookkeeper should take special procedures to obtain and record such
invoices at the fiscal year end.
405.05 Date Stamping Invoices Received. In a business with a low volume of purchase transactions,
accounting personnel usually do not stamp the invoice with the date received. However, in a business
with a high volume of purchase transactions, a controller sometimes requires the bookkeeper or
payables clerk to stamp the invoice with the date received by accounting. Controllers may use this date
stamp to help monitor the accounting department’s processing volume or speed, help file unpaid
invoices, schedule invoices for payment, or calculate discounts. Rather than have a separate stamp, the
date received can be incorporated into the invoice processing slip or stamp, as discussed at Paragraphs
410.07-410.08.
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Obtaining Direct Payment Authorization
405.06 The bookkeeper’s first step in processing the invoice is to obtain approval to pay the invoice. The
approval procedure should confirm that the business actually received its purchase in accordance with
the agreed upon cost, quantity, quality, and other purchase terms. When the business tracks purchases
by specific cost centers or “project codes” (such as contracts or construction projects), the bookkeeper
may also use the approval procedures to determine the purchase’s complete account coding (discussed
at Paragraphs 410.05—410.06).
405.07 Businesses generally choose from among three different procedures to approve the purchase:
 Check signer approval.
 Direct approval by person who initiates the purchase.
 Indirect approval by the person who initiates the purchase.
405.08 Except in the smallest companies, approval by the check signer does not give the business the
assurance it is seeking. Generally, small and medium-sized service businesses find the second method,
direct approval by the person who initiates the purchase, to be most appropriate. These two methods are
discussed in the following paragraphs. Large or inventory intensive businesses rely heavily upon the
indirect approval by the purchase initiator; however, even the business that uses the indirect approval
method for inventory purchases may still use the direct approval method for many small purchases of
goods and services. The indirect approval method is described at Paragraphs 405.16-405.26.
405.09 Before obtaining the check signer’s or purchase initiator’s approval, many businesses require the
bookkeeping staff to verify the legitimacy of large invoices from new vendors. The bookkeeping staff
usually has the credit department use their resources (such as Dun and Bradstreet books) to verify that
the vendor is bona fide.
405.10 Check Signer Approval. Some small companies rely on the check signer (usually the owner) to
approve all disbursements. This control often is not effective for two reasons. First, the check signer is
often too busy (and the checks are prepared too close to the mail pickup times) to carefully examine
each disbursement and its support. Second, in many businesses, one check signer does not have
sufficient information to be the primary control over every payment.
405.11 Instead, the check signer’s review should serve as only a secondary form of approval for the
transaction, and it should be accompanied by either the direct or indirect approval of the purchase
initiator. If such approval is not possible, then another officer, such as the controller, should carefully
review the supporting documents and account coding for all significant disbursements.
405.12 Direct Approval. In businesses where managers directly approve the payment of invoices for
their purchases, the bookkeeping staff forwards the invoices to the managers for approval. If an invoice
comes to the manager directly from the vendor, the manager should approve the invoice before sending
it on to accounting.
405.13 In either case, the bookkeeper should instruct the managers that their approval should include a
review of the item description, cost, quantity, quality, and payment terms. Managers may simply initial the
invoice to indicate their approval. Highlighting or circling the initials helps the bookkeeper locate the
approval. Some businesses standardize the location of the approval initials by including a space for the
approval on the processing slip or block stamp (described at Paragraph 410.07).
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Processing Purchases and Payments with QuickBooks
405.14 Direct approval’s biggest challenge is that the managers may delay or lose the invoices. In some
businesses, managers are very responsible in approving and returning invoices. In other situations,
however, the bookkeeper may find it necessary to implement a procedure to ensure that invoices sent for
approval are returned promptly. One procedure is for the bookkeeping staff to send a copy of the invoice
to the manager for approval, noting on the original invoice when and to whom the copy was sent.
Another procedure is for the bookkeeper to keep a log of original invoices sent to managers for approval.
The information in the log should be sufficient to allow the bookkeeping staff to request a replacement
invoice from the vendor, if necessary.
405.15 Not all purchases arise from invoices. For example, travel advances are not initiated by an
invoice, Instead, the business may use a check request form to initiate a purchase transaction. The
check request form is prepared by the purchase initiator, approved by an authorized manager, and
forwarded to the bookkeeper. Upon receipt, the bookkeeper basically processes the check request in the
same way as an authorized invoice.
Obtaining Indirect Payment Authorization
405.16 In a large or inventory intensive business, the purchase volume is such that having a manager
directly approve invoices is not an effective and efficient use of time. Instead, the business obtains
approval for payment indirectly in what is usually a two step process:
 The bookkeeper compares the invoice to a purchase order form (“PO”) created by the
person initiating the purchase.
 The bookkeeper compares the invoice to a receiving report form (“RR”) prepared by
an employee or to a packing list verified by an employee.
405.17 These comparisons may be performed manually by the bookkeeping staff or in part by the
computer system. Because the indirect approval method involves several comparisons and multiple
documents, it requires much greater administrative effort by the bookkeeper than does the direct method.
However, more time is saved by the operating departments. These comparisons are discussed further in
the following paragraphs.
405.18 Comparison to Purchase Orders. For the bookkeeping staff, a purchase order represents
documentation of the manager’s pre-approval of the purchase terms (such as the item, price, and
quantity). By comparing the invoice (what the vendor says it did and the terms) and the purchase order
(what the manager expected to be done and the terms), the bookkeeper can determine if the manager
pre-approved what the vendor billed. Because purchase orders given to external vendors legally commit
the business to complete the purchase, any PO form should be reviewed by an attorney before being
adopted by the business.
405.19 When comparing the invoice to the PO, the bookkeeping staff should review the following items (if
applicable):







4-4
Item number.
Item description.
Cost.
Quantity.
Discount.
Payment due date.
Freight charges.
 Other purchase terms.
405.20 When the purchase information on the invoice and the purchase order agree, the bookkeeping
staff can proceed to the next stage of the approval process (discussed at Paragraph 405.21). When
there are differences, the bookkeeper usually must notify the creator of the purchase order and await
further instructions. Generally, the bookkeeper should send only copies of purchase orders, not originals,
to persons outside the accounting department as part of the resolution process. The bookkeeper may
document when and to whom the PO copy was sent on the PO retained in the accounting department.
405.21 Comparison to Receiving Reports. For the bookkeeping staff, a receiving report prepared by
an employee who has physically counted and inspected the goods received can help provide
authorization for the invoice payment. By comparing the receiving report (what was received) with the
purchase order (what the manager expected to receive), the bookkeeper can determine if the manager
pre-approved what the company actually received. When comparing the invoice and the receiving report,
the bookkeeper should compare the product descriptions and quantities of goods.
405.22 Often a business uses a copy of the purchase order with the prices and quantities masked out as
the receiving report form. Many office supply stores sell pre-printed multi-part purchase order/receiving
report forms. Some businesses use the packing list enclosed with the received goods, instead of a
receiving report form, to document its counts and inspections.
405.23 When the purchase information on the invoice, purchase order, and receiving report agree, the
bookkeeper can consider the invoice as approved for payment and then proceed to the next stage of the
payment process (discussed at Paragraph 410.01). When the receiving report contains differences, the
bookkeeper usually must notify the creator of the purchase order and await further instructions.
Generally, the bookkeeper should send only copies, not originals, of receiving reports to persons outside
the accounting department as part of the resolution process. The bookkeeper may document when and
to whom the receiving report copy was sent on the receiving report retained in the accounting
department. Some businesses find it advantageous to adopt an accounting policy for the approval of
purchases that are divided into several shipments.
405.24 Control over POs and RRs. Businesses find it useful to sequentially number POs and RRs.
Assigning each PO a unique number helps those purchasing goods to track their commitments. Similarly,
sequential numbering of receiving reports helps the business track receipts of purchases.
405.25 For the bookkeeping staff, the PO and receiving report numbers can form an important link
between the invoice and the support that authorizes its payment. The bookkeeper usually records the PO
and RR numbers on the invoice itself, attaching the supporting POs and RRs to the invoice.
405.26 When administering a system using POs and RRs, the bookkeeper often keeps files of “open” or
unmatched invoices, POs, and RRs as well as files of invoices, POs, and RRs with differences awaiting
resolution by the preparer of the purchase order. Periodically, the bookkeeper should review these open
items and investigate items that have not been resolved within a reasonable time. Management may also
want such information (for example, to identify vendors who are slow to ship).
410
RECORDING INVOICES IN THE ACCOUNTING SYSTEM
410.01 After the bookkeeping staff has completed the initial invoice processing (received the invoice,
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Processing Purchases and Payments with QuickBooks
obtained approval for its payment, and updated the vendor information), the staff performs clerical
processes to record the purchases in the accounting records, including:





Recalculating the invoice.
Assigning accounting codes.
Documenting procedures performed on each invoice.
Entering invoices into the system.
The following paragraphs discuss these activities.
Recalculating the Invoice
410.02 Traditionally, the bookkeeper performed calculations to determine the clerical accuracy of the
invoice. In performing these tests, the bookkeeper multiplied the units purchased by the unit cost, totaled
all the unit costs, determined the applicable sales tax rate and calculated the taxes, calculated and
subtracted any discounts, and calculated the total invoice charges.
410.03 With the advent of computer prepared invoices, some businesses have chosen to not recalculate
invoices or to recalculate them only if they exceed a certain amount. Other businesses have the
bookkeeping staff total the invoice but calculate the extended price of selected items only. Still other
businesses have the staff continue the traditional practice.
410.04 To avoid misunderstandings, the bookkeeping staff should determine that the business’s
expectations for calculations are clearly expressed and documented. When only selected items on the
invoice are recalculated, the staff should also carefully document on the invoice which items are
recalculated, usually by placing a symbol (such as) next to those items.
Assigning Accounting Codes
410.05 The bookkeeping staff must assign accounting codes to each invoice to record the transaction in
the form a computer will understand. Because detecting and correcting a miscoded transaction is often
difficult and time-consuming, the staff should take extra care to ensure the initial transaction coding is
correct. For example, while an out-of-state vendor may not charge the business sales tax on a purchase,
the business may owe its home state a use tax that should be recorded. The bookkeeping staff should
be able to recognize that the use tax is due and to code the invoice accordingly.
410.06 When coding invoices, bookkeeping staff may encounter transactions that require the
establishment of new account codes in the general ledger. The bookkeeper has two basic options. The
first option is to suspend processing until the code is set up, which may delay the recording of the entire
invoice batch. The second option is to record the transaction in a suspense account. The advantage of
the second option is that the liability is recorded and the batch processed without further delay; its
disadvantage is that the bookkeeper must remember to follow-up on and properly record the transaction
in the general ledger and other supporting journals. The bookkeeper will have to rely on the controller
and personal preference in choosing which option to use.
Documenting Procedures Performed on Each Invoice
410.07 A bookkeeper may find that by documenting the invoice processing steps as they are performed,
the bookkeeper can better keep track of what steps remain for each invoice. This documentation usually
is accomplished in one of two ways:
 A processing slip. A processing slip is usually from one-half to one page in length
and is attached to the invoice and its supporting PO and receiving report. The slip
4-6
contains spaces where the bookkeeper documents each processing step completed.
(In some businesses the processing slip is called a “voucher,” and while a voucher
often contains the same information as a processing slip, a true voucher contains a
unique document number.) The processing slip’s primary advantage is that the slip
often is more readable than the stamped processing block; its disadvantage is that it
may become separated from the invoice.
 A stamped processing block. The bookkeeper may use a rubber stamp to impress
a form onto the face of the invoice itself. The form, sometimes called a processing
block, contains spaces where the staff documents each processing step completed.
The stamped processing block’s primary advantage is that the processing
documentation cannot become separated from the invoice and lost. Its disadvantage
is that it may be hard to read.
410.08 The processing slip or stamped processing block should be affixed to the invoice before invoices
are sent out of the accounting department for approval (see Paragraphs 405.14-405.15). Exhibit 4-1
displays a form that could be used as a processing slip. A stamped processing block would use
abbreviations and smaller spaces to fit on the invoice. Note that the block should be modified for the
business; for example, some businesses would not use the lines for “Agreed to PO #,“ “Agreed to RR #,“
or “Discount Missed.” The block also contains lines such as “Entered in Batch # by” and “Paid by Check
#,“ that are for later processing use. (See Paragraphs 410.09-410.14 and Section 425).
Exhibit 4-1
Vendor Invoice Processing Slip or Stamped Block
Done by
Date Received by Accounting
Initiator’s Approval
Agreed to P0 # _____________
Agreed to RR # _____________
W-9 on file
_Y _N _NA
Backup Withholding _Y _N _NA
Insurance Certificate _Y _N _NA
________
________
________
________
________
Done by
Price x Quantity Tested
________
Invoice Totaled
________
Computed Sales Tax
________
Recorded Use Tax
________
Computed Freight
________
Discount Taken $____________ ________
Discount Missed $____________ ________
Vendor # _________ Invoice # ________________ Invoice Due Date _____________
Amounts and Accounting/Project Codes:
Processing Reviewed by ____ Entered in Batch #____ by
Paid by Check #_______________
Other businesses may use software programs that place vendor information (W-9, backup withholding,
and insurance certificate) on the computer screen; the bookkeeping staff could then remove those items
from the processing block.
Entering Invoices into the System
410.09 After the bookkeeping staff has assigned the account coding to the invoice, the bookkeeper is
ready to enter the purchase transaction into the business’s computerized accounting system. (If the
business uses a manual accounting system, the bookkeeper typically delays recording the purchase until
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Processing Purchases and Payments with QuickBooks
the preparing of the disbursement check.) Many controllers think this is the most efficient time to review
the adequacy of the invoice processing. However, others prefer to review the invoice and its support
after the check has been prepared. The controller’s preference should be determinative.
410.10 When entering the information into the computer system, the bookkeeping staff’s goals are to
ensure that:




All the required information on the invoice is entered.
The information entered is accurate.
Invoices are entered only once.
All the invoices to be processed are entered.
410.11 The first three goals may be met in part through calculations and comparisons built into the
computer program. If this is not the case, the bookkeeper and the controller or outside CPA should
design procedures to give assurance that these goals are met. For example, the bookkeeper may
compute totals of certain information on each invoice and then compare the calculated total to a
corresponding total calculated from a computer report.
410.12 The third and fourth goals—assurances that all the invoices to be processed are entered
once and only once—are generally accomplished by using batches to control unentered invoices.
A batch consists of a bundle of invoices that are entered into the computerized accounting system during
the same session.
410.13 Batching Invoices. An effective batch system contains four features:
 Cover sheet. The cover sheet allows the bookkeeper to quickly determine the status
of a batch’s processing. The cover sheet contains a unique batch identifying number
and has space for the bookkeeper to document the steps taken in processing the
batch and to record the “batch total.” The batch cover sheet is temporarily attached to
the bundle of supporting invoices.
 Batch total. The bookkeeper computes the batch total by computing the total credit
to trade accounts payable from the invoices to be entered. The computer program
calculates the total credit to trade accounts payable for the invoices entered. When
the two totals agree, the bookkeeper has gained some assurance that all the invoices
have been entered accurately and only once.
 Cancellation. The bookkeeper should note on the invoice that it has been entered
into the computer. This procedure helps ensure that an invoice is entered only once.
Some bookkeepers place a special mark on the invoice, others stamp the invoice
“Entered,” while others initial a line on the stamped processing block or processing
slip. To help research data entry problems, the authors recommend recording on the
invoice both the batch number and the initials of the person who entered the invoice.
 Vendor invoice batch control log. The bookkeeper records the batch total and the
processing stage of the batches in a vendor invoice batch control log. Typically, the
bookkeeper records the date and the person who entered the batch, the date and
person who cancelled the supporting invoices (marked as “entered”), and the batch
total (total credit to trade accounts payable).
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410.14 Once the batch has been entered into and accepted by the system, the bookkeeper removes the
batch control sheet and temporarily files the entered but unpaid invoices by vendor in an “entered and
awaiting payment file. Usually, the batch control sheets are kept only for a month (if they are kept at all)
to allow tracking of problems located during the monthly accounting cycle.
410.15 Purchase Journal Posting. After one or more invoice batches have been entered into the
computer, the bookkeeper must instruct the computer program to post the entered invoices to a
purchase journal that automatically updates the computerized vendor history records and subsidiary
accounts payable journal. (Some computer programs go a step further and automatically post the
purchase journal to the general ledger; others do not.)
410.16 Because of interruptions, the bookkeeper may forget to instruct the computer to post the entered
invoice batches to a purchase journal. While some computer programs have controls to prevent
bookkeeping staff from forgetting to post a batch, many others do not. Thus, bookkeeping staff should
follow a procedure to ensure that all the invoice batches entered are posted to a purchase journal.
410.17 The bookkeeper’s primary tool for this task is a comparison of the vendor invoice batch control
log to the purchase journal. The bookkeeper should record in the invoice batch control log the sequence
number of the purchase journal to which the batch was posted. After posting a purchase journal to the
general ledger, the bookkeeper should agree the totals of the batches posted to the purchase journal
(per the invoice batch control log) to the purchase journal’s total. If the two totals agree, the bookkeeper
has assurance that all the invoices entered into the system were posted to the purchase journal. The
bookkeeper should document the agreement on the purchase journal and the vendor invoice batch
control log. If the two totals do not agree, the bookkeeper must locate and correct the difference.
410.18 In some accounting systems, after posting to the purchase journal the bookkeeper must take
additional steps to update supporting fixed asset, project cost, or inventory records. For example, the
fixed asset subsidiary journal may not be integrated with the purchasing software module, and the
bookkeeper would have to re-enter information into the fixed asset program to record assets purchased.
415
DISBURSING CASH
415.01 After recording the invoices in the accounting system, the bookkeeper is ready to pay the
invoices. When disbursing cash, the bookkeeper has two major activities:
 Selecting the invoices to pay.
 Issuing checks.
During these activities, the bookkeeper’s concerns include taking full advantage of the vendor’s credit
terms and protecting the business’s cash from misuse. The following paragraphs give suggestions for
conducting these activities.
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Processing Purchases and Payments with QuickBooks
Selecting Invoices to Pay
415.02 Many businesses take advantage of the vendor’s credit terms by delaying the payment of
invoices until near the end of the credit term. This practice requires that each invoice be assigned a
payment date. Many computerized accounting systems automatically assign the date of payment based
upon (a) the invoice date entered into the accounting system, and (b) a “time to pay” (such as 25 days)
recorded in the computerized vendor master file. Some more sophisticated systems also take discount
terms into the calculations. In manual systems, the bookkeeper typically uses knowledge of the vendor’s
credit terms to file the invoices awaiting payment by the scheduled payment date.
415.03 While credit terms are a key factor in deciding when to pay an invoice, other important factors
include the business’s cash on hand, expected cash flow, relations with the vendor, and credit rating
considerations. The computer program, or even the bookkeeper, may not have access to all this
information.
415.04 Accordingly, prior to preparing the disbursement checks, the bookkeeper often prepares a
proposed “scheduled to pay” listing of the invoices. (Many computerized systems can prepare a
scheduled to pay listing as a standard report.) The business’s controller or owner modifies and approves
the scheduled to pay listing to better respond to the business’s cash and purchasing situation. The
bookkeeper then reassigns any invoice payment dates as directed and runs the disbursement checks. It
is a good practice for the controller to initial the scheduled to pay listing when approving it. The controller
may then later compare the checks actually written with the approved schedule of checks.
415.05 The scheduled to pay listing usually groups invoices by date within vendor, includes the vendor
total, and calculates the grand total of the check run. Some versions of the report also include the
amount and due dates of proposed payment discounts. The authors recommend that the report also print
each vendor’s standard “time to pay” used by the computer. Upon seeing the “time to pay” information,
the controller or owner may wish to change the period or renegotiate the vendor’s terms.
415.06 Partial or Held Payments. Sometimes the controller may decide to pay only part of an invoice.
As a general rule, the bookkeeper should associate the partial payment with a specific vendor invoice
and should not list the payment as a “payment on account.” This procedure will help reduce confusing
differences between the business’s and the vendor’s records. However, the controller may want the
subsidiary accounts payable ledger to show both the original amount of the payable and the current
amount owed; in this situation, the bookkeeper may have to manually write the requested information on
the subsidiary ledger.
415.07 At other times the controller may decide to put a payment “on hold,” that is, to delay the payment
indefinitely (usually until a dispute is resolved). In both manual and computerized systems, the
bookkeeper needs a means to ensure that the held payment is not forgotten. A regular review of the
accounts payable listing (see Paragraph 420.06-420.08) is one procedure that helps identity held
payments. The bookkeeper also may keep the held payment from being forgotten by physically placing
the invoice into a special folder kept in the front of the open invoice files.
415.08 Offsetting Payables and Receivables. Generally, it is not wise to offset a payable with a
receivable from the same company, if the receivable and payable arose from separate types of
transactions (such as the business’s purchase of services from the ABC Company and the business’s
sale of merchandise to the ABC Company). Such offsetting usually creates problems
in retracing the transaction. More importantly, however, without additional accounting entries the
offsetting may misstate underlying subsidiary ledgers and computer files used to calculate various taxes.
4-10
415.09 Debit balances in accounts payable, however, may be offset against credit balances in accounts
payable since the debits usually do arise from purchase transactions (returns, price adjustments for
damaged merchandise, overpayments, or discounts).
Issuing Checks
415.10 When issuing checks the bookkeeper usually performs the following steps:




Preparing the checks.
Getting the checks signed.
Distributing the checks.
Filing the paid invoices and check copies.
The following paragraphs discuss these activities in detail.
415.11 Preparing Checks. When preparing checks using a computer and special check stock, the
bookkeeper’s goals include ensuring that only authorized and recorded disbursements are made. The
bookkeeper can meet these goals by:
 Securing check stock. The bookkeeper should keep all check stock, including stock
not currently used, under lock and key. (Some businesses go so far as to use two
locks requiring two persons be present to unlock the stock.) The unopened boxes of
checks should be listed in a check stock log, remain taped or otherwise sealed, and
be regularly monitored for unauthorized opening and use. Blank stock taken to
prepare checks should not be let out of the bookkeeper’s sight.
 Recording all checks used. The bookkeeper should log all checks taken from the
open box of check stock, including those that were damaged and voided (see
Paragraph 415.13).
415.12 The bookkeeper should keep written but unissued checks under lock and key. if the computer
prepares a listing of the checks printed, the listing should be retained for review by the check signer.
Some controllers may choose to retain the listing longer for control purposes.
415.13 Typically, when preprinted stock is used, several checks at the beginning of a check run are
ruined in the process of aligning the printer. The bookkeepers should record the checks in the log,
physically cut the signature lines out of the check, and place both the original and duplicate checks in the
check history file (see Paragraph 415.23).
415.14 Sometimes checks are written and recorded in the accounting system, only later to require
cancellation (“voiding”) and reissuing. Usually, the computerized accounting system has a special
program to void checks. The bookkeeper should physically cut the signature lines out of the check and
place both the original and duplicate checks in the check history file.
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Processing Purchases and Payments with QuickBooks
415.15 Even when the business is using a computerized accounting system, the business will often
prepare by hand checks that cannot wait to be printed in the next check run. These checks are often
called “manual” checks to distinguish them from computer prepared checks. Because the computerized
accounting program did not write the checks, the bookkeeper must update the computer records to
reflect the checks’ issuance. Most computerized accounting programs contain options to record the
issuance of manual checks.
415.16 Signing Checks. When the business opens a checking account with a bank the business
completes documents authorizing certain employees or combinations of employees to sign checks up to
specified limits. The bookkeeper should be familiar with the authorized check signers and their limits. In
companies with many checking accounts or signers, the bookkeeper may have to prepare a schedule
showing the authorized signers and their limits for each checking account.
415.17 In smaller companies, an unauthorized person may sometimes have to sign a check, as when all
the authorized signers are out of town and a tax payment is due. The bank will usually pay the check if
the business gives the bank an authorization letter signed by a check signer before the check is
presented at the bank for payment (which may take up to one week when out of town mail is involved).
415.18 Usually, the check signer desires to see support for the payments. The bookkeeper typically gives
the check signer the following:
 Approved and initialed “scheduled to pay” listing. Some systems produce a
listing of checks when checks are written, and the signer often wants to view this
listing as well.
 Checks. The bookkeeper should arrange the checks in the same order as listed on
the “scheduled to pay” listing. (To accelerate the disbursing of the checks, the
bookkeeper may attach the mailing envelope and remittance advice, if any, to the
check.)
 Support. The bookkeeper should furnish the invoices and attached support for each
check, arranged in the same order as listed on the “scheduled to pay” listing. When
several invoices support a check, the bookkeeper may group them together using a
rubber band or a file folder.
 Distributing the Checks. The bookkeeper should distribute the checks as quickly as
possible after they have been signed. This general rule minimizes risks that a check
will be lost or stolen.
415.20 One way the bookkeeper can quicken the disbursing of checks is to prepare the mailing
envelopes before the checks are signed, rather than after. The bookkeeper could use window envelopes
or address the envelope and insert the remittance advices. The bookkeeper could then clip the
envelopes to the back of the checks to be signed.
415.21 The bookkeeper should avoid “holding” checks for one or more days after they are prepared
because the checks may be lost or stolen. Checks held at the end of an accounting period may require
adjustments in the accounting records. See Paragraph 420.10 for additional discussion. Held checks
also complicate the controller’s job of managing the company’s cash.
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415.22 If the bookkeeper does have to hold a check, it is generally preferable that the check not be
signed as part of the regular check run. Instead, the check should be signed when it is released. If,
however, the check must be signed and held, the bookkeeper should ensure that the check is securely
locked up.
415.23 Filing Paid Invoices and Check Copies. Businesses vary in how many check copies they
prepare. The simplest system is for the business to prepare one copy along with the original. The copy is
placed in a check history file, which consists simply of all checks in numerical order. The bookkeeper
writes the check number on the invoice to provide an “audit trail” as well as to prevent the double
payment of the invoice.
415.24 Some businesses prepare one original check and two copies. The bookkeeper files one copy in a
check history file and attaches the remaining copy to the invoice. The attached check provides the
needed “audit trail” and helps to prevent double paying invoices. When several invoices are paid by one
check, the controller may want the bookkeeper to make additional photocopies of the check to attach to
each invoice paid.
415.25 The bookkeeper files the invoices and attached support in accordance with the business’s
practice, with a goal of easily producing the documentary support for a disbursement. Usually the invoice
or check numbers are the keys to locating a document, but some systems rely upon the purchase order
number or a voucher number. Most small and medium-sized businesses file invoices and support by
vendor name and invoice number (or date).
415.26 Many small businesses keep both the current and the prior year’s files accessible. Others keep
accessible only the current year’s (although they may not remove the previous year’s files until after the
first one or two months of the new year). Because invoice and check records may be used in lawsuits,
some legal experts advise keeping them for seven years. The controller, in consultation with the
business’s attorney, usually determines how long paid invoices and check copies should be retained.
420
COMPLETING PERIOD-END ACTIVITIES
420.01 To help ensure that all authorized purchase transactions, and only such transactions, are
recorded in the accounting records, the bookkeeper should perform certain activities at period end,
including:




Reconciling internal records.
Reconciling to outside vendor records.
Reviewing the accounts payable listing.
“Cutting off” accounts payable.
The following paragraphs discuss these period-end activities.
Reconciling Internal Records
420.02 As part of the monthly close of the general ledger, the bookkeeper should make two comparisons
(“reconciliations”). The bookkeeper should:
 Compare the beginning and ending general ledger balances. The bookkeeper
may calculate the expected general ledger ending balance using the beginning
general ledger balance, the purchases journals, the cash disbursement journals, and
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Processing Purchases and Payments with QuickBooks
other reviewed general ledger entries. If the calculated and actual ending balance
amounts agree, the bookkeeper has assurance that all the amounts entered in the
summary journals were posted to the general ledger.
 Compare the accounts payable subsidiary ledger to the general ledger. If the
total of the accounts payable subsidiary ledger (sometimes called the accounts
payable listing) agrees to the ending balance of the general ledger accounts payable
account, the bookkeeper has assurance that all the invoices and payments posted to
the general ledger were also posted to the detailed vendor records.
The bookkeeper should investigate any differences the comparisons identity.
Reconciling to Outside Vendor Records
420.03 While the bookkeeper should carefully exclude the vendor’s statement from the invoices to be
processed (see Paragraph 400.03), the bookkeeper should not totally ignore the vendor’s statement.
Periodically, the bookkeeper should compare (reconcile) the business’s records and the vendor’s
statement of unpaid invoices. This reconciliation gives the bookkeeper assurance that the company’s
purchase liabilities are properly recorded in the business’s records.
420.04 When reconciling the statement to the business’s records, the bookkeeper usually agrees the
statement’s listing of invoices to the business’s accounts payable subsidiary ledger (list of accounts
payable). Differences are usually explained by recently paid invoices, unentered invoices, or unmatched
invoices/purchase orders/receiving reports. To help the bookkeeper, many vendors arrange the
statement’s invoice listing in date order.
420.05 How often the bookkeeper makes the comparison will depend upon the credit relations with the
vendor, the purchase volume, and the frequency, amount, and persistence of the differences. At a
minimum, the bookkeeper usually reconciles the largest vendor statements in preparation for an annual
financial audit.
Reviewing the Accounts Payable Subsidiary Ledger
420.06 The bookkeeper (or possibly the controller) should review the accounts payable subsidiary ledger
monthly for debits and old invoices. In some companies, special computer programs read the accounts
payable file and locate debits or old unpaid invoices.
420.07 Debits represent amounts vendors owe the business. Sometimes vendors will pay the business
cash for the debit. In most instances, debits are offset against the amounts owed by inclusion on a
disbursement check as a “negative invoice.” However, debits that vendors will not honor should be
removed from the accounts payable subsidiary ledger and from the general ledger (by a general journal
entry).
420.08 Old unpaid invoices should be investigated and compared with the vendor’s statements. In some
cases the invoices represent true liabilities requiring payment. In other cases the invoices were already
paid and the listing should be corrected. The bookkeeper should review the corrective actions to be
taken with the initiator of the purchase and the controller (or outside CPA) before making correcting
entries. Some companies have the bookkeeper regularly prepare an aged account payables report to
identify such old invoices.
“Cutting Off” Accounts Payable
420.10 When period-end reports are prepared for outsiders (such as quarterly or annual reports to the
bank or shareholders), the bookkeeper should take special precautions to ensure that all purchases and
4-14
purchase obligations are recorded (“cutoff”) in the proper period. Precautions that bookkeepers can take
to get a proper period-end cutoff include:
 Gathering invoices. The bookkeeper can circulate a memo to managers who may
have received invoices directly from vendors. The memo should encourage the
managers to forward the invoices to the bookkeeper for recording and processing.
 Recording the last documents used. At the end of business on the last day of the
accounting period, the bookkeeper can determine the document numbers of the last
used check and receiving report. The bookkeeper can then investigate to determine
that these and surrounding transactions are properly recorded or reported in the
accounting records for the current period. Generally, the bookkeeper should reflect
the items received but not yet invoiced as an accrued liability in the financial
statements.
 Reviewing invoices. For one or two weeks after the end of the period, the
bookkeeper should carefully examine vendor invoices received. Many of these
invoices frequently are for goods or services received in the preceding accounting
period. For example, the bookkeeper may carefully examine invoices received in April
for goods or services received in March. In addition to the normal processing of the
invoices the bookkeeper should make a list of all such invoices, their account
codings, and amounts, and attach copies of the invoices (if the business will be
audited by a CPA). The bookkeeper will usually make a general ledger entry to
properly state the period’s financial records.
 Listing held checks. If a check was held at a period end, the accounting records
incorrectly report the liability to be paid. If the amount is significant, the controller or
CPA may need to prepare a reclassification entry to debit cash and credit accounts
payable at the date of the financial statements.
425
SPECIAL ISSUES IN PROCESSING PURCHASES
425.01 Businesses obtain certain information about vendors in order to avoid the risk of substantial IRS
penalties, to lower their insurance costs, or to lower their exposure to legal damages. Ideally, this
information is obtained on or before the time an order has been placed with a vendor. In practice,
however, the business often obtains or updates the information when the bookkeeper begins to process
the invoice.
425.02 The business should obtain or update information:
 On the vendor’s status as an independent contractor to protect the business from IRS
claims for employment taxes and worker claims for unemployment benefits.
 On the vendor’s status as a “noncorporate nonemployee” to fulfill its IRS obligations
to prepare Form 1099-MISC.
 On the vendor’s tax status to fulfill its IRS obligations to withhold amounts to pay
income taxes (“backup withholding”).
 On the vendor’s insurance status to save on the business’s insurance costs and
protect the business from lawsuits.
425.03 The following paragraphs discuss in detail the bookkeeper’s updating and filing of the vendor
information.
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Processing Purchases and Payments with QuickBooks
Independent Contractor Information
425.04 Under the federal income tax rules, most vendors that small businesses use are considered to be
independent contractors in business for themselves, rather than employees of the business. However,
small businesses that rely on individuals to routinely provide services (such as welding, office cleaning,
painting, computer consulting, or peak load work) may be at risk for misclassifying as independent
contractors persons the IRS views as employees. The IRS is actively auditing the status of workers and
is often aggressive in claiming that workers are employees. The penalties for misclassification can be
very severe and have been responsible for the liquidation of many smaller businesses.
425.05 With knowledge of the classification principles the IRS uses and proper documentation, the
bookkeeper can do much to defend the business against IRS claims of misclassification. Under federal
income tax laws, there are three rules for classifying workers:
 Direct sellers (such as door-to-door salespersons) and licensed real estate agents are
independent contractors.
 Corporate officers are employees.
 All other workers are classified by using twenty “common law” factors. In general, the
common law rule is that an independent contractor is free to determine how the work
for the business is to be performed. The bookkeeper can use the questionnaire to
help classify those noncorporate vendors whose status appears uncertain. The
bookkeeper does not need to complete the questionnaire on every vendor. The
completed questionnaire should be filed in the vendor documentation file (see
Paragraph 425.20).
425.06 If the business conducts a significant amount of business with a vendor whose independent
contractor status may be uncertain, the bookkeeper should discuss the matter with the controller or
outside CPA. In many unclear cases, the bookkeeper can help defend the business by obtaining certain
documentation supporting the business’s treatment of the worker. Exhibit 4-2 presents examples of
helpful documentation. The documentation should be placed in the vendor’s documentation file (see
Paragraph 425.20).
Exhibit 4-2
Documentation Supporting Independent Contractor Status





Contracts
Bids
Vendor’s advertisements in newspapers, fliers, magazines, and telephone directories
The vendor’s business card and stationery
Documents evidencing the vendor’s reimbursement to eth business of any fees, equipment
rentals, supplies, insurance, bonding, or other expenses paid on the vendor’s behalf
Vendor payments for damages to equipment or the work site
The vendor’s licenses, sales tax certificate, governmental permits, or incorporation
documents
The vendor’s insurance certificates or policies
Evidence of the vendor’s separate business location




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425.07 Most businesses classifying vendors use the IRS rules and find them sufficient. However, the
bookkeeper should be aware that several laws—such as federal social security, federal unemployment,
and state workers’ compensation laws—use somewhat different definitions of an independent contractor.
These laws therefore infrequently classify workers differently than the federal income tax law.
Form 1099-MISC Information
425.08 As part of its program to collect income taxes, the IRS requires businesses to report payments
made to many “nonemployees” (basically, independent contractors). IRS Form 1099-MISC is most
commonly used to report these payments. To comply with the reporting requirements, the business must
determine whether the requirements apply to both the vendor and the payment, as discussed below:
 The vendor. In general, a vendor must be reported on Form 1099-MISC if it is a
“noncorporate nonemployee.” A noncorporate entity is typically a sole proprietorship
or a partnership that has not chosen to legally incorporate. The IRS instructions
indicate that a noncorporate business include one whose name ends with “Company”
or “Co.” or no indication of status; corporate entities have names that end with “P.C.,”
Incorporated,” “Inc.,” “Corporation,” or “Corp.” Law and accounting firms are usually
noncorporate businesses. In general, a nonemployee (independent contractor) is a
person who is free to determine how the work for the business is to be performed
(see Paragraphs 425.04-425.07).
Thus, when the bookkeeper sets up a new vendor account, the bookkeeper should
determine if the vendor is a noncorporate nonemployee; if so, the bookkeeper
should indicate in both the vendor’s documentation file and the computerized
vendor master file that the vendor is subject to Form 1099-MISC reporting.
 The payment. The law requires the business or nonprofit organization report on Form
1099-MISC payments (including exchanges of property or services) for services
rendered to the trade, business, or nonprofit organization. Payments statutorily
exempt from reporting on a Form 1099-MISC include payments for rent made to real
estate agents, for merchandise and inventory, and for utilities and telecommunications services. Exhibit 4-3 lists the types of payments to noncorporate
nonemployees that must be reported. [Other payments may be reportable on a form
other than the Form 1099-MISC. This discussion on the bookkeeper’s determination
of the vendor’s Form 1099-MISC reporting status is equally applicable to the
obligation to report on the other information returns.]
425.09 Businesses must give Form 1099-MISC to recipients by January 31st of each year and to the IRS
(along with a summary Form 1096) by February 28th. Bookkeepers can gain more information from the
Form 1099 instructions.
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Processing Purchases and Payments with QuickBooks
Exhibit 4-3
Payments Reported on Form 1099-MISC
Repo

Payment Type1
Payments for services performed for a trade or business by people not treated as
its employees, including auto reimbursements, awards, bonuses, car expense,
Christmas bonuses, commissions, compensation, damages, directors’ fees,
education expense reimbursement, fees, golden parachute payments, health
services, medical services, mileage, prizes, subcontractors’ fees, use of an
entertainment faculty, and vacation allowances.
Reporting
Threshold
$ 600

Rent payments (except payments to real estate agents).
$ 600

Royalty payments.
$



Direct sales (to door-to-door salespersons and others) of consumer products for
resale.
Payments to crew members by owners or operators of fishing boats. Report
payments of proceeds from sale of catch.
Payments to a physician, physicians’ corporation, or other supplier of health and
medical services. (Issued mainly by medical assistance programs or health and
accident insurance plans.)
10
$5,000
All
$ 600
1
Assumes payments are made only to noncorporate nonemployees (basically,
independent contractors).
425.10 Some newer computerized application systems allow the bookkeeper to indicate reporting on a
Form 1099-MISC at both the vendor and invoice levels. However, in most computerized accounting
systems, the bookkeeper usually indicates if a vendor requires reporting on Form 1099-MISC but does
not indicate if a payment requires reporting. For example, if the bookkeeper indicates that the ABC
Construction Company is subject to Form 1099-MISC reporting, the computer typically will aggregate all
the payments made to ABC throughout the year for inclusion on the Form 1099-MISC. If the business
gives ABC some payments that are reportable and some that are not, the bookkeeper typically creates
two separate ABC Construction Companies as vendors—one for the reportable and one for the
nonreportable payments. The bookkeeper should seek to make accurate distinctions among reportable
and nonreportable payments; if the reported amounts are higher than they are required to be, the
business may pay unnecessarily high workers’ compensation premiums (see Paragraphs 425.17425.19).
Backup Withholding
425.11 The IRS requires businesses not only to report payments made to independent contractors, but
also in certain cases to withhold 30% of the payment as income tax and remit the withholding to the IRS.
This withholding is called backup withholding.
4-18
425.12 Most businesses must make backup withholding if either of the following occur:
 The independent contractor did not give the business a taxpayer identification
number (TIN) to show that the independent contractor had been registered in the
federal tax system. For individuals and sole proprietorships, the TIN is the Social
Security number; for corporations and partnerships, the TIN is an assigned federal
employer identification number (FEIN).
 The IRS informs the business that the furnished TIN is invalid.
425.13 To administer this law, the bookkeeper should use IRS Form W-9 to obtain a certified TIN from
independent contractors subject to backup withholding. The bookkeeper should file the completed forms
in the vendor documentation file (see Paragraph 425.20).
425.14 The Form W-9 instructions list both the vendors and the payments exempt from backup
withholding. For most businesses the exempt vendors are corporations and governments and the
exempt payments are those not subject to reporting on Form 1099-MISC or the other information reports
(see Paragraphs 425.08-425.10).
425.15 If the business is required to make backup withholding from a vendor’s payments, the
bookkeeper must keep track of scheduled payments to the vendor. Automatic backup withholding is not
a standard feature among most commercial computerized accounting systems, so the bookkeeper
normally must use manual reminders to identify the vendor from whom amounts must be withheld. In
addition, the bookkeeper should place in the vendor’s documentation file:
 A memo describing the vendor’s backup withholding status and documenting that the
vendor was informed.
 A schedule showing the gross, backup withholding, and the net amounts for each
affected payment.
 Copies of correspondence and reports to the IRS and the vendor.
The amounts withheld should also be clearly marked on each payment check and on the check support.
425.16 Because the remittance is not part of the business’s routine tax procedures, it is generally best if
the remittance is made as soon as possible so it will not be overlooked later. The business reports the
amounts withheld to the vendor annually on Form 1099-MISC.
Vendor Insurance
425.17 Many workers’ compensation insurance policies automatically will charge additional premiums to
cover independent contractors who receive Form 1099-MISC, unless the business can show that the
independent contractor has separate workers’ compensation coverage. In addition, if the independent
contractor is not adequately insured, the business may have to pay legal damages for the independent
contractor’s accidents and other harmful acts.
425.18 Many businesses therefore require that some independent contractors furnish the business with
“proof of insurance” certificates stating that the vendor has a specified minimum amount of commercial
automobile, general liability, and workers’ compensation insurance coverages. Such certificates can and
should be obtained directly from the vendor’s insurance broker. The business’s determination of which
independent contractors should furnish the proof and how much coverage is necessary is best made by
the owner or controller in consultation with the business’s insurance agent. Their determinations should
4-19
Processing Purchases and Payments with QuickBooks
be documented in a written company policy.
425.19 As a standard procedure when processing invoices, the bookkeeper should determine if the
business has an acceptable current proof of insurance certificate for an independent contractor subject to
the business’s policy on insurance; if not, the bookkeeper usually informs the owner or controller. The
bookkeeper should file the certificates in each vendor’s documentation file (see Paragraph 425.20) and
retain the certificates until the statute of limitations for claims against the business has passed (at least
two years). Each month the bookkeeper should review the schedule, make revisions for new certificates
received, and request new certificates from those active vendors whose certificates will soon expire.
Prior to any workers’ compensation audit, the bookkeeper should review the vendor insurance schedule
and vendor documentation files for all vendors who received a Form 1099-MISC; the bookkeeper can
then seek to obtain any missing certificates proving insurance coverage.
Filing Vendor Information
425.20 Bookkeepers may keep the information gathered about vendors in two files. These files are:
 Vendor documentation files. The vendor documentation files (as they are called in
this Guide) are paper-based files that contain information on the vendor. While not
every vendor may have a file, the bookkeeper should always keep vendor
documentation files on some vendors (such as those the IRS is likely to assert are
employees). Often the vendor documentation file can be non-invoice documents
clipped together and placed in the vendor’s paid invoice files. (However, the
bookkeeper may need to carry some of these documents forward from year to year,
rather than filing them with the year’s paid invoices.) A vendor’s documentation file
would contain any of the documents listed in Exhibit 4-2 used to document the
vendor’s independent contractor status; Form 1099-MISC duplicate copies; IRS Form
W-9; documents regarding backup withholding described at Paragraph 425.15; and
proof of insurance certificates.
 Vendor master files. These are computerized files that a computerized accounting
system uses in processing invoices and preparing checks. They usually contain
address information, the system’s internal vendor identification number, payment
terms, and the vendor’s status for Form 1099-MISC reporting.
430 WORKING WITH THE QUICKBOOKS VENDOR CENTER
Working with the Vendor Center
430.01 The Vendor Center is where you record information about the companies or people from whom
you buy goods or services. QuickBooks uses the data in the Vendor Center to fill in purchase orders,
receipts, bills, and checks as you receive and pay for goods and services.
Adding New Vendors
430.02 Add a new vendor to the Vendor Center. Suppose Rock Castle Construction is working with a
new subcontractor, and it needs to add information about the new vendor to its QuickBooks Vendor list.
To add a new vendor:
1. Click Vendor Center in the navigation bar.
4-20
QuickBooks displays the Vendor Center.
2. Click New Vendor at the top of the Vendor Center.
QuickBooks displays the New Vendor window.
The New Vendor window is where you enter all of the information regarding a new
vendor, such as name, phone, contact, address, and opening balance. Just as when
you add a new customer, you start by providing basic information on the Address Info
tab.
3. In the Vendor Name field, type Hughes Electric.
This is the name QuickBooks displays for this vendor in the Vendor list. If the vendor
is an individual, you may wish to enter the last name first, then the first name.
4. In the Company Name field, type Hughes Electric, and then press Tab.
5. Click in the Name and Address field, after the company name displayed on the first
line, and press Enter.
Notice that QuickBooks displays the company name on the first line of the Address
field.
6. On the second line of the Address field, type P.O. Box 2316.
7. Press Enter to move to the next line.
8. Type Middlefield, CA 94432.
9. In the Contact field, type David Hughes.
10. In the Phone field, type 510-555-6666.
11. In the FAX field, type 510-555-6667.
4-21
Processing Purchases and Payments with QuickBooks
When you finish, your window should look like this.
Providing Additional Vendor Information
430.03 The Additional Info tab in the New Vendor window is where you can enter a vendor type (if you
want to categorize your vendors), payment terms, your credit limit, the vendor’s tax identification number,
whether this vendor is eligible for a 1099 form, and your opening balance. You’ll add this information now
for Hughes Electric.
To add information to a vendor record:
1. Click the Additional Info tab.
QuickBooks displays the Additional Info tab of the New Vendor window.
4-22
2. In the Account No. field, type 123-445.
3. In the Type field, type Subcontractors.
Notice that when you type “sub,” QuickBooks fills in the rest of the word.
4. In the Terms field, choose “2% 10 Net 30” from the drop-down list.
5. In the Credit Limit field, type 2000 and press Tab.
Your New Vendor window should resemble the figure below.
4-23
Processing Purchases and Payments with QuickBooks
6. Click OK.
QuickBooks adds the vendor and displays the updated Vendor list.
Notice that Hughes Electric has been added to the list.
4-24
7. Close the Vendor Center.
435
ENTERING AND PAYING BILLS IN QUICKBOOKS
Handling Bills in QuickBooks
435.01 When you have a business expense, you can handle it in one of the following ways:
 You can use the QuickBooks accounts payable feature to track the amounts you owe
to vendors, track your cash flow needs, and handle bills you want to pay later.
 You can use QuickBooks to write and print a check. When you receive a bill that you
want to pay immediately, you can write a QuickBooks check more quickly and
accurately than you can by hand. An additional advantage is that QuickBooks makes
the entry in the checking account register for you.
 You can write a check manually and enter the information into a QuickBooks check
register later. This doesn’t take advantage of features in QuickBooks, but sometimes
it’s necessary. For example, if you purchase supplies at a retail store, they expect
payment on the spot, and you may not know the amount in advance.
 You can pay by credit card and enter the credit card receipt into QuickBooks later.
This section shows you how to use QuickBooks for accounts payable.
Using QuickBooks for Accounts Payable
435.02 Some business owners, especially if they own smaller, home-based businesses, pay their bills
when they receive them. Most business owners, however, find it more convenient to pay bills less often.
(They also like keeping the cash in the company for as long as possible.) If you don’t plan on paying your
bills right away, QuickBooks can help you keep track of what you owe and when you owe it.
435.03 The money you owe for unpaid bills is called accounts payable. QuickBooks uses the Accounts
Payable account to track all the money you owe. Like any QuickBooks balance sheet account, the
Accounts Payable account has a register where you can view all your bills at once.
To see the Accounts Payable register:
1. From the Lists menu, choose Chart of Accounts.
QuickBooks displays the chart of accounts.
2. Double-click Accounts Payable in the list to open the register.
QuickBooks displays the Accounts Payable register.
4-25
Processing Purchases and Payments with QuickBooks
The register keeps track of each bill you have entered, shows you the due date, and
keeps a running balance of all the bills you owe. As a business owner, this helps you
forecast your cash flow, and the QuickBooks reminder system helps you pay your
bills on time.
3. Press Esc twice to close the open windows.
Using accounts payable to pay your bills involves two steps: entering the bill and paying the bill. You’ll
practice both steps in this section.
Entering Bills
435.04 When you receive a bill from a vendor, you should enter it into QuickBooks as soon as you can.
This keeps your cash flow forecast reports up to date and doesn’t give you the chance to set aside a bill
and forget about it.
435.05 Rock Castle Construction received a bill from the company that created its new brochures. The
bill includes a charge for courier delivery. Rock Castle Construction doesn’t plan to pay the bill until close
to its due date, but the company wants to keep an eye on the accounts payable total, so enter the bill
now.
To enter a bill:
1. From the Vendors menu, choose Enter Bills.
QuickBooks displays the Enter Bills window.
4-26
The top half of the window is where you enter the bill. The bottom half is the detail
area where you can assign the bill amount to different expense accounts, customers,
or jobs.
Notice that the Bill Received checkbox has a checkmark. The only time the Bill
Received checkbox should be cleared is if you’re using QuickBooks for inventory and
you want to record items you’ve received that you haven’t actually been billed for yet.
2. In the Vendor field, type Willis Advertising, and then press Tab.
3. When QuickBooks displays a message telling you that Willis Advertising is not on the
Vendor list, click Quick Add.
4. In the Amount Due field, type 1500.
5. Click in the Bill Due field. Notice that QuickBooks supplies a date for you in the Bill
Due field. The date displayed is ten days from the date in the Date field. You can
change the date if you wish. If your Vendor list had payment terms entered for this
vendor, QuickBooks would have used those terms to calculate the bill’s due date.
6. Click in the Account column on the Expenses tab and type Printing. QuickFill
completes the entry for you, and displays Printing and Reproduction as the account.
QuickBooks lets you assign transactions to more than one account, so you can keep
close track of where your company spends its money. Rock Castle Construction
wants to assign the majority of this bill to a printing and reproduction expense
account, and the rest to a freight delivery expense account.
7. Press Tab to accept Printing and Reproduction as the account.
8. Type 1450 to change the amount from 1,500 to 1,450.
9. Click in the Account column below Printing and Reproduction.
10. From the drop-down list, choose Freight & Delivery, and then press Tab.
4-27
Processing Purchases and Payments with QuickBooks
QuickBooks automatically assigns the remainder of the bill amount ($50.00) to Freight
& Delivery.
Your screen should resemble the figure below.
11. Click Save & Close to record the bill.
Paying Bills
435.06 When you start QuickBooks or open a QuickBooks company file, a Reminders window appears
that tells you whether you have transactions to complete, such as bills to pay or money to deposit.
Tip: If you don’t see the Reminders window when you start QuickBooks, you can turn it on by choosing
Preferences from the Edit menu. Click Reminders, click the My Preferences tab, and select “Show
Reminders List when opening a Company file.”
435.07 When QuickBooks tells you that you have bills due, you can display the Pay Bills window and
select the bills you want to pay.
To pay a bill:
1. From the Vendors menu, choose Pay Bills.
QuickBooks displays the Pay Bills window.
4-28
The Pay Bills window shows your unpaid bills as of any date you enter. You can pay
by check, credit card, or with an online payment (if you are set up to make online
payments).
2. Select the “To be printed” option.
By selecting this option, you are telling QuickBooks that you will print this check later.
3. Select the Willis Advertising bill by clicking in the column to the left of the bill.
QuickBooks displays a checkmark next to the bill and changes the amount in the
Ending Bank Balance to reflect a payment of $1,500.00. If you want to make a partial
payment, you can enter the amount you want to pay in the Amt. To Pay column. Your
screen should resemble the figure below.
4-29
Processing Purchases and Payments with QuickBooks
4. Click Pay & Close.
How QuickBooks Records Your Bill Payment
435.08 When you pay a bill through the Pay Bills window, QuickBooks makes an entry in the accounts
payable register, showing a decrease of $1,500 in the total payables. It also creates a check from your
checking account to pay the bill.
To see the entry in the accounts payable register:
1. From the Company menu, choose Chart of Accounts. QuickBooks displays the chart
of accounts.
2. In the chart of accounts, double-click the Accounts Payable account. QuickBooks
displays the accounts payable register.
4-30
The register now shows the bill payment to Willis Advertising.
3. Close the accounts payable register.
435.09 At the same time QuickBooks recorded the entry in your accounts payable register, it made an
entry in your Checking account.
To see the entry:
1. In the chart of accounts, double-click Checking. QuickBooks displays the checking
account register.
Notice that the third to the last entry in the register is the check for the payment to
Willis Advertising.
4-31
Processing Purchases and Payments with QuickBooks
2. Select the Willis Advertising transaction.
3. On the toolbar, click Edit Transaction.
QuickBooks displays the Bill Payments (Check) window.
This check is called a “Bill Payment Check” and differs from the check form that you
use to enter checks directly into the checking account. (That form shows expenses
directly on the check voucher portion, while the bill payment form shows the bills paid
by the check.)
4. Press Esc to close the Bill Payment Check window.
5. From the Window menu, choose Close All to close all the open QuickBooks windows.
6. Click Home in the navigation bar to open the Home page.
Applying Vendor Discounts to Bill Payments
435.10 If you take advantage of discounts for early payment offered by some vendors, you can record
the discounts directly in the Pay Bills window. You can set up QuickBooks to track the discount amounts.
In this section, you’ll apply a discount for early payment to one of Rock Castle Construction’s vendors.
To apply a discount for early payment:
4-32
1. On the Home page, click Pay Bills.
QuickBooks displays the Pay Bills window.
2. In the “Due on or before” field, type 1/16/2008 and press Tab. QuickBooks displays
all of Rock Castle Construction’s bills due on or before 1/16/2008.
3. From the Sort Bills By drop-down list, choose Discount Date. Your screen should look
like this.
4. Click to put a checkmark next to the bill for Hamlin Metal with a due date of
1/10/2008.
QuickBooks displays the discount and credit information for Hamlin Metal.
5. Click Set Discount.
QuickBooks displays the Discount and Credits window prefilled with information about
Rock Castle’s terms with Hamlin Metal, and the amount of the discount based on
those terms (in this case, two percent of $670.00, or $13.40).
6. From the Discount Account drop-down list, choose Construction: Discounts given to
track the discount amount.
7. Click Done.
8. Click Pay & Close.
Note: You can set up QuickBooks to always use discounts and credits from vendors. If you always track
discounts from vendors in the same account, you can set up a default account. From the Edit menu,
4-33
Processing Purchases and Payments with QuickBooks
choose Preferences. Click Purchases & Vendors, and then click the Company Preferences tab. Select
the “Automatically use discounts and credits” checkbox and choose the account in which you want
QuickBooks to track the discounts you receive from vendors.
440
WRITING A QUICKBOOKS CHECK
440.01 You can enter checks directly into the check register by using the QuickBooks Write Checks
window. When you enter a check at the Write Checks window, you can see the address information and
easily allocate the check between multiple accounts.
Suppose that you need to write a check to pay Rock Castle Construction’s telephone bill.
To write a check:
1. In the Banking area of the Home page, click Write Checks.
QuickBooks displays the Write Checks window.
The Bank Account field shows the account from which you are writing this check.
QuickBooks displays the current date in the Date field. (The sample data is set to
display December 15, 2007 as the current date.) You can change either of these
4-34
values if you wish, but they are fine for our example.
2. Select the “To be printed” checkbox.
QuickBooks displays a checkmark in the checkbox.
3. In the Pay to the Order of field, type Cal Telephone.
4. Press Tab to move to the Amount field.
QuickBooks has an AutoRecall feature that fills in the amount from the lasttransaction
with a payee. This is convenient when you have recurring payments ofthe same
amount. You can turn on AutoRecall by choosing references from the Edit menu.
Click General, and then select the checkbox for “Automatically recall last transaction
for this name” on the My Preferences tab.
5. Type 156.91 (the amount of the telephone bill), and then press Tab.
Notice that QuickBooks spells out the amount of the check for you on the line below
the payee.
6. Click in the Account column on the
Utilities:Telephone from the drop-down list.
Expenses
tab,
and
then
choose
Your screen should resemble the following figure.
4-35
Processing Purchases and Payments with QuickBooks
The Expenses tab is where you assign the amount of the check to one of the
expense accounts on your company’s chart of accounts. In this case, Rock Castle
Construction assigns the check to its Utilities account and the Telephone subaccount.
You use the Items tab only when purchasing items you plan to stock in inventory.
7. Click Save & Close.
8. From the Banking menu, choose Use Register.
Rock Castle Construction has more than one type of bank account, so QuickBooks
displays the Use Register window and asks you to specify the account you want.
9. Click OK to accept Checking as the account whose register you want to see.
QuickBooks opens the Checking register.
4-36
Notice that the check you just wrote is listed in the register as a check that needs to
be printed.
10. Close the Checking account register.
445
ENTERING A HANDWRITTEN CHECK IN QUICKBOOKS
445.01 Sometimes you need to write a check on the spot for items you did not plan to purchase.
QuickBooks lets you write the check, and then enter it later in the checking account register or on the
check form.
Suppose that while picking up supplies one day, you stop at Bayshore Office Supply and find a new
office chair on sale for $99.95. The sale ends today, so you write a check on the spot. You’ll have to
enter it in QuickBooks later.
To enter a handwritten check in the checking account register:
1. From the Banking menu, choose Use Register.
QuickBooks displays the Use Register window.
2. Click OK to accept Checking.
QuickBooks displays the register for the Checking account.
3. Click in the Number field in the blank transaction at the bottom of the register, then
double-click to highlight the number that QuickBooks prefills.
4. Type 1204, and then press Tab.
5. In the Payee field, type Bayshore Office Supply, and then press Tab.
4-37
Processing Purchases and Payments with QuickBooks
QuickBooks displays a message telling you that Bayshore Office Supply is not on the
Name list.
6. Click Quick Add.
QuickBooks displays the Select Name Type window.
Bayshore Office Supply is a vendor, so you can accept the displayed choice.
7. Click OK.
QuickBooks adds the new vendor to the Vendor list.
8. In the Payment field, type 99.95, and then press Tab.
9. In the Account field, type Of, and then press Tab.
QuickBooks fills in Office Supplies.
10. In the Memo field, type Office chair.
The Checking account register on your screen should resemble the following figure.
4-38
11. Click Record.
12. Close the Checking account register.
450
TRACKING CREDIT CARD TRANSACTIONS IN QUICKBOOKS
450.01 Many businesses pay for expenses with a credit card rather than a check. For travel expenses
especially, a credit card is invaluable because it gives a detailed listing of each charge. You can track
credit card transactions in QuickBooks just as easily as you track expenses you pay for by check.
450.02 You should set up a QuickBooks credit card account for each credit card you use in your
business. Like any QuickBooks account, a credit card account has its own register. The register lists all
the charges and credits you've recorded, as well as payments you've made.
450.03 The way you open and scroll through a credit card register is the same way you open and scroll
through any QuickBooks account register.
Entering Credit Card Charges
450.04 QuickBooks lets you choose when you enter your credit card charges. You can enter credit card
charges when you charge an item or when you receive the bill. Your choice depends on whether you like
to enter information into QuickBooks incrementally or all at once. The advantage to entering charges
when you charge an item is that you can keep close track of how much you owe. In addition, if the
charge is for a particular job, you can keep track of how much you’re spending on that job.
Suppose you have a $30 gasoline charge you want to enter into QuickBooks. The form you use is the
Enter Credit Card Charges form.
To enter a credit card charge:
1. From the Banking menu, choose Enter Credit Card Charges.
QuickBooks displays the Enter Credit Card Charges window.
4-39
Processing Purchases and Payments with QuickBooks
This is the window where you enter your charges. Notice that the form at the top of
the window looks just like a familiar credit card charge slip.
2. In the Credit Card field, select CalOil Card from the drop-down list (if it’s not already
selected).
3. In the Purchased From field, select Bayshore CalOil Service from the drop-down list.
The next field is called Ref No. Most credit card receipts have some sort of
transaction number near the top, which exists for identification and tracking purposes.
Entering this number from a credit card receipt gives you additional information for the
credit card charge, but you don't have to use it. You don’t need to enter one for this
example.
4.
5.
6.
7.
4-40
Click in the Amount field, and then double-click to select the entire amount.
Type 30 and then press Tab.
Click the Expenses tab.
In the detail area, click in the Account column and assign the charge to the
Automobile:Fuel expense account, as shown in the figure below. (Automobile is the
account; Fuel is the subaccount.)
8. Click Save & Close to record the transaction and close the window.
After you record this credit card charge, QuickBooks adds a $30 transaction to the
credit card account register (increasing the liability by $30). It also adds $30 to the
Automobile:Fuel expense account. (You will see the increase when you create
reports on their expense accounts.)
Reconciling a Credit Card Statement
450.05 Just as we reconciled a bank account in the previous section, you should compare your credit
card receipts with your statement and reconcile your credit card statement. Reconciling a credit card
account is almost identical to reconciling a bank account.
To reconcile a credit card statement:
1. From the Company menu, choose Chart of Accounts.
QuickBooks displays the chart of accounts.
2. Click CalOil Card in the list once to select it.
3. Click the Activities menu button, and then choose Reconcile Credit Card.
QuickBooks displays the Begin Reconciliation window.
4-41
Processing Purchases and Payments with QuickBooks
In the Beginning Balance field, QuickBooks displays the balance of all cleared
transactions in the credit card register. To reconcile a credit card statement, all you
have to do is enter the ending balance and check off each transaction listed on your
statement.
4. In the Statement Date field, enter 12/15/2007.
5. In the Ending Balance field, type 101.02.
Note: When the ending balance is different from the previous month’s ending
balance, check for cleared transactions that are now showing as uncleared.
6. Click Continue.
QuickBooks displays the Reconcile Credit Card window
4-42
The Reconcile Credit Card window shows all the transactions for the credit card
account that have not yet cleared. You’ll use this window to check off the transactions
listed on your statement.
Marking Cleared Transactions
450.06 To mark the transactions as cleared:
1. In the “Charges and Cash Advances” section of the window, select all three charges.
2. In the “Payments and Credits” section of the window, select the 12/02/07 payment for
$135.80.
QuickBooks places a checkmark in the column to the left of each transaction you
select.
Your Reconcile Credit Card window should resemble the following figure.
4-43
Processing Purchases and Payments with QuickBooks
3. Click Reconcile Now.
QuickBooks displays the Make Payment window.
When you’ve finished reconciling a credit card account, QuickBooks gives you a
chance to pay part or all of the balance due on your credit card.
4. You want to write a check for payment now, so leave that option selected and click OK.
QuickBooks displays the Select Reconciliation Report window.
4-44
5. In the Select Reconciliation Report window, select Detail and then click Display. Keep
a record of the reconciliation report, you could choose Save as PDF from the File
menu and save the report as a PDF file.
You could also click Print to print a hard copy of the report.
6. Click OK at the message that QuickBooks displays.
7. Close the report.
Paying a Credit Card Bill
450.07 To write a check for the bill now:
1. In the Write Checks window, make sure Checking is listed as the bank account.
Notice that QuickBooks has already filled in the amount of the payment for you, and
has assigned the expense to the CalOil Card account. (If you change your mind and
decide you only want to make a partial payment, you can change the amount here.)
4-45
Processing Purchases and Payments with QuickBooks
2. Click in the Pay to the Order of field and select CalOil Company as the name of the
credit card company from the drop-down list.
3. Click the “To be printed” checkbox to select it.
4-46
4. Click Save & Close to record the transaction.
QuickBooks subtracts $101.02 from your checking account and also subtracts that amount
from your credit card account.
4-47
Processing Purchases and Payments with QuickBooks
4-48
Processing Payroll with QuickBooks
5
Table of Contents
Section
Description
Page
500
Introduction .......................................................................................................... 5-1
505
Obtaining Payroll Information .............................................................................. 5-2
510
Computing Wages ................................................................................................ 5-10
515
Performing Pay Period Activities ......................................................................... 5-16
520
Performing Monthly Payroll Activities................................................................. 5-26
525
Performing Quarterly Payroll Activities .............................................................. 5-27
530
Performing Annual Payroll Activities .................................................................. 5-32
535
Working with the QuickBooks Employee Center................................................ 5-40
540
Processing Payroll with QuickBooks .................................................................. 5-45
TOC 5-1
Processing Payroll with QuickBooks
500
5
INTRODUCTION
500.01 Over the years, government regulations have turned the processing of payrolls into one of the
accounting staff’s most complex and demanding tasks. For example, each pay period an employee’s
year-to-date wages usually must be compared to a separate federal unemployment tax limit, a state
unemployment tax limit, a social security tax limit, a federal income tax withholding table, and a state
income tax withholding table. In addition, the federal government is constantly making changes to
employment tax forms and regulations. Even with the use of a computerized payroll accounting program,
accounting staff must have a firm grasp of payroll preparation and of tax requirements in order to process
a payroll correctly.
500.02 This chapter gives an overview of the key steps in processing payrolls, whether by using a
computer software program or manually, and addresses the following payroll processing activities.
 Obtaining Payroll Information. Section 505 discusses the basic information
about the employer, the job, the employee, and the time worked that the
accounting staff must know in order to prepare a payroll.
 Computing Wages. Section 510 describes the steps in computing gross pay,
withholding employment taxes, and making other payroll deductions. The text also
explains how to calculate overtime, which is often misunderstood.
 Performing Pay Period Activities. Section 515 reviews the activities accounting
staff perform each pay period. These activities include entering the time worked,
creating the payroll register, printing paychecks, recording pay information in
accounting records, and depositing withheld employment taxes.
 Performing Monthly Payroll Activities. Section 520 briefly examines two
reconciliations that accounting staff usually perform monthly: reconciliation of the
payroll bank account and of the employee payroll deductions.
 Performing Quarterly Payroll Activities. Section 525 addresses the quarterly
activities of filing Form 941 to report federal income taxes and FICA (Social
Security) taxes withheld and paid. The text also explains how to calculate and
deposit federal unemployment taxes.
 Performing Annual Payroll Activities. Section 530 guides the accounting staff
through key year-end payroll activities. At year end, staff should identify nonpayroll compensation, issue Forms W-2, file the fourth quarter Form 941, and file
the annual federal unemployment tax return (Form 940). This section includes
instructions on reconciling the amounts between all the filed employment forms.
 Working with the QuickBooks Employee Center. Section 535 discusses how
you work with the QuickBooks Employee Center.
 Processing Payroll With QuickBooks. Section 540 discusses how you process
payroll with QuickBooks including (1) overview of payroll tracking, (2) setting up for
payroll, (3) setting up employee payroll information, (4) writing a paycheck, (5)
tracking your tax liabilities, and (6) paying payroll taxes.
500.03 This overview is designed to benefit both the new and the experienced payroll bookkeeper.
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505
OBTAINING PAYROLL INFORMATION
505.01 To accurately calculate payrolls, the payroll bookkeeper needs information about the employer,
the job, the employee, and the time worked or taken on leave. This information is usually recorded in
company procedural memos, employee information documents, or time sheets. Information about the
employer, the job, and the employee changes infrequently, while information about the time worked or
taken for leave changes during each pay period.
505.02 This section describes how the payroll bookkeeper gathers and processes the required
information.
Employer Information
505.03 To accurately calculate a payroll, the bookkeeper needs the following information about the
employer:
a. Employer identification number (EIN).
b. The workweek.
c. The pay period.
505.04 Information in a.-c. usually is established when the business first becomes an employer and
seldom changes. The following paragraphs briefly discuss the information needed.
505.05 Employer Identification Number (EIN). The federal employment tax system identifies
employers by their federal employer identification number (EIN), a nine digit number in the form “xxxxxxxxx.” Before paying its first employee wages, a business should obtain an EIN by filing with the IRS
a Form SS-4, Application for Employer Identification Number (call 1-800-TAX-FORM to request). A sole
proprietorship that incorporates is also required to obtain a new EIN. In some regions, the IRS has a
program that permits the business to fax the completed form to the IRS and receive the EIN within a day.
505.06 The Workweek. The federal law governing employee wages and work hours, the Fair Labor
Standards Act (FLSA), requires the employer to designate and document the day and time when the
workweek begins. The workweek consists of the seven consecutive 24-hour periods (168 consecutive
hours) following the designated time.
505.07 An internal policy memo is sufficient to designate the workweek. Employers can choose different
workweeks for different employees or groups. Any changes in the workweek must be conducted to give
the employee as much overtime pay in the week of change as the employee would have received under
the old workweek definition.
505.08 The FLSA uses the definition of the workweek in the calculation of overtime pay for certain
employees who work in “nonexempt positions” (discussed at Paragraph 505.12). States may require that
overtime be paid based on the hours worked in the workday (rather than in the workweek). Some states
require that notices be given or posted designating the workweek or workday. The payroll bookkeeper
should be familiar with the applicable state rules.
505.09 The Pay Period. The pay period is a grouping of workweeks and days, and the payroll
bookkeeper must know the pay period in order to accumulate all the wages owed. The pay periods used
most often by companies are as follows:
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



Weekly (52 pay periods).
Biweekly (26 pay periods).
Semimonthly (24 pay periods).
Monthly (12 pay periods).
505.10 Employers may set different pay periods for different groups of employees within the bounds set
by state laws regulating when wages must be paid. To simplify compliance with the FLSA, the authors
recommend that the business pay nonexempt employees either weekly or biweekly.
505.11 The employer should document in an internal memo the designated pay period for each
employee group, and the payroll bookkeeper should also indicate the employee’s pay period on the
Employee Payroll Information Sheet (discussed in Paragraph 505.18). This documentation is required
under the FLSA and also serves to protect the payroll bookkeeper should a dispute over the pay
procedures arise.
Job Information
505.12 Job positions can either be exempt or nonexempt from the FLSA’s minimum wage and overtime
requirements. A job’s FLSA category (exempt or nonexempt status) has consequences for the wage
rate, pay deductions, and time records used to calculate the employee’s paycheck. Exhibit 5-1
summarizes these consequences.
Exhibit 5-1
Comparison of Exempt and Nonexempt Employees
Attribute
Exempt
Payment amount The employer pays an exempt employee
a fixed salary for any and all work
performed during a workweek. Pay does
not vary with quality or quantity of work.
Nonexempt
The employer may pay a nonexempt
employee using an hourly, salary, piece,
commission, or any other method.
However, the total compensation must be
at least the minimum wage for all hours
worked, plus over time pay for hours over
the maximum.
Pay deductions
Generally, deductions for time not
worked may not be made from the
weekly salary; doing so will likely void the
exemption. The FLSA does specify
several exceptions to this policy.
Time Records
Employers are not legally required to
record the hours worked.
The employer may pay a nonexempt
employee only for the hours worked.
Therefore, deductions may be made from
wages for lateness, full or partial day
absences, and any time the employee
doesn’t work.
Employers must maintain accurate daily
and weekly records of all hours worked.
505.13 While a number of exemptions from overtime and minimum wages exist, most payroll
bookkeepers will face issues involving the “white collar” exemptions, that is, the exemptions for
executive, administrative, professional, and outside sales positions. These exemptions are based only
upon a combination of job duties and salary amounts, and not upon the employee’s job title, receipt of a
fixed amount of pay called a salary, or high income.
505.14 The job’s FLSA category is usually determined when a job position is created and listed on the
written job description, If the business does not have written job descriptions, the payroll bookkeeper
should learn the FLSA category from the controller or outside CPA. To increase the efficiency of payroll
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processing, the bookkeeper should also record the FLSA category on the Employee Payroll Information
Sheet (discussed in Paragraph 505.18).
505.15 While it is the job position that is technically exempt or nonexempt from the FLSA, in common
speech people refer to the employee as exempt or nonexempt. Accounting staff should not become
confused by this language usage.
Employee Information
505.16 Payroll bookkeepers need the following information about the employee in order to accurately
prepare a payroll:
a.
b.
c.
d.
e.
f.
g.
Name and address.
Social Security Number (SSN).
Job title.
Wage rate.
Withholding status.
Advanced earned income credit (EIC) status.
Other authorized deductions.
505.17 The information in a.-g. is usually provided when the employee is first hired.
505.18 Because the information generally comes from several sources, for efficient processing the
payroll bookkeeper should summarize this information on one form, such as the Employee Payroll
Information Sheet illustrated in Exhibit 5-2.
505.19 The payroll bookkeeper then modifies the information only when notified of changes. To ensure
that only authorized changes are made and that the business has written documentation of payroll
activity to use in employment audits and lawsuits, the payroll bookkeeper should make changes in the
employee payroll information only when a properly authorized Payroll Change Form is received. After
entering the changed information into the computer system, the bookkeeper should verify that the
change was correctly entered and posted, and document the verification on the change form itself.
505.20 The following paragraphs discuss in further detail the information to be gathered.
505.21 Name and Address. Because the employee’s name is used by the SSA and IRS, bookkeepers
should not change an employee’s name (such as through marriage or divorce) in the payroll records until
the employee can produce a revised Social Security card (see Paragraph 505.22). Address data should
be kept current to allow the business to fulfill its legal obligations to deliver Forms W-2, benefit plan
information, and COBRA notices.
505.22 Social Security Number (SSN). Because of the SSN’s uses, federal agencies may impose fines
on employers who report wage information with inaccurate or missing Social Security numbers.
Bookkeepers gather the SSN when the employee completes Form W-4, Federal Withholding Allowance
Certificate (see the discussion beginning at Paragraph 505.29 below). In addition, the authors
recommend that the bookkeeper compare the SSN entered into the accounting system with a photocopy
of the Social Security card. However, the employer cannot legally compel the employee to produce the
card.
505.23 Employers can verify individual SSN’s by calling (800) 772-1213. Employees needing to obtain or
revise a Social Security number should complete Form SS-5, Application for a Social Security Card
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[available at local Social Security offices or by calling (800) 772-1213]. It usually takes two weeks to
obtain a new or revised card.
505.24 Job Title. The employee’s job is important in (a) establishing whether overtime must be paid (see
Paragraph 510.07) and (b) determining that wage differences between men and women working the
same job do not reflect sex discrimination. The payroll bookkeeper should obtain from management the
employee’s job title, and any corresponding job description should be retained as part of the employment
records.
Exhibit 5-2
GENERAL INFORMATION
Employee number 227
Name Arthur Collin Smith
(First, middle, last)
Address 987 Main Street
City Smallville
Department Accounting
Date employed January 1, 2008
Employee Payroll Information Sheet
Social Security number 123-456-7890
State Texas
Zip 76188
Title Staff Bookkeeper
Date terminated
PAYMENT INFORMATION
Pay period
 Weekly
 Biweekly
 Semimonthly  Monthly
FLSA category
 Exempt
 Nonexempt
Wage rate (weekly salary if exempt, or hourly rate if nonexempt) $11 per hour
DEDUCTION INFORMATION
Income taxes
Federal
State/Local
Number of allowances claimed
2
N/A
Additional withholding requested
—
N/A
Marital status
 Married
 Single
 Married, but withhold a higher single rate
Earned income credit
Has the employee filed W-5 for this year with employer?
 Yes
Has the employee’s spouse file W-5 for this year with any employer?
 No
 Yes
 No
Other deductions (Enter the deduction amount or percentage of gross wages that should be deducted
before and after income taxes in each pay period.)
Before tax
After tax
Insurance
___________
30.75
Retirement plan
___________
___________
Savings plan
___________
30.00
_______________________________________
___________
___________
_______________________________________
___________
___________
_______________________________________
___________
___________
_______________________________________
___________
___________
_______________________________________
___________
___________
Completed by Cheryl Anderson
Date January 1, 2008
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505.25 When receiving a Payroll Change Notice involving a job title, the payroll bookkeeper should
prepare a revised Employee Payroll Information Sheet, review whether the employee’s FLSA exemption
status has changed (see discussion beginning at Paragraph 505.12), and enter any new wage rate into
the system. The payroll change notice form should be retained in the employee’s payroll file.
505.26 Wage Rate. Under the FLSA, the employer’s records must reveal the two components of the
employee’s wage rate: (a) the wage base (how the employee is paid—for example, by the hour,
commissions, by the number of pieces produced, or by a weekly salary) and (b) the wage amount (the
amount that is paid for each hour or week worked, unit sold, or piece produced).
505.27 The payroll bookkeeper obtains from management the employee’s authorized wage rate. The
payroll bookkeeper should be very careful to ensure that there is a clear written audit trail for each
change in an employee’s wages. Such payroll change notice forms should be kept in the employee’s
payroll file.
505.28 The payroll bookkeeper should also ensure that the wage rate for nonexempt employees is
expressed in terms other than a salary. In some companies it is common practice to describe the wages
paid an office worker, such as a secretary, as a weekly “salary.” However, such workers are usually in
nonexempt jobs and must be paid overtime. Technically, a salary is a fixed amount of pay that does not
vary with the time worked or work accomplished. A secretary that receives a “salary” of $400 per week
and is expected to work 40 hours weekly actually has an hourly wage rate of $10.
505.29 Employee’s Withholding Status. To properly withhold federal income taxes and calculate the
employee’s net wages, the employer must ask each new employee to complete a Form W-4 before or on
employment commencement. Some states require that employees complete a separate state withholding
allowance certificate.
505.30 Because claims for excessive allowances and exemptions may result in civil and criminal
penalties, the payroll bookkeeper should never suggest or recommend to the employee a number of
withholding allowances. Employees can consult the Form W-4 and its instructions; IRS Publication 919,
Is My Withholding Correct?; and Publication 525, Taxable and Nontaxable Income. These publications
can be ordered by calling 1-800-TAX-FORM.
505.31 Some employees may claim a total exemption (“exempt status”) from federal income tax
withholding. (However, withholding Social Security and Medicare taxes may still be required). To qualify
for exempt status, the employee must meet all of the following conditions:
 The employee must expect to have no federal income tax liability for the current
taxable year. If circumstances change and a liability is expected in the current year,
the employee must file a new Form W-4 within 10 days (for liabilities expected in the
following year, by the later of 10 days or December 1).
 The employee must not have had a tax liability in the prior year.
 If the employee’s current year income exceeds $600 and includes unearned income,
the employee must not be claimed as a dependent on another return.
505.32 The IRS requires that employees file an amended Form W-4 within 10 days of an event that
decreases their number of withholding allowances. For example, such decreases may occur:
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 Upon marriage to an employed spouse.
 Upon a divorce or legal separation.
 When a spouse claims him- or herself as an exemption, as when the spouse begins
new job.
 When someone else will claim a claimed dependent.
 When a claimed dependent’s level of income will invalidate the allowed exemption.
 When income is greater or exemption or deductions are less than previously planned.
505.33 An employee may amend the Form W-4 for an increased number of withholding allowances at
any time.
505.34 Employees often are unaware of their obligation to update the Form W-4. Accordingly, the
business should use the employee handbook to inform employees of their obligations.
505.35 When an employer receives the Form W-4, the employer must comply with its withholding
instructions no later than the start of the first payroll period ending on or after 30 days from the receipt of
the Form W-4. Generally, the withholding instructions continue to apply until the employee amends the
Form W-4. However, an employee claiming fully exempt status annually must renew the Form W-4 by
February 15; otherwise, the employer must resume withholding as though the employee is single with
zero withholding allowances.
505.36 The employer is not under any affirmative obligation to evaluate the number of exemptions for
which the employee is entitled. However, the employer does have three duties regarding the Form W-4
contents:
 Ignore Invalid Forms W-4. A Form W-4 is rendered invalid if the employee changes
or adds language to the form, such as rescinding the certification that the form is
correct. The form is also considered invalid if the employee indicates verbally that the
form is not correct. When a form is invalid, the employer should request a valid one;
until a valid form is received, the employer should withhold based on an earlier valid
form or as if no form had been returned (that is, at a “single, no allowances” level).
 Report excessive allowances. The employer must send with its Form 941,
Employer’s Quarterly Payroll Tax Return, copies of all Forms W-4 claiming more than
10 withholding allowances along with any written employee statements supporting the
claimed allowances. The IRS will then notify both the employee and the employer of
the maximum number of allowances. IRS Publication 15, Circular E, Employer’s Tax
Guide, contains further instructions.
 Report certain full exemptions. The employer must send the IRS all claims for full
exempt status by employees with normal weekly wages of more than $200. The
transmittal instructions are the same as for claims of more than 10 allowances.
505.37 The payroll clerk should retain the signed original Forms W-4 (no copies) for four years after the
company files the related annual employment tax returns.
505.38 EIC Status. Employees with income less than $33,030 in 2005 and claiming a dependent child
may qualify for an advance earned income credit (EIC) that will increase the paycheck amount.
Employees wanting to receive the advance EIC must file IRS Form W-5, Earned Income Credit Advance
Payment Certificate.
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505.39 Employers are legally required to personally notify certain employees that they may be eligible for
the earned income tax credit (EIC) and may receive the credit in advance as part of their wages. The
easiest way for the employer to comply is to either have IRS Notice 797, Notice of a Possible Federal
Tax Refund Due to the Earned Income Credit (EIC), printed on the back of the Form W-2 or sent to all
employees with their copy of the Form W-2. Employers should not change the language of the notice.
Employers can learn more about the EIC and their duties in IRS Publication 15, Employer’s Tax Guide;
Publication 937, Employment Taxes and Information Returns; and Publication 1325. Employees can
learn more about the EIC in IRS Publication 596, Earned Income Credit. The IRS forms and publications
related to the EIC can be obtained by calling 1-800-TAX-FORM.
505.40 Other Authorized Deductions. To accurately compute the employee’s net pay, the payroll
bookkeeper must know the nature and amount of other payroll deductions (for example, for retirement
plans, insurance, or loan repayments). The payroll bookkeeper should maintain a file documenting each
deduction’s authorization and tax status. The Fair Labor Standards Act (FLSA) requires the payroll
records to clearly show the date, amount, and description of deductions from wages; many computerized
payroll accounting systems produce a deductions register that lists such information.
505.41 Most states require the employer to have written documentation from the employee authorizing a
deduction from pay, especially those involving an element of profit to the employer (such as repayment
of loans with interest). It is important that the business use documentation for deductions that is accepted
by state courts. The payroll bookkeeper can obtain further information from the outside CPA or legal
counsel.
Time Information
505.42 To accurately calculate the payroll, accounting staff must know (a) how much time was used and
(b) what type of time was used.
505.43 How Much Time Was Used. Many businessmen’s time records are not in compliance with
federal timekeeping requirements, and these businesses are often penalized when a wage and hour
audit occurs. Courts have ruled that this timekeeping duty is the employer’s, not the employee’s.
505.44 The FLSA’s general rule is that businesses must record for nonexempt employees each day’s
beginning and ending work time and the total time worked during the workweek. However, the
requirement is less extensive for nonexempt employees who work a fixed schedule in an establishment
operating on a fixed schedule (such as office workers). In this situation, the employer may maintain a
statement showing the regular hours the employees are scheduled to work. In weeks an employee
adheres to the schedule, the employee should indicate (by statement or checkmark) that the scheduled
hours were actually worked. In weeks the employee works more or less than the scheduled hours, the
employee should show the exact number of hours worked each day and each week.
505.45 The business may use time cards (and time clocks) or time sheets to record the time worked and
leave taken, as well as the supervisor’s approval. If time sheets are used, the business should require
that they be completed in ink and all corrections initialed; such procedures lessen the chances for
disputes during wage and hour audits. Time sheet forms usually are available from commercial business
form suppliers. To help the payroll bookkeeper during wage and hour and workers’ compensation audits,
the authors recommend that the business separate the overtime hours from regular hours on the time
card or time sheet.
505.46 The payroll bookkeeper should ensure that the timekeeping system records the information
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needed to comply with state as well as federal pay rules. To have the strongest defenses in the legal
disputes over wages, the authors recommend that the business have nonexempt employees track time
worked to the nearest five minutes and have all exempt employees record any workweek hours
exceeding 40.
505.47 In some situations (such as on-call time), exactly what constitutes recordable time worked can be
a matter of dispute. The FLSA regulations regarding time worked generally consider time worked to be:
 Time that an employer requires an employee to be on duty, or
 Time an employee is “suffered or permitted” to work.
505.48 Sometimes, businesses mistakenly think that they must pay only for time that supervisors
approve. The business is legally obligated to pay for unauthorized time worked, but it may take
disciplinary action if its policy on unauthorized work was violated. Supervisors approve time records to
(a) verify that the time recorded was accurately described, (b) determine that time worked was
authorized, and (c) gain current information about the department’s functioning.
505.49 What Type of Time Was Used. Not all time is compensated at the same rate; some time is paid
at the regular rate, some at an overtime rate, and some leave time is unpaid. To properly prepare a
payroll, the payroll bookkeeper must first determine what type of time has been used.
505.50 Generally, the employee includes a description of how the time was spent (work, vacation, sick
leave, and so forth) on the time card or time sheet. Based on that description, the payroll bookkeeper (or
the employee’s supervisor) then indicates what type of time was used. While the business usually
categorizes leave into detailed subcategories (such as holiday, vacation, sick leave, jury leave, and
family and medical leave) in order to administer leave benefits, the primary distinction for wage
calculations is whether the time was worked time, paid leave, or unpaid leave. In categorizing the time
used, the bookkeeper should be aware that under the FLSA:
 Paid or unpaid leave does not count towards overtime. For example, no overtime
is incurred when an employee takes a paid holiday and works 40 hours during the
remainder of the workweek. The paid holiday is considered paid leave, not time
worked, and the employee did not exceed 40 hours worked. Vacations, holidays, sick
leave, and other paid or unpaid leave should not be considered in determining if more
than 40 hours were worked during the workweek.
 Only the excess of 40 hours worked during the workweek is considered
overtime hours. Under the FLSA, the payroll bookkeeper should accumulate the first
40 hours worked during the workweek as regular hours, and then consider any
excess to be overtime. For example, if a part-time employee works thirty hours in the
workweek instead of the usual twenty, the employer incurs no overtime liability,
because the hours worked did not exceed 40.
 Each workweek stands alone. Time worked during one workweek cannot be
averaged with the time worked in a second workweek, even if the two weeks are in
the same pay period. For example, if a nonexempt employee that is paid biweekly
works 45 hours during the first workweek and 35 hours the second, the employer
must pay overtime for the extra five hours worked during the first week.
Some states, however, may have different wage and hour rules such as requirements that overtime pay
be based on the number of hours worked in a day or the number of days worked in a week.
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510
COMPUTING WAGES
510.01 After all the necessary payroll information has been obtained, the payroll bookkeeper can
calculate the amounts to be paid and withheld. The procedures to follow depend upon whether the
payroll is processed using a computer program or manually.
510.02 Regardless of whether manual or computerized payroll systems are used, it is important that
bookkeepers understand the steps needed to calculate payroll information. The following paragraphs
provide guidance for computing gross pay, tax withholdings, and other pay check deductions.
Computing Gross Pay
510.03 In most instances, the calculation of gross pay is fairly simple and depends largely on whether the
job position is exempt or nonexempt from the FLSA (see discussion beginning at Paragraph 505.12),
and, if nonexempt, whether overtime was worked. The following paragraphs discuss the calculation of
gross pay under these various situations.
510.04 Exempt Employees. The gross pay of employees in FLSA exempt positions is calculated by
multiplying the employee’s weekly salary by the number of weeks in the pay period. If the exempt
employee’s salary is expressed as an annual amount, the payroll bookkeeper can compute gross pay by
dividing the annual salary by the number of pay periods during the year. For example, if a company pays
its employees twice each month (i.e., 24 times each year) the gross pay for each pay period of an
employee earning $36,000 annually would be $1,500 ($36,000/24). (Because of past court decisions
involving implied employment contracts, the authors recommend that salaries always be expressed in
weekly amounts.)
510.05 Exempt employees generally receive the same gross pay each pay period regardless of the
number of hours worked. Therefore, for those employees, the payroll bookkeeper can calculate the first
payroll of the year and simply duplicate that payroll amount until employee salaries or deductions
change. In some cases, however, companies may enter into unusual compensation arrangements with
their exempt employees. For example, an employee may be paid a commission, a bonus based on
company or department performance, or a combination of salary and bonus. In those cases, the
calculation of gross pay can become complex. Bookkeepers should carefully review any such
arrangements and compute gross pay in accordance with compensation agreements.
510.06 Nonexempt Employees. For nonexempt employees, gross pay usually is computed by
multiplying the hourly pay rate by the number of hours worked and paid leave during the workweek. For
example, the gross pay of an employee receiving $8.50 per hour and working 40 hours during the
workweek would be $340 ($8.50 x 40 hours = $340).
510.07 Overtime. If overtime hours are worked, the calculation of gross pay becomes more complex.
Under the FLSA, employers are required to pay overtime at a premium rate to workers in nonexempt
positions who work more than 40 hours during the workweek. (A handful of states require overtime pay
based on the number of hours worked during a day or the number of days worked during the week). The
FLSA requires no overtime pay for employees in exempt positions regardless of the hours worked.
510.08 The FLSA requires employers to keep records of the total premium pay for overtime hours. The
overtime premium pay excludes the straight-time earnings for overtime hours. The overtime premium pay
represents the additional one-half of regular hourly wages paid applied to the workweek’s hours worked
in excess of 40. For example, assume the employee has a regular wage rate of $8.50. The straight time
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(non-overtime) pay for the employee working 56 hours during the workweek would be $476 ($8.50 x 56
hours), overtime premium pay would be $68 [($8.50 x ½) x (56 - 40 hours)], and total wages would be
$544.
510.09 To calculate the overtime premium pay, the payroll bookkeeper first determines the amount of
regular and overtime hours (discussed beginning at Paragraph 505.50). The payroll bookkeeper then
determines the overtime premium rate and then calculates the overtime premium pay. The following
paragraphs briefly discuss these two activities.
510.10 The business’s overtime premium rate equals one-half of the “regular rate.” The FLSA defines the
regular rate as the workweek’s total “includable compensation” before any overtime premium pay divided
by the workweek’s total hours worked. For example, using the example in Paragraph 510.08, the regular
rate is $8.50 ($476 ÷ 56) and the overtime premium rate is $4.25 ($8.50 x ½).
510.11 “Includable compensation” consists of the employee’s basic hourly wages for the workweek plus
commissions; incentive, on-call, attendance, quality, production, and hazard bonuses; suggestion
awards; and noncash compensation. In practice, most businesses consider the employee’s basic hourly
rate to be the regular rate. While this is often true, it is not always true, and the payroll bookkeeper
should at least be aware that differences exit.
510.12 Once the bookkeeper has determined the overtime hours and overtime rate, the bookkeeper
simply multiplies the two to determine the overtime premium pay. Ideally, the payroll system will record
overtime premium pay separately from regular pay. Management often can use the separate overtime
premium pay number to gauge the effectiveness of staffing and scheduling.
In addition, the business usually needs to know non-overtime wages in order to calculate accurately
workers’ compensation and various benefit plan premiums.
Withholding Employment Taxes
510.13 After calculating the gross wages, the payroll bookkeeper must calculate the portion of the wages
required by federal law to be collected (withheld) from the employee’s wages for:
 Federal income taxes. Employers must withhold personal income taxes from
employees’ wages and remit the withholdings directly to the federal government or its
depository bank. These taxes are often referred to as federal income tax withholdings
(FITW).
 Social Security and Medicare taxes (collectively called FICA). Employers must
withhold FICA taxes from employee wages. Employers then must remit the
withholdings, along with matching amounts paid by the employer, directly to the
federal government or its depository bank.
510.14 In addition, employers must withhold and remit employment taxes imposed by state laws. State
employment taxes vary depending on the laws of each state. Accordingly, a detailed discussion of state
employment tax requirements is beyond the scope of this Guide.
510.15 Employment Tax Coverage. Only individuals that are classified as employees are covered by
the employment tax laws. Thus, independent contractors and volunteers are not subject to employment
taxes. The definition of employee under each of the federal employment tax laws is as follows:
5-11
Processing Payroll with QuickBooks
 Federal income tax withholding. For FITW purposes, individuals are generally
classified by the common-law concept of employee. That is, they are employees if the
payer has the right to control how the work is performed. By law, however, FITW
regulations classify compensated corporate officers as employees and licensed real
estate agents and direct sellers (such as many door-to-door sellers) as
nonemployees.
 Social Security and Medicare taxes. FICA regulations add full-time life insurance
agents, agent or commission drivers (such as route drivers), full time traveling
salespersons, and certain home workers to FITW’s list of employees.
510.16 Employers should use caution when classifying individuals as independent contractors rather
than employees. Employers may be held liable for all employment taxes (and be assessed a penalty of
100% of the unpaid taxes) if they classify employees as independent contractors and there is no
reasonable basis for doing so.
510.17 Many types of businesses and employees receive special treatment under the employment tax
laws. Bookkeepers should refer to IRS Publication 15 (Circular E), Employer’s Tax Guide, to determine
whether any of their business’s employees should receive special treatment.
510.18 Federal Income Tax Withholding. Generally, employers should withhold federal income taxes
on all wages, salaries, fees, bonuses, commissions on sales or on insurance premiums, taxable fringe
benefits, pensions and retirement pay (unless taxed as an annuity) paid as compensation for services.
Usually, employers withhold on all wages at the time of payment; the one exception is that employers
may choose the time period(s) to withhold taxes arising from a taxable noncash fringe benefit (such as
personal use of a company auto).
510.19 Because of the complexity of compensation taxation, payroll bookkeepers should refer to IRS
Publication 15 (Circular E), Employer’s Tax Guide, and consult with the controller or outside CPA to
determine how wages should be treated for federal income tax and FICA withholding. IRS Publication 15
can be obtained by calling 1-800-TAX-FORM.
510.20 The amount of withholding will vary depending on each employee’s wage, marital status, and
withholding allowances claimed on Form W-4 (discussed beginning at Paragraph 505.29). Federal
income tax withholding may be computed using any of the methods listed in Exhibit 5-3. The most
common methods used, however, are the wage bracket method and the percentage method, as
discussed in the following paragraphs.
 Wage bracket method. Bookkeepers can avoid the detailed work of computing
withholding amounts by using the wage-bracket tables in IRS Publication 15 (Circular
E), Employer’s Tax Guide. Different withholding tables are available for each payroll
period (for example, weekly, biweekly, semimonthly, etc.) and for single and married
employees. To determine withholding amounts, bookkeepers should (a) locate the
table applicable to the appropriate marital status and payroll period, (b) locate the
wage bracket (first column of the table) in which the wage payment falls, (c) locate the
withholding amount on the line for that wage bracket that is listed in the column for
the number of allowances claimed by the employee, and (d) add any additional
amount of voluntary withholding that was requested by the employee to the amount
determined in (c).
5-12
To illustrate, the withholding amount for a married employee that is paid semimonthly
is found on the Married Persons—Semimonthly Payroll Period withholding table. If the
employee is paid $2,000 semimonthly in 2005 and claims four allowances, the
withholding amount is $201. If the employee is paid $1,500 semi-monthly and claims
two allowances, the withholding amount is $156.
 Percentage method. Federal income tax withholdings are determined using IRS rate
tables. Different rate tables are available for each payroll period and for single and
married employees. To determine the amount of income tax withholdings,
bookkeepers should (a) multiply the amount allowed for one withholding allowance for
the particular pay period by the number of allowances claimed by the employee, (b)
subtract the amount in (a) from the employee’s wages, and (c) compute the amount
to withhold based on the amount determined in (b) and the appropriate rate table. IRS
rate tables can be found in IRS Publication 15 (Circular E), Employer’s Tax Guide.
Exhibit 5-3
Method
Percentage method
Wage bracket tables
Alternative formula for percentage withholding
Wage bracket percentage method withholding
table
Combined income, employee Social Security, and
employee Medicare tax table
Annualized wage method
Average estimated wage method
Cumulative wage method
FIT Withholding Methods
Comments
See IRS Publication 15, Employer’s Tax Guide.
See IRS Publication 15.
Useful for computerized payroll systems.
See IRS Publication 493. Alternative Tax Withholding Methods and Tables.
Useful for computerized payroll systems.
See IRS Publication 493.
See IRS Publication 493.
See IRS Publication 493.
See IRS Publication 493.
Useful for commission salespersons. See IRS
Publication 493. Employee must make a written
request, and employer must consent.
Part-year employment method
Useful for temporary or seasonal employees
working less than 245 days a year. See IRS
Publication 493. Employee must make a written
request, and employer must consent.
Additional voluntary withholding
Employee must indicate additional amounts on
Form W-4, line 6.
Other alternative methods
See IRS Publication 15.
Nonresident aliens
Withholding is subject to treaty obligations.
See IRS Publication 515, Withholding of Tax on
Nonresident Aliens and Foreign Corporations.
Third-party sick pay
See IRS Publication 15.
Withholding on pensions and annuities
See IRS Publications 15 and 493.
Note: IRS publications can be ordered by calling 1-800-TAX-FORM.
To illustrate, assume that an unmarried employee claiming two allowances is paid $500
weekly in 2005. The income tax withholding of $53.36 would be computed as follows:
5-13
Processing Payroll with QuickBooks
Total wage payment
Adjustment for one allowance for
Weekly pay periods
Allowances claimed
$ 500.00
$ 47.12
x
2
Wages subject to withholding
– Base
94.24
-
405.76
50.00
$
53.36
355.76
Withholding per Table—Weekly
Payroll Period, Single Person
($355.76 x 15%)
510.21 Federal Income Tax Withholding on Supplemental Wages. Supplemental wages are
compensation paid to employees in addition to their regular wages. Examples include bonuses,
commissions, tips, overtime pay, accumulated sick leave, severance pay, vacation pay, reimbursed
business expenses taxable to the employee, and payment of nondeductible moving expenses.
510.22 The IRS allows employers to withhold at a flat rate on supplemental wages. This option arose
when few employers had computerized payroll software. However, because such software is now
common, and because the flat rate in 2005 is 25% (which is often higher than the employee’s regular
withholding rate), most payroll bookkeepers just enter supplemental wage amounts into the payroll
software program when processing the regular wages earned during the pay period. The program then
calculates actual withholding on the combined regular and supplemental wages.
510.23 If the business chooses to apply the flat rate on supplemental wages, the business must:
 Distinguish supplemental wages from regular wages when paid. If not, they must
be combined with regular wages for withholding.
 Pay supplemental wages in a year in which the employee receives regular
wages. If regular wages have not been received (for example, if an employee
received severance pay in January and no other wages), the employer must compute
withholdings the same as for regular wages.
510.24 Social Security and Medicare Withholding. The Federal Insurance Contributions Act (FICA)
provides for a system of old-age, survivors, disability, and hospital insurance. The insurance is financed
through the assessment of Social Security taxes (for old-age, survivors, and disability insurance—
OASDI) and Medicare taxes (for hospital insurance—HI). The taxes are levied equally on both employers
and employees. Employers collect the employees’ portions of the taxes through payroll deductions.
Those deductions, along with the employers’ matching amounts, are then paid to the federal government
and reported on employment tax returns.
510.25 The most significant differences between how FIT withholding and FICA withholding treat types of
compensation occur in the following items:
 401(k) pre-tax contributions. Such amounts are excluded from FIT
withholding but included in FICA withholding.
 SEP employee contributions. Such amounts are excluded from FIT
withholding but included in FICA withholding.
 Deceased worker’s wages paid in year of death. Such amounts are
5-14
excluded from FIT withholding but included in FICA withholding.
 Nonqualified deferred compensation plan payments. Generally,
contributions to such a plan are excluded from FIT withholding but included in
FICA withholding, while payments to an employee from the plan are included
in FIT withholding but excluded from FICA withholding. Because the payroll
tax treatment of such plans can be complex, the payroll bookkeeper should
obtain advice from a CPA.
Payroll personnel should be aware of these differences and take steps to ensure that withholding is
accurately calculated.
510.26 For 2008, the rates of withholding from employee wages are as follows:
 Social Security tax—6.2% of the first $102,000 of each employee’s wages.
 Medicare tax—1.45% of each employee’s wages.
To illustrate computing withholdings for Social Security and Medicare taxes, assume that an employee’s
gross pay for the current pay period is $4,000, and the employee’s year-to-date gross pay (prior to the
current pay period) is $57,600.
Calculation of Social Security withholding
Current period gross pay
Gross pay in excess of wage limit:
Year-to-date gross pay (including
the current pay period)
($4,000 + $57,600)
Social Security wage limit
Current period gross pay subject to
Social Security withholding
Social Security withholding rate
Current period Social Security withholding
Calculation of Medicare withholding
Current period gross pay
Medicare withholding rate
Current period Medicare withholding
$ 4,000
$ 61,600
60,600
(1,000)
x
3,000
6.20%
$
186
$ 4,000
x 1.45%
$
58
Making Other Payroll Deductions
510.27 The payroll bookkeeper may be required to compute a number of payroll deductions in addition to
federal, state, and local employment taxes. Many of the deductions benefit the employees by funding
insurance or retirement plans. Other deductions, such as those for creditor garnishments, tax levies, and
mandatory child support, may be unpopular with employees and quite complicated. Federal tax laws
whether deductions may be made before or after the computation of federal income tax or FICA
withholding. In some cases, state and federal withholding treatments differ. Federal and state minimum
wage rules must be followed if the deductions threaten to lower employee pay below federal or state
minimums. Accounting staff should be familiar with the regulatory requirements, tax treatments, and
5-15
Processing Payroll with QuickBooks
limitations of all employee payroll deductions to ensure that the deductions are computed accurately.
510.28 Documentation authorizing all deductions should be retained in the payroll file and summarized
on the Employee Payroll Information Sheet (see discussion at Paragraph 505.18). When entering a new
deduction into the payroll software, the payroll bookkeeper should print or review the deduction
information contained in the computer, agree the amounts to the revised Employee Payroll Information
Sheet, and document on the information sheet that the changes were correctly entered.
515
PERFORMING PAY PERIOD ACTIVITIES
515.01 Each pay period, the bookkeeper enters time data into the payroll system, creates the payroll
register, prints paychecks, records payroll information, and deposits employment taxes. This section
discusses those procedures.
Entering Time Data
515.02 When computerized payroll systems are used, payroll processing is greatly simplified. When an
employee is hired, the bookkeeper enters information about the employee, wage rates, and withholding
(all discussed in Section 505) into the payroll software and changes the information infrequently. To
process each pay period’s payroll, the payroll bookkeeper typically batches the time cards or time sheets
together, calculates batch control totals from each time category’s hours (such as total regular time,
overtime, paid leave, and unpaid leave), and records the hours in a control log. The bookkeeper then
enters the hours worked into the payroll accounting software, which produces a payroll time report
showing the time entered for each employee and for the company as a whole. (Some payroll programs
create an hours and earning register when the payroll register is produced rather than when the data is
entered.) The bookkeeper compares this payroll time report (or hours and earnings register) to the
control log totals to determine that all the time was entered into the system. The bookkeeper then
documents on each time card or time sheet that the information was processed and files the time
records.
515.03 The payroll software then calculates gross pay and all withholdings and prepares the paychecks.
Payroll records are automatically posted and relevant tax return data are stored.
515.04 When payroll information is processed manually, the bookkeeper uses the time records when
making the calculations discussed in Section 510 for wages, withholdings, and deductions. The
calculations are relatively straightforward, but tedious.
Creating the Payroll Registers
515.05 When the payroll bookkeeper (or the payroll software) has calculated the gross wages (including
the overtime premium), employment tax withholdings, and other deductions, the bookkeeper usually
produces a draft payroll register. The payroll register shows the proposed paycheck’s gross wages,
withholding, and deductions for each employee and for the business in total. The specific payroll register
format will vary among payroll software systems. Exhibit 5-4 displays a sample payroll register page.
515.06 The bookkeeper uses the draft payroll register to:
 Review the proposed payroll checks for reasonableness. The payroll bookkeeper
should review the payroll register to determine if the total payroll’s net pay is what
was expected (consistent with other similar pay periods) and if any individual checks
5-16
appear unusually large or low.
 Determine that FICA taxes are being withheld properly. For 2008, the payroll
register’s total Medicare withholding should always be 1.45% of the total Medicare
wages. For employees with year-to-date earnings less than $102,000, the Social
Security withholdings should be 6.20% of the Social Security wages. If the payroll
register lists the employer portions of FICA taxes, the amounts should match the
employee’s withholdings.
515.07 The payroll software may also produce an hours and earnings register (which includes data from
the time sheets), a deductions register (which details all deductions made from an employee’s
paycheck), a general journal (which indicates the accounts and amounts to be recorded in the general
ledger), a job cost journal (which indicates how the payroll costs will be allocated to specific job projects),
and a check register (which usually shows the information that will appear on the paycheck stubs). The
bookkeeper should determine that these reports all balance to the payroll register and that the results
appear reasonable. Usually, the payroll bookkeeper can correct input errors and rerun the payroll
register.
515.08 Wage and Tax Control Log. Payroll bookkeepers should prepare manually a control log of wage
and tax information, even if the business uses a payroll accounting software program. By comparing the
manually accumulated information to the cumulative information reported on the payroll register, the
bookkeeper gains assurance that the computer program is properly accumulating and storing the data.
Maintenance of this control log is very important, given the inconvenience, lowered employee morale,
and tax penalties that may arise from errors in withholding taxes or reporting wage information.
5-17
Processing Payroll with QuickBooks
Exhibit 5-4
Line
1.
2.
3.
4.
a
Name
J. Apple
M. Rich
A. Carr
YTD
Sample Payroll Register Page
b
Regular
Wages
2311
1500
300
2031
c
OT
Premium
5.502
0
0
5.50
d
Gross
Wages
236.50
1500.00
300.00
2036.50
e
FIT
Taxable
Wages
236.50
1500.00
300.00
2036.50
f
FIT
WH
g
Soc Sec
Wages
h
Soc Sec
WH
236.50
03
300.00
536.50
14.66
03
18.60
33.26
14.00
42.00
04
56.00
i
Medicare
Wages
236.50
1500.00
300.00
2036.50
j
Medicare
WH
3.43
21.75
4.35
29.53
k
State
Tax
WH
4.97
31.50
04
36.47
l
Other
Deductions
37.00
115.00
43.00
195.00
1
Regular wages calculated as 42 hours at $5.50/hr. regular wage rate.
2
Overtime premium calculated as 2 overtime hours (42-40) at $2.75/hr. overtime premium rate ($5.50 x .5).
3
Employee’s year-to-date earnings exceed the Social Security maximum base.
4
Employee’s withholding allowances on Form W-4 are so great that no amounts are withheld for federal and state income taxes.
5-18
m
Net Pay
162.44
1289.75
234.05
1686.24
Printing Payroll Checks
515.09 Once the payroll register is correct, the payroll bookkeeper is ready to print the payroll checks.
The process of printing payroll checks is similar to that used to print accounts payable checks. The
payroll bookkeeper should:
 Keep all check stock in a secure place.
 Record all receipts and uses of check stock. A check stock log can be used for
this purpose.
 Quickly distribute signed checks or keep them in a secure place.
 File payroll check copies numerically in a check file.
515.10 State laws regulate:
 When wages must be paid (pay day laws).
 What wage information (such as the paycheck stub contents) must accompany the
paycheck.
 If and how wages can be paid by direct deposit.
 The employer’s actions when a paycheck is unclaimed (escheat laws).
The payroll bookkeeper should know and follow the applicable laws.
Recording Payroll Information
515.11 Recording payroll information is an automatic function of most computerized payroll and general
ledger systems. The software posts the information in the general ledger and prints (or produces the
information necessary to prepare) quarterly and annual payroll tax returns and employee Forms W-2.
When payroll is prepared manually, however, bookkeepers must summarize the information for each pay
period and record it on the general ledger through journal entries. They must also summarize the
information by employee to provide the quarterly and year-to-date information necessary to prepare
payroll tax returns and employee Forms W-2. These two activities—recording payrolls in the general
ledger and summarizing employee payroll data—are discussed in the following paragraphs.
515.12 The General Ledger. In most cases, wages, payroll taxes, and withholdings for each pay period
are summarized (in total or by department) and recorded in the general ledger through two journal
entries—one to record wages and employee withholdings and another to record the employer portion of
payroll taxes.
515.13 For example, assume that a company’s payroll checks totaled $12,935 and consisted of the
following:
Gross wage
Withholdings:
Federal income taxes
Social Security
Medicare
Insurance
Net pay
$ 18,500
$ 3,450
1,147
268
700
5,565
$ 12,935
515.14 Assume further that the wages paid are subject to employer-paid federal unemployment taxes of
5-19
Processing Payroll with QuickBooks
0.8% and state unemployment taxes of 2.8%. The company’s payroll would be recorded in the general
ledger through the following entries:
Salaries
Federal income tax withheld
FICA taxes withheld
Insurance payable
Cash
18,500
3,450
1,415
700
12,935
To record salaries and employee withholdings.
Payroll taxes
Employer FICA taxes payable
Employer FUTA taxes payable ($18,500 x .8%)
Employer State unemployment taxes payable
($18,500 x 2.8%)
2,081
1,415
148
518
To record the company’s portion of payroll taxes.
(While it is preferable to record the FUTA and SUTA taxes as part of the payroll journal entry many
businesses with small FUTA and SUTA taxes expense the taxes quarterly.)
515.15 The Employee Payroll History. To allow the preparation of Forms W-2 and properly track the
wage base limits of Social Security and FUTA taxes, the bookkeeper should post payroll information to
computer or manual files containing quarterly and year-to-date payroll information by employee.
515.16 The posting is done automatically when payroll software is used. If payroll is calculated manually,
the payroll bookkeeper should complete an Employee Earnings History Form for each employee. (A
completed form is illustrated in Exhibit 5-5). The form accumulates an employee’s gross wages; wages
subject to Social Security, Medicare, and unemployment taxes; withholdings; deductions; and net pay for
each pay period. In addition, the form provides for quarter and year-to-date totals of those amounts. The
total of all such Employee Earning History forms should agree to the balances on the payroll register or
the Wage and Tax Control Log (see Paragraph 515.08) for the same period.
5-20
Exhibit 5-5
Employee Earnings History
Employee name M. Sanders
Calendar Year
2008
FIRST QUARTER
Date
___1-16
___1-31
___2-16
___2-28
___3-16
___3-31
_______
_______
_______
_______
_______
Check #
____244
____253
____268
____282
____296
____311
_______
_______
_______
_______
_______
First quarter totals
Year-to-date totals
Gross
Wages
___2500
___2500
___2500
___2500
___2500
___2500
_______
_______
_______
_______
_______
_______
___15000
___15000
Social
Security
Wages
___2500
___2500
___2500
___2500
___2500
___2500
_______
_______
_______
_______
_______
_______
__15000
__15000
Medicare
Wages
___2500
___2500
___2500
___2500
___2500
___2500
_______
_______
_______
_______
_______
_______
__15000
__15000
FUTA
Wages
___2500
___2500
___2000
_______
_______
_______
_______
_______
_______
_______
_______
_______
_ _7000
_ _7000
SUI
Wages
___2500
___2500
___2500
___1500
_______
_______
_______
_______
_______
_______
_______
_______
___9000
___9000
FIT
W/H
____334
____334
____334
____334
____334
____334
_______
_______
_______
_______
_______
_______
___2004
___2004
Social
Security
W/H
155.00
155.00
155.00
155.00
155.00
155.00
_______
_______
_______
_______
_______
_______
_930.00
_930.00
Medicare
W/H
_ _36.25
_ _36.25
_ _36.25
_ _36.25
_ _36.25
_ _36.25
_______
_______
_______
_______
_______
_______
_ 217.50
_ 217.50
Other Deductions
__ __30
_______
_______
__ __30
_______
_______
__ __30
_______
_______
__ __30
_______
_______
__ __30
_______
_______
__ __30
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
____180
_______
_______
____180
_______
_______
Net
Pay
_1944.75
_1944.75
_1944.75
_1944.75
_1944.75
_1944.75
_______
_______
_______
_______
_______
_______
11668.50
11668.50
SECOND QUARTER
Date
___4-16
___4-30
___5-16
___5-31
___6-16
___6-30
_______
_______
Check #
____321
____342
____356
____372
____395
____395
_______
_______
Second quarter totals
Year-to-date totals
Gross
Wages
___2500
___2500
___2500
___2500
___2500
___2500
_______
_______
_______
___15000
___30000
Social
Security
Wages
___2500
___2500
___2500
___2500
___2500
___2500
_______
_______
_______
__15000
__30000
Medicare
Wages
___2500
___2500
___2500
___2500
___2500
___2500
_______
_______
_______
__15000
__30000
FUTA
Wages
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_ _7000
SUI
Wages
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
___9000
FIT
W/H
____334
____334
____334
____334
____334
____334
_______
_______
_______
___2004
___4008
Social
Security
W/H
155.00
155.00
155.00
155.00
155.00
155.00
_______
_______
_______
_930.00
1860.00
Medicare
W/H
_ _36.25
_ _36.25
_ _36.25
_ _36.25
_ _36.25
_ _36.25
_______
_______
_______
_ 217.50
_ 435.00
Other Deductions
__ __30
_______
_______
__ __30
_______
_______
__ __30
_______
_______
__ __30
_______
_______
__ __30
_______
_______
__ __30
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
____180
_______
_______
____320
_______
_______
Net
Pay
_1944.75
_1944.75
_1944.75
_1944.75
_1944.75
_1944.75
_______
_______
_______
11668.50
23337.00
5-21
Processing Payroll with QuickBooks
Exhibit 5-5 (Continued)
Employee Earnings History
Employee name M. Sanders
Calendar Year
2008
THIRD QUARTER
Date
___7-16
___7-31
___8-16
___8-31
___9-16
___9-30
_______
_______
_______
_______
_______
Check #
____452
____478
____499
____531
____544
____571
_______
_______
_______
_______
_______
Third quarter totals
Year-to-date totals
Gross
Wages
___2500
___2500
___2750
___2750
___2750
___2750
_______
_______
_______
_______
_______
_______
16000
__46000
Social
Security
Wages
___2500
___2500
___2750
___2750
___2750
___2750
_______
_______
_______
_______
_______
_______
16000
__46000
Medicare
Wages
___2500
___2500
___2750
___2750
___2750
___2750
_______
_______
_______
_______
_______
_______
16000
__46000
FUTA
Wages
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
__7000_
SUI
Wages
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
__ 9000
FIT
W/H
____334
____334
____401
____401
____401
____401
_______
_______
_______
_______
_______
_______
_ 2272
___6280
Social
Security
W/H
155.00
_155.00
_170.50
_170.50
_170.50
_170.50
_______
_______
_______
_______
_______
_______
_992.00
2852.00
Medicare
W/H
_ _36.25
_ _36.25
___39.88
___39.88
___39.88
___39.88
_______
_______
_______
_______
_______
_______
_ 232.02
_667.02
Other Deductions
Insurance
__ __30
_______
_______
__ __30
_______
_______
_____30
_______
_______
_____30
_______
_______
_____30
_______
_______
_____30
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
____180
_______
_______
____540
_______
_______
Net
Pay
_1944.75
_1944.75
_2108.62
_2108.62
_2108.62
_2108.62
_______
_______
_______
_______
_______
_______
12323.98
35660.98
FOURTH QUARTER
Date
Check #
__10-16
____593
__10-31
____609
__11-16
____624
__11-30
____645
__12-16
____668
__12-31
____682
_______
_______
Fourth quarter totals
Year-to-date totals
5-22
Gross
Wages
___2750
___2750
___2750
___2750
___2750
___2750
_______
_ 16500
_62500
Social
Security
Wages
___2750
___2750
___2750
___2750
__ _600
_______
_______
_ 11600
_ 57600
Medicare
Wages
___2750
___2750
___2750
___2750
___2750
___2750
_______
_ 16500
__62500
FUTA
Wages
_______
_______
_______
_______
_______
_______
_______
_______
_ _7000
SUI
Wages
_______
_______
_______
_______
_______
_______
_______
_______
_ _9000
FIT
W/H
____401
____401
____401
____401
____401
____401
_______
___2406
___8686
Social
Security
W/H
_170.50
_170.50
_170.50
_170.50
37.20
_______
_______
__719.20
_3571.20
Medicare
W/H
___39.88
___39.88
___39.88
___39.88
___39.88
___39.88
_______
__239.28
__906.30
Other Deductions
_____30
_______
_______
_____30
_______
_______
_____30
_______
_______
_____30
_______
_______
_____30
_______
_______
_____30
_______
_______
_______
_______
_______
____180
_______
_______
____720
_______
_______
Net
Pay
_2108.62
_2108.62
_2108.62
_2108.62
_2241.92
_2279.12
_______
12955.52
48616.50
Depositing FICA and FITW Taxes
515.17 Many troubled businesses, unaware of the stiff penalties faced by both the business and the
responsible individuals, fail to make timely employment tax deposits. If the business fails to withhold
employment taxes or to remit the taxes, the IRS can levy a 100% penalty for the taxes due on either (a)
the business or (b) the business’s individual officers and employees. IRS Publication 594, The Collection
Process, contains the IRS’s explanation of its powers to assess and collect the 100% penalty. Payroll
bookkeepers and business officers should read this IRS publication.
515.18 Because banks typically will not knowingly loan money to be used for payroll or payroll taxes, the
best strategy is to never get behind on the tax deposits. Therefore, the authors strongly urge the
business to deposit payroll taxes every payday, even if the deposit is not legally due. The authors also
recommend that, before the last tax deposit in the quarter is due, the bookkeeper first drafts the
employment tax returns and then adjusts the tax deposit to pay all the taxes calculated as due.
515.19 This section describes (a) how to determine the amount to be deposited, (b) the process for
completing the deposit coupon and depositing the taxes, (c) the required schedule for depositing
employment taxes, and (d) the penalties for late deposits.
515.20 Determining the Deposit Amount. If taxes are voluntarily deposited when every payroll is run
(see Paragraph 515.18), the amount of FIT and FICA taxes to be deposited can be calculated using the
Wage and Tax Control Log (Paragraph 515.08). The amounts withheld from the employees comes from
the payroll register, while the employer’s matching amounts are calculated by the payroll bookkeeper and
entered in columns j-l of the log. The payments of advance earned income credit (if any) are obtained
from the payroll register. The total deposit should be the amount of the withheld FIT and FICA taxes, plus
the employer’s matching FICA taxes, less any advance earned income credit payments.
515.21 Making the Deposits. The deposit process is relatively straightforward. The business must make
the deposit in an authorized institution, using available funds accompanied by a properly completed
deposit coupon. In addition, the payroll bookkeeper should ensure that the tax payment is properly
recorded in the company’s records.
515.22 The bookkeeper must mail or deliver all tax deposits to an authorized financial institution or a
Federal Reserve Bank, also enclosing a federal tax deposit coupon, Form 8109. The deposit must be as
an “immediate credit item,” such as cash, postal money order, and checks or drafts drawn on and made
out to the order of the Federal Reserve bank or authorized depository (usually larger banks—a list can
be obtained from the area’s Federal Reserve bank). A check drawn on another bank may be used only if
the depository is willing to accept the check.
515.23 Deposit coupons are available at any IRS Service Center and are generally provided to
the employer upon application for an Employer Identification Number. If the employer must make
a deposit and a preprinted form is not available, Form 8109-B may accompany a deposit made
to any authorized depository or Federal Reserve Bank. An employer who has not received an
Employer Identification Number must remit the deposit directly to the IRS.
515.24 The employer can obtain further guidance on deposits in IRS Publication 15 (Circular E),
Employer’s Tax Guide.
515.25 When making the tax deposit, the payroll bookkeeper should have the bank validate a deposit
receipt or a photocopy of the deposit coupon. The payroll bookkeeper also should record each tax
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Processing Payroll with QuickBooks
deposit made on the stubs provided in the deposit coupon book.
515.26 Due Dates. As stated previously, the authors recommend that the payroll bookkeeper deposit
payroll taxes after every pay period. However, this is not legally required. The following paragraphs
discuss the legal requirements for deposits of withheld FIT and FICA taxes (and of the employer’s
matching FICA taxes) on wages, tips, and sick pay. There are different rules for deposits of FUTA taxes,
as discussed beginning at Paragraph 525.18.
515.27 The IRS will determine the employer’s deposit category based upon the amount of employment
taxes recorded on Form 941 during the 12 months ending the previous June 30 (the “lookback” period).
The IRS will notify each employer before a new tax year about the employer’s category. Under the
deposit rules, employers fall into two categories:
 Monthly depositor. Employers who deposited $50,000 or less in the lookback period
are classified as monthly depositors. Each month’s employment taxes are due by the
15th of the following month. If banks are closed on the 15th, the employer can deposit
the taxes on the next business day. New employers are also classified as monthly
depositors.
 Semi-weekly depositor. Employers reporting more than $50,000 in the lookback
period are classified as semi-weekly depositors. If a payday is on Wednesday,
Thursday, or Friday, employment taxes are due the following Wednesday. For
paydays on all other days of the week, employment taxes are due on the following
Friday. If banking holidays occur, the employer will always have three banking days
to deposit the taxes. For example, an employer with a payday on the Friday before a
Monday holiday has until Thursday to deposit the employment taxes. Semi-weekly
deposits that include paydays in two different quarterly reporting periods require two
separate deposits with the period clearly marked on the deposit coupons.
515.28 For employers in either category, whenever the accumulated employment tax liability reaches
$100,000, the employer must deposit the taxes by the next banking day. In addition, such an employer
becomes classified as a semi-weekly depositor for the remainder of the year and for the next year.
515.29 Employers with a deposit liability less than $2,500 during the quarter may remit their taxes with
the quarterly employment tax return.
515.30 Penalties. Generally, the timeliness of deposits is determined by the date (based upon the bank’s
deposit cutoff schedule) the authorized financial institution or Federal Reserve bank receives it. One
limited exception is possible. If the employer is not required to make deposits more frequently than
monthly and the deposit is less than $20,000, the deposit will be considered
timely if the employer can prove (by certified U.S. mail) that the deposit was mailed two days before the
due date.
515.31 Late deposit penalties vary with the time the deposit is overdue, as summarized in Exhibit 5-6.
5-24
Exhibit 5-6
Late Deposit Penalties for FITW and FICA
Period Late
Penalty as a Percentage of the Deposit
1 to 5 days
6 to 15 days
16 or more
10 days or more after demand is made by IRS
2%
5%
10%
15%
515.32 A penalty of 10% for 16 days calculates to an annual interest rate of over 225%. If necessary, the
company should borrow funds to pay the taxes, since the interest rate is lower than the IRS charges.
However, many lenders will refuse to lend money if they know the funds will be used for payroll and
payroll taxes.
515.33 Besides the preceding restrictions, the IRS may require the employer making late deposits to file
employment tax returns monthly rather than quarterly.
520
PERFORMING MONTHLY PAYROLL ACTIVITIES
520.01 Many payroll accounting software programs require the bookkeeper to perform certain monthly
closing procedures. Because of differences in systems, such procedures are not covered in this Guide.
Accounting staff should consult the software manual for their specific payroll software program. However,
whatever systems are used the payroll bookkeeper each month should reconcile the payroll bank
account and reconcile the employee payroll deductions.
Reconciling the Payroll Bank Account
520.02 If the business uses a separate bank account for payroll, the bookkeeper should reconcile the
account monthly. The procedures and forms for reconciling the account are the same as those used for
the business’s regular cash account. Ideally, a bookkeeper other than the payroll bookkeeper will
reconcile the payroll account.
520.03 Accounting staff should follow the applicable state laws when dealing with outstanding
(uncashed) payroll checks. These laws are called escheat laws, and accounting staff can obtain
information about them from the state (usually the secretary of state or state controller), a CPA, the
controller, or an attorney.
Reconciling Employee Payroll Deductions
520.04 The payroll bookkeeper should reconcile the deductions made from employees to the deductions
remitted to benefit plan providers, insurers, the IRS, courts, and other payees. This reconciliation should
be made because the business has a high legal duty to forward such funds and not use them for general
business purposes. Sometimes the timetable for making the remittances is set by state law; in other
cases, it is part of a contractual agreement between the business and the employees. The bookkeeper
should review with the controller or outside CPA when all deduction remittances are due and record the
dates on an Employment Tax Calendar.
520.05 The bookkeeper can perform this reconciliation by analyzing monthly the general ledger accounts
used to record the employer’s liability. For example, the bookkeeper may perform the following analysis
5-25
Processing Payroll with QuickBooks
of the health insurance withholdings account (used to record amounts withheld from employees to pay
for health insurance).
Description
March’s beginning balance:
February withholdings
February liability
for B. Brown
Beginning balance
Added withholdings:
March 1 payroll
March 8 payroll
March 15 payroll
March 22 payroll
March 29 payroll
Total added withholding
Amount
Dr. (Cr.)
$ (1,250)
$
(50)
$ (1,300)
$
$
$
$
$
300
300
325
325
325
$ (1,575)
Remittances
AAAA Insurance 3/15/05 check #123
$ 1,300
Other
Coverage for B. Brown during
Cobra election period
March’s ending G/L balance
(50)
$ (1,625)
This analysis shows that (a) the $1,300 remittance of the February deductions was timely and (b) the
amounts paid match those withheld.
520.06 The payroll bookkeeper should perform a similar monthly analysis on each deduction’s general
ledger account. The bookkeeper should then accumulate from all the analyses (for insurance, savings
plans, tax levies, and other deductions) the month’s total withholdings and then agree the amount to the
monthly totals in the payroll register or deduction register.
525
PERFORMING QUARTERLY PAYROLL ACTIVITIES
525.01 Quarterly, the bookkeeper must file the IRS Form 941, Employer’s Quarterly Payroll Tax Return,
and deposit the federal unemployment taxes (FUTA taxes). This section discusses those activities.
Filing Forms 941
525.02 This topic discusses the general requirements for Form 941 and the detail procedures to prepare
the form for the first three quarters of the year. The preparation of the fourth quarter Form 941 is
considered part of the year-end activities and is addressed beginning at Paragraph 530.22.
525.03 Most employers report wages, tips, federal income tax withholding, and FICA taxes to the IRS
quarterly using Form 941, Employer’s Quarterly Payroll Tax Return. Exceptions to this general rule
5-26
include:
 Agricultural employers. Such employers should file annually Form 943, Employer’s
Annual Tax Return for Agricultural Employees. Employers should refer to the IRS
Circular A, Agricultural Employer’s Tax Guide.
 Household employers. Such employers should file quarterly Form 942, Employer’s
Quarterly Tax Return for Household Employees.
 Seasonal employers. Such employers file Form 941 but not for quarters in which
they regularly do not have payroll. If at least one quarterly return is filed each year,
seasonal employers should mark the appropriate box at the top of Form 941 to
indicate seasonal status.
525.04 If a business is sold or transferred during a quarter, the prior owner and the new owner must both
file Form 941 for that quarter. Each party should only report the wages it paid during the quarter,
however. Businesses that cease operations or cease to be employers should write “Final Return” on the
last return filed.
525.05 Preparing the Forms 941. Accounting staff should prepare the Form 941 first in draft form before
the quarter’s last tax deposit. This procedure allows the accounting staff to make needed adjustments
within the quarter and avoid filing any Forms 941C during the year.
525.06 Many payroll software programs prepare a Form 941 report. Specific instructions for completing
the return are provided with the form. In addition, the IRS presents a “case,” including a completed
return, in Publication 937, Employment Taxes and Information Returns (call 1 -800-TAX-FORM to
request).
525.07 Reconciliations. Once the draft Form 941 is prepared the bookkeeper should perform two
reconciliations. In the first, the bookkeeper should reconcile the draft Form 941 to the payroll register.
Information that should be reconciled includes FIT wages, FITW, Social Security wages, Social Security
taxes (both employee’s and employers), Medicare wages, Medicare taxes (both employee and
employer’s), tax deposits, and tax liabilities. The bookkeeper should also recalculate the Social Security
and Medicare taxes and determine that the employer’s portion of the FICA taxes equals the employee’s
withholdings.
525.08 In the second reconciliation, the payroll bookkeeper should perform a reconciliation of the
information within the Form 941 itself. The compensation subject to FITW (line 2) should be reconciled to
compensation subject to Medicare taxes (line 7) and Social Security taxes (lines 6a-b). This
reconciliation is necessary to ensure that the wage information is being properly reported. The primary
differences arise from the handling of the following four items:
 401(k) pre-tax contributions. Such amounts are excluded from line 2 but included in
lines 6 and 7.
 SEP employee contributions. Such amounts are excluded from line 2 but included
in lines 6 and 7.
 Deceased worker’s wages paid In year of death. Such amounts are excluded from
line 2 but included in lines 6 and 7.
 Reimbursed nontaxable employee moving expenses. Such amounts are included
in line 2 but excluded from lines 6 and 7.
 Nonqualified deferred compensation. The payroll bookkeeper should consult with
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Processing Payroll with QuickBooks
the controller or outside CPA to determine the proper treatment of any nonqualified
deferred compensation. Generally, payments into the plan are excluded from line 2
but included in lines 6 and 7, while payments from the plan are included in line 2 but
excluded from lines 6 and 7.
525.09 After performing these reconciliations and making any necessary corrections and adjustments
(addressed in the following paragraph), the bookkeeper is ready to make the quarter’s final tax deposit
(see discussion starting at Paragraph 515.17) and file the Form 941.
525.10 Correcting Withholding Errors. If the reconciliations uncover errors in withholding, the payroll
bookkeeper should make the following corrections:
 If payroll taxes are overwithheld and the error is discovered before filing Form 941,
the employer should return the overwithholding to the employee and obtain a signed
receipt showing the date and amount repaid.
 If payroll taxes are underwithheld and the error is discovered before filing Form 941,
the employer should report the correct amount of withholdings on Form 941, pay the
employee’s portion of taxes that were underwithheld, and deduct the needed
withholdings from the employee’s next payroll check.
 If payroll taxes are overwithheld and the error is discovered after filing Form 941, the
employer may either (a) apply the excess amounts against the next quarter’s liability
or (b) repay the employee in the next quarter, obtaining a signed receipt showing the
date and amount paid.
 If payroll taxes are underwithheld and the error is discovered after filing Form 941, the
employer may either (a) correct the shortfall in a later quarter of the year or (b) file
Form 941C correcting Form 941 for the quarter when the error occurred.
525.11 If the reconciliations uncover either a difference in the Social Security and Medicare taxes
calculated or an imbalance between the employees and employer portions, the employer should add the
balancing amount to the final tax deposit. Most businesses record small amounts necessary to balance
as employer’s FICA expense.
525.12 Due Dates. Form 941 generally is due on the last day of the month following the quarter. For
example, Form 941 for the quarter ended March 31, 2008 generally is due April 30, 2008. If all payroll
taxes are deposited when due during the quarter, however, Form 941 is not due until the 10th day of the
second month following the quarter. Thus, in the preceding example, if all payroll taxes were deposited
when due, the Form 941 would be due May 10, 2008.
525.13 Tax Return Signers. Accounting staff generally should not sign the Form 941 (or the Form 940
unemployment tax return). Employment tax returns must be signed by an authorized representative of
the company under penalty of perjury. Exhibit 5-7 lists authorized signers.
5-28
Exhibit 5-7
Employment Return Authorized Signers
Entity
Authorized Signers1
Proprietor
Owner
Corporation
President, vice-president, or other principal officer
Partnership
Authorized partner
Unincorporated organization
Informed officer
Trust or estate
Fiduciary
1
Employers may authorize an agent (such as a tax preparer) to sign employment tax
returns by filing IRS form 2678, Employer Appointment of Agent. An entity’s authorized signer may
delegate the signing authority to an employee only by filing IRS form 2848, Power of Attorney and
Declaration of Representative.
525.14 The IRS usually will not discuss an IRS notice with a bookkeeper who is not authorized to sign
the employment tax return. However, the authorized signer can grant the IRS permission to talk to the
bookkeeper by using either IRS Form 2848, Power of Attorney and Declaration of Representative, or IRS
Form 8821, Tax Information Authorization. The employer can specify on these forms the limits to the
bookkeeper’s authority.
525.15 Mailing Procedures. All employment tax returns should be mailed on or before the due date by
certified U.S. mail, return receipt requested. The payroll bookkeeper should keep a photocopy of the
return in the payroll files.
525.16 Penalties. The IRS may assess penalties for filing a return late unless there is a reasonable
cause. For each whole or partial month the employer fails to file a return when required, the IRS imposes
a penalty of 5% (up to a maximum of 25%) of the amount the employer should have reported on the
return.
Calculating and Depositing FUTA Taxes
525.17 The Federal Unemployment Tax Act (FUTA), together with state unemployment systems,
provides for payments of unemployment compensation to workers that have lost their jobs. Most
employers pay federal and state unemployment taxes to fund the following two-tier system:
 State level. Each state sets its state unemployment insurance (SUI) tax rate and
wage base so that sufficient funds are raised to pay anticipated benefit claims
(and provide a surplus for solvency). State rates currently vary from 0.05% to
10%, and the wage base levels range from $7,000 to $22,700.
 Federal level. The federal government sets a federal unemployment tax rate and
wage base sufficient to establish a pool from which states may borrow if their
benefit funds become depleted. The federal tax rate in 2008 is 6.2% and the wage
base is $7,000.
525.18 State and federal unemployment taxes are interrelated. The federal government generally allows
employers a credit against FUTA taxes of up to 5.4% for fully paying state unemployment taxes. (The
credit generally is allowed even if the employer’s state unemployment tax rate is less than 5.4%.) Thus,
an employer that fully pays its state unemployment taxes would actually be assessed federal
unemployment taxes of only 0.8% (6.2% - 5.4%).
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Processing Payroll with QuickBooks
525.19 IRS Publication 15 (Circular E), Employer’s Tax Guide, lists various types of compensation and
discusses whether they are subject to FUTA taxes.
525.20 Determining the Deposit Amount. While some businesses have payroll software programs that
record the FUTA tax liability as a payable when each payroll is paid, many payroll systems do not
calculate the FUTA and SUI liability as part of the regular payroll processing. In these cases, the payroll
bookkeeper prepares a draft Form 940 each quarter, calculates the wages subject to the FUTA tax and
applies the FUTA tax rate. The payroll bookkeeper makes the quarterly tax deposit on the basis of this
calculation (but does not file the Form 940, which is filed only at year end) and records the quarterly
FUTA tax expense.
525.21 To illustrate the calculation of the FUTA tax liability, assume that a company whose wages during
the year were as follows:
YTD Wages as of the end of the:
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
M. Jones
B. Dugan
A. Roberts
$ 5,500
6,000
8,000
$ 11,000 $ 16,500 $ 22,000
12,000
18,000
24,000
16,000
24,000
38,500
$ 19,500
$ 39,000 $ 58,500 $ 84,500
Calculation of 1st quarter FUTA tax liability
Total year-to-date wages
Less wages in excess of FUTA limit:
A. Roberts ($8,000 -$7,000)
$ 19,500
1,000
Wages subject to FUTA
FUTA tax rate (assuming that state
unemployment taxes were fully paid)
x
0.8%
FUTA tax liability
$
148
Calculation of 2nd quarter FUTA tax liability
Total year-to-date wages
Less wages in excess of FUTA limit:
M. Jones ($11,000 - $7,000)
B. Dugan ($12,000 - $7,000)
A. Roberts ($16,000 -$7,000)
18,500
$ 39,000
$ 4,000
5,000
9,000
18,000
Year-to-date wages subject to FUTA
Less wages subject to FUTA in 1st quarter
5-30
21,000
18,500
2,500
FUTA tax rate (assuming that state
unemployment taxes were fully paid)
x
0.8%
FUTA tax liability
$
20
Calculation of 3rd and 4th quarter FUTA liability
No FUTA tax is due since wages paid for each employee in the 3rd and 4th
quarters were in excess of the FUTA wage limit.
525.22 Because the federal and state unemployment taxes often use different taxable wage bases, most
payroll bookkeepers use payroll accounting software to make the calculation. The software generally
prepares a draft Form 940 or state unemployment tax return.
525.23 Reconciliations. When making the quarterly federal and state unemployment tax calculations,
the payroll bookkeeper should manually create or obtain from the computer program the following two
reconciliations:
 An employee-by-employee listing reconciling the payroll register’s gross wages to
the amount used in the FUTA tax calculation. Such reconciliations are extremely
helpful during unemployment tax audits and for checking the reasonableness of
the unemployment tax calculations.
 A reconciliation of wages reported on the FUTA calculation to the total reported
on quarterly SUI tax returns or calculations. State unemployment auditors often
want to inspect such reconciliations.
525.24 Due Dates. Employers must calculate and deposit FUTA taxes quarterly. (The FUTA tax return,
Form 940, is filed annually and is discussed beginning at Paragraph 530.29.) The quarterly FUTA tax
deposit is due on April 30, July 31, October 31, and January 31.
525.25 If the liability at quarter end is $100 or less, the balance may be carried over to the next quarter. If
the liability at year end is $100 or less, the business has the option to include the tax payment with the
Form 940 return (due on January 31).
525.26 Making the Deposit. The FUTA tax deposit is made following the same procedures used for
depositing FITW and FICA taxes, discussed beginning at Paragraph 515.21. The bookkeeper should
clearly mark that the coupon is for a “940” remittance. The deposits should be recorded on the stub in the
deposit coupon book and on the worksheets used to calculate the quarterly FUTA tax liability.
530
PERFORMING ANNUAL PAYROLL ACTIVITIES
530.01 At the end of the calendar year, the payroll bookkeeper must complete the fourth quarter
activities, report wages to both the government and the employee, and file the annual federal
unemployment tax return. In order to have complete, accurate, and consistent reports and tax deposits,
the authors recommend that the bookkeeper observe the following sequence of year-end activities:
 Recording non-payroll compensation. Many items of taxable compensation do not
flow through the payroll system or are not paid in cash. For example, the employee’s
personal use of a business auto is considered taxable compensation. The payroll
bookkeeper must identify and value such compensation elements, calculate and
withhold the applicable taxes, and add this data to the wage and tax data
accumulated in the payroll system. Although the IRS regulations sometimes require
otherwise, in practice most bookkeepers value and add such benefits to the payroll in
the fourth quarter.
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Processing Payroll with QuickBooks
 Prepare Forms W-2 and W-3. The Form W-3 (summarizing the individual Forms W2) should be reconciled to the total of the payroll register and the non-payroll
compensation data.
 Prepare the Form 941 for the fourth quarter. The bookkeeper should reconcile the
draft Form 941, Employer’s Quarterly Federal Tax Return, to the Form W-3, resolve
differences, and adjust the year’s last FITW and FICA tax deposit to balance with the
Form 941
 Prepare a Form 940. Again, the payroll bookkeeper should reconcile the draft Form
940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, to the Form W3, resolve differences, and adjust the year’s last FUTA tax deposit to balance with the
Form 940.
These activities are discussed in the following topics.
Recording Non-payroll Compensation
530.02 Taxable fringe benefits and other non-payroll compensation include, among other items, country
club dues paid for the employee, the value of personal use of company autos, and employer provided
group life insurance coverage exceeding $50,000. As listed on IRS Publication 15 (Circular E),
Employer’s Tax Guide, the business is required to report and withhold taxes from many types of nonpayroll compensation. The payroll bookkeeper and controller or outside CPA should work together to
identify which of the business’s compensation require reporting and the value to assign the benefits.
530.03 To properly withhold employment taxes and prepare the Forms W-2, 941, and 940, the
bookkeeper must combine the non-payroll compensation with the payroll information. How the payroll
bookkeeper accomplishes this depends on the payroll accounting software. With sophisticated payroll
software, the bookkeeper can easily enter such compensation and specify the correct tax and
withholding treatments. Other software requires the bookkeeper to enter such items as both additions to
gross pay and deductions from after-tax pay and to make manual adjustments in the infrequent cases
where the treatment for FITW and FICA taxes differ. In both of these cases, because the amounts are
entered into the payroll system, the fringe benefit and non-payroll compensation is recorded in the payroll
register. When preparing the Form 941, the payroll bookkeeper can then rely on the quarterly payroll
register without adjustment.
530.04 In other cases, the payroll bookkeeper must make manual additions to the information in the
payroll register to correctly state wages, and then the bookkeeper must recalculate the employment
taxes. Because the Social Security wage base maximum limit ($102,000 in 2008) may apply to certain
employees, the manual additions and recalculations must be made on an employee by employee basis.
Typically, the bookkeeper makes these manual adjustments before the last payroll of the year, so there
will be cash wages from which to withhold taxes arising from the fringe benefits and non-payroll
compensation.
530.05 Whatever the situation, the payroll bookkeeper should leave clear documentation as to what
adjustments were booked to the normal payroll.
Issuing Forms W-2 and W-3
530.06 After the non-payroll compensation has been processed and combined with the payroll data, the
payroll bookkeeper is ready to prepare the draft Forms W-2, Wage and Tax Statement, and Form W-3,
Transmittal of Income and Tax Statements (which summarizes the Form W-2 information). The following
paragraphs discuss the Form W-2 preparation.
5-32
530.07 A Form W-2 should be prepared for each employee for whom the employer:
a. Withheld income tax.
b. Would have withheld income tax if the employee had not claimed two or more
exemptions (including total exemption).
c. Withheld Social Security and Medicare taxes.
d. Received a statement from a third-party payer of sick pay.
530.08 The IRS presents a “case,” including a completed return, in Publication 937, Employment Taxes
and Information Returns (call 1 -800-TAX-FORM to request).
530.09 Preparing the Forms W-2 and W-3. Most payroll software systems prepare Forms W-2 and W3. If the bookkeeper is using a manual payroll system, numerous low priced software programs are
available that prepare and print these forms only.
530.10 To avoid error when preparing Forms W-2 and W-3, the authors recommend the following:
Verify employee names, Social Security numbers, and addresses.




Include cash bonuses in Social Security and Medicare wages.
Use only the current year’s versions of Forms W-2 and W-3.
File Forms W-2 with the Social Security Administration, not the IRS.
Report both Social Security and Medicare wages and taxes separately for each
employee.
 Verify that the amount of wages and taxes withheld are reported in the appropriate
box on Form W-2.
 Mark the Pension Plan box on the Forms W-2 of all employees that are active in the
company’s pension plan. If the box is not marked, the employee may make a
contribution to an IRA that may later be ruled nondeductible. Form W-2 provides
instructions, and the employer may also consult IRS Publication 1602. Where
applicable, employers should also mark the Deferred Compensation box.
530.11 Reconciliations. After the Forms W-2 and W-3 are prepared, the payroll bookkeeper should
perform two reconciliations:
 The FIT wages and taxes withheld, Social Security wages and taxes withheld, Medicare
wages and taxes withheld, and advance EIC payments on the W-3 should agree to the
combined payroll data (in the payroll register) and non-payroll data (either in the payroll
register or non-payroll compensation workpapers).
 Within the Form W-3, the FIT wages should be reconciled to the Medicare wages and Social
Security wages.
The Forms W-2 and W-3 should be revised until the reconciliations above are in balance.
530.12 Due Dates. Forms W-2 are due to employees by the earlier of the following:
 January 31st. No extension beyond the January 31st deadline is permitted.
 If requested by a terminated employee, 30 days after the employee’s request or
after the final wage payment.
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Processing Payroll with QuickBooks
530.13 A copy of Forms W-2, along with Form W-3, is due to the SSA by the last day of February. Thus,
employers have the month of February to correct any errors noticed by employees on their Forms W-2. A
30 day extension for filing with the SSA can be requested.
530.14 Forms W-2 must also be filed with certain states and cities. The dates that Forms W-2 are due to
states and cities vary, but generally range from January 31st to March 31st. When a terminated
employee requests a wage statement, some states have deadlines for the issuance of the wage
statements that are shorter than the federal deadlines.
530.15 Replacement Forms. A lost or damaged employee copy of Form W-2 may be replaced by
issuing another Form W-2 and marking the reissued form “Reissued Statement.” Employers should not
send reissued statements to the SSA. (The rules for corrected Forms W-2 are discussed at Paragraph
530.26.)
530.16 Undelivered Forms. If an employer has attempted to deliver Forms W-2 to the employee by mail
but has been unsuccessful, the returned envelope (which is proof of the attempt) should be kept on file
until the form is claimed. Forms that cannot be delivered should be kept on file for four years.
530.17 Filing on Magnetic Media. In general, employers that file 250 Forms W-2 must use magnetic
media (such as computer disks or tapes) to file the returns. (They should not file the same returns on
paper.) If filed on magnetic media, the forms must meet the requirements described in the SSA’s
Technical Information Bulletin No. 4. Many CPAs can prepare the returns using magnetic media, and
several computer programs that cost around $100 are available to help in the process. Businesses that
file using magnetic media for the first time should file Form 4419, Application for Filing Information
Returns Magnetically/Electronically, at least 30 days before the deadline for filing the returns (February
28).
530.18 If filing on magnetic media would be an undue hardship, a waiver from the requirement may be
obtained. (The waiver must be obtained each year.) Waivers should be requested from the IRS at least
45 days before the due date of the returns using Form 8508, Request for Waiver from Filing Information
Returns on Magnetic Media.
530.19 Employers can obtain information about magnetic media filing in IRS Publication 1220,
Specifications for Filing Forms 1098, 1099, 5498, and W-2G on Magnetic Media or Electronically.
530.20 Penalties. Penalties may be assessed for failing to file Forms W-2. The federal penalties for
failure to file are presented in Exhibit 5-8.
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Exhibit 5-8
Form W-2 Filing Penalties
Penalty
$50 per each failure to furnish the
employee a correct form by the due
date
$100 per each intentional failure to
provide employees or SSA with correct forms
Maximum Annual Penalty
Regular Business
Small Business1
$100,000
[NA]
$100,000
[NA]
$15 for each form if correctly filed with
SSA within 30 days of date due
$ 75,000
$ 25,000
$30 for each form if correctly filed with
SSA after 30 days of date due but
before August 1
$150,000
$ 50,000
$50 for each form not correctly filed
with SSA by August 1
$250,000
$100,000
1
A small business is a firm with average annual gross receipts of $5 million or less for the three most
recent taxable years.
Preparing the Fourth Quarter Form 941
530.21 Ideally, the payroll bookkeeper prepares a draft fourth quarter Form 941 after recording the nonpayroll compensation and preparing the Form W-3 and before the year’s final FITW and FICA tax
deposit. The bookkeeper should first prepare the Form 941 in accordance with the procedures described
beginning at Paragraph 525.02 for use in the first three quarters. These procedures include reconciling
the draft Form 941 to the payroll register, performing an internal reconciliation of FIT wages to Medicare
and Social Security wages, and correcting withholding or adjusting the tax deposit as necessary.
530.22 Reconciliation to Forms W-3. Once the draft fourth quarter Form 941 has been prepared (and
includes the non-payroll compensation and taxable fringe benefits), the payroll bookkeeper should
reconcile the year’s four Forms 941 to the Form W-3. This reconciliation is necessary because the IRS
and SSA will require the employer to explain discrepancies between the following information reported
on both sets of forms:








Wages, tips, and other compensation.
Federal income tax withheld.
Social Security wages.
Social Security tips.
Social Security tax withheld.
Medicare wages and tips.
Medicare tax withheld.
Advance earned income credit.
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Processing Payroll with QuickBooks
530.23 Reconciling items that are designed to exist include the following:
 Reimbursed nontaxable employee moving expenses. Such amounts are excluded
from Form W-2, box 1 (wages, tips, and other compensation) but included in Form
941, line 2 (total wages and tips subject to withholding, plus other compensation).
 Third party’s withholding on sick pay. Such amounts are included in Form W-2,
box 2 (federal income tax withheld) but excluded from Form 941, line 3 (total income
tax withheld from wages, tips, and sick pay).
530.24 Correcting Errors In Forms 941 or W-2. The following are common errors that create
differences between the two reports that must be corrected:
 Properly applying the Social Security wage base limit on the Forms W-2, but
mistakenly not applying the limit to the data reported on the Form 941.
 Properly including other compensation or taxable fringe benefits (such as auto usage
or group term life insurance exceeding $50,000) on Forms W-2 but improperly
omitting the amounts from the Form 941 return.
530.25 How an employer corrects these or other detected errors depends on what returns have been
filed. Exhibit 5-9 presents corrective actions for Forms 941 as well as Forms W-3 and W-2.
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Exhibit 5-9
Error Type
Error in current year FIT or
FICA data on Form 941 or
Forms W-2, found before
Form W-3 is filed
Corrections of Reported Wages
Reports to Employee
If Form W-2 was already
issued, give employee a new
Form W-2 marked “corrected”.
Reports to IRS or SSA
IRS: File Form 941C
SSA: Check “Void” box on original
Form W-2, Copy A. The void Copy
A’s are included in counting the
sequence of forms for subtotals, but
the amounts included on the void
forms should not be included in the
subtotal. Do not mark corrected Copy
A as “Corrected.”
IRS: File Form 941C
SSA: File Form W-3C and Forms W2C
Error in current year FIT or
FICA data on Form 941 or
Forms W-2, found after Form
W-3 is filed
Issue Form W-2C
Error in prior year’s FIT or
FICA data on Form 941,
FormsW-2, or Form W-3
Issue Form W-2C
IRS: File Form 941C
SSA: File Form W-3C and Forms W2C
530.26 After the Form 941 has been reconciled to the Form W-3, the bookkeeper can make the year’s
final deposit of FIT and FICA taxes.
Filing Form 940
530.27 After preparing the Forms W-2, and before making the year’s final deposit of FUTA taxes, the
bookkeeper should prepare a draft Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax
Return.
530.28 Federal unemployment taxes are reported to the IRS annually, generally on Form 940 or 940EZ. Employers (other than household or agricultural employers) must file the form if they paid wages of
$1,500 or more in any calendar quarter or had at least one employee (including part-time and temporary
employees) in any 20 different weeks during the year.
530.29 Household and agricultural employers are exceptions to the general rule. Household employers
must only file Form 940 if they paid cash wages of $1,000 or more during any calendar quarter in the
current or prior year. Agricultural employers must only file Form 940 if they (a) paid cash wages of
$20,000 or more during any calendar quarter in the current or prior year or (b) employed 10 or more farm
workers during some part of a day for at least one day during any 20 different weeks in the current or
prior year.
530.30 Employers that receive Form 940 from the IRS and are not liable for federal unemployment
taxes during the year should write “Not Liable” on the front of the form, sign it, and return it to the IRS. If
returns will not be required in the future, employers should mark the box above Part I of the form
indicating that the return is a final return.
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Processing Payroll with QuickBooks
530.31 Form 940-EZ. Form 940-EZ is a simplified version of Form 940 that may be used by employers
that (a) pay unemployment contributions to only one state, (b) pay their unemployment contributions by
January 31st, (c) do not have taxable FUTA wages that are exempt from state unemployment tax, and
(d) do not pay wages that are subject to the unemployment compensation laws of a credit reduction state
(currently only Michigan).
530.32 Preparing the Form 940. Specific instructions for completing the return are provided with the
form. In addition, the IRS presents a “case,” including a completed return, in Publication 937,
Employment Taxes and Information Returns (call 1-800-TAX-FORM to request).
530.33 In practice, bookkeepers commonly complete the Form 940 by (a) listing on line 1 the total
wages on the payroll register, (b) leaving line 2 blank, and (c) calculating employee wages in excess of
$7,000 for inclusion in line 3. This procedure is quick and generally accurate.
530.34 However, as unemployment taxes increase at the state and federal levels (proposals are
currently in Congress), accounting staff have a greater desire to minimize the taxes and avoid problems
in an increasing number of audits. One response is to more precisely calculate the total payments (line 1)
and, especially, the exempt payments (line 2). The following paragraphs discuss procedures to more
precisely complete the Form 940.
530.35 Reconciliations between Forms 940 and W-3. After completing the draft Form 940, the payroll
bookkeeper should reconcile reported wages between the Form 940 and the Form W-3. Proper
reconciling differences between the Form W-3, box 1 (wages, tips, and other compensation) and Form
940, Part 1, line 1 (Total wages and tips subject to withholding, plus other compensation) include:
 401(k) plan pre-tax contributions. Such amounts are excluded from the Form W-3
but included in the Form 940.
 SEP employee contributions. Such amounts are excluded from the Form W-3 but
included in the Form 940.
 Section 125 plan pre-tax contributions. Such amounts are excluded from the Form
W-3 but included in the Form 940.
 Deceased worker wages paid in year of death. Such amounts are excluded from
the Form W-3 but included in the Form 940.
 Reimbursed nontaxable employee moving expenses. Such amounts are excluded
from the Form W-3 but included in the Form 940. However, these amounts are
deducted from the FUTA taxable base by inclusion on Form 940, Part 1, line 2.
530.36 Identifying Excluded Payments. If the payroll bookkeeper has entered into the payroll register
the value of taxable fringe benefits used to draft the Form 940, the bookkeeper should remove certain of
the fringe benefits amounts exempt from FUTA taxation. The bookkeeper does this by listing such items
as “excluded payments” on Part 1, line 2 of Form 940. Benefits excluded from FUTA taxation include:
 Employer paid group-term life insurance coverage on current and former employees
in excess of $50,000.
 Reimbursed employee moving expenses not taxed by FIT. (Such amounts are
included in both lines 1 and 2 of Form 940, Part 1. The result is to exclude such
amounts from the FUTA tax base).
 Section 125 plan pre-tax contributions.
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530.37 Calculating Payments in Excess of $7,000. The Form 940 (on Part 1, line 3) also requires the
bookkeeper to calculate the amount of wages paid in excess of the federal FUTA wage base of $7,000.
Most payroll software programs will do this calculation automatically.
530.38 Making the Final FUTA Tax Deposit. After completing the Form 940, the bookkeeper should
reconcile the calculated FUTA tax liability with the year’s deposits to date. Any differences should be
added to the final FUTA tax deposit for the year. The deposit procedures are the same as for the
quarterly FUTA deposits (see Paragraph 525.27).
530.39 Signing and Mailing the Form 940. The procedures surrounding the return signing and mailing
are the same as for the Form 941 and are discussed at Paragraphs 525.14-525.16.
530.40 Due Date. Form 940 or 940-EZ is due by January 31st of the following year. Employers that
deposit all taxes properly and on time receive an additional 10 days to file the return. A 90-day filing
extension may be obtained by submitting a written request to the IRS.
535
WORKING WITH THE QUICKBOOKS EMPLOYEE CENTER
535.01 The Employee Center stores information about your employees such as name, address, and
social security number. It also stores information QuickBooks needs to calculate your employee
paychecks (if you are using QuickBooks for payroll). You’ll learn how to enter employee payroll
information later in this course. For now, enter only the basic employee information.
535.02 QuickBooks uses the information you enter in the Employee list to track sales and fill in
information on checks and other forms.
Adding New Employees
535.03 Suppose that Rock Castle Construction has hired a new employee and you want to add her
information to the Employee list.
To add a new employee:
1. Click Employee Center in the navigation bar.
QuickBooks displays the Employee Center, including the Employee list.
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Processing Payroll with QuickBooks
The Employee Center is where you add a new employee, edit information for an
existing employee, or delete an employee name (as long as you have not used the
employee name in any transactions).
2. Click New Employee at the top of the Employee Center.
QuickBooks displays the New Employee window.
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The Personal tab is where you enter basic information about the employee, such as
name, Social Security Number, and date of birth.
3. In the First Name field, type Marlene.
4. In the Last Name field, type Duncalf, and then press Tab.
Notice that QuickBooks fills in the “Print on Check as” field with the information you
entered in the name fields. You can enter a different name if you wish.
5. In the Social SS No. field type 123-45-6789.
6. In the Gender field, select Female from the drop-down list.
7. In the Date of Birth field, type 7/18/82.
The Personal tab should look like this.
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Processing Payroll with QuickBooks
8. Click the Address and Contact tab.
9. In the Address field, type 195 Spruce Avenue, #202.
10. For the City, State, and Zip fields, type Bayshore, CA 94326.
11. In the Phone field, type 415-555-1111.
When you finish, the window should look like this.
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12. In the Change tabs field, select Employment Info from the drop-down list.
13. In the Hire Date, type 11/26/2007.
14. Click OK.
15. When QuickBooks asks if you want to set up payroll information, click Leave As Is.
QuickBooks updates and displays the Employee list with the new employee’s name
added.
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Processing Payroll with QuickBooks
16. Close the Employee Center.
540
PROCESSING PAYROLL WITH QUICKBOOKS
Overview of Payroll Tracking
540.01 This section is designed to demonstrate some of the QuickBooks payroll features. The way you
process payroll for your company may differ from this section depending on which (if any) payroll service
you subscribe to.
540.02 You will not go through the payroll setup process in this section.
N12
540.03 To calculate payroll, QuickBooks uses tax tables. To get the tax tables to use with your own
QuickBooks company data file, you need to subscribe to one of the Intuit Payroll Services—either
QuickBooks Standard Payroll, QuickBooks Enhanced Payroll, or QuickBooks Assisted Payroll. Intuit also
offers a full service payroll option—Intuit Payroll Services Complete Payroll. To learn about these options
or subscribe to one of them, from the Employees menu, choose Add Payroll Service, and then choose
Learn about Payroll Options from the submenu.
540.04 QuickBooks calculates each employee’s gross pay, and then calculates taxes and deductions to
arrive at the net pay. With QuickBooks, you can write the paycheck, record the transaction in your
QuickBooks checking account, keep track of your tax liabilities, and pay them.
540.05 You, as the employer, must subtract taxes and other deductions before issuing an employee’s
paycheck. Some typical paycheck deductions are federal and state withholding (income) taxes, social
security taxes (FICA), Medicare taxes, and state unemployment insurance. You may also deduct for
benefits such as a 401(k) plan, or contributions to your company’s medical/dental plan.
540.06 When you withhold social security, Medicare, and federal withholding taxes from employees’
paychecks, you must submit regular deposits of the withheld tax money (semiweekly or monthly,
depending on the size of your payroll), and file quarterly forms that list the total amounts you withheld
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from each employee’s paycheck.
Calculating Payroll with QuickBooks
540.07 To do its payroll calculations, QuickBooks needs four kinds of information:
 Information about your company
Besides the company name and address, this includes information about your federal
tax ID numbers. You enter this information in the EasyStep Interview when you set up
your QuickBooks company data file. (You can view most company information by
choosing Company Information from the Company menu.)
 Information about your employees
The QuickBooks Employee list stores general information about each of your
employees, and specific information related to payroll (such as the employee’s salary
or hourly rate, filing status, number of exemptions, and miscellaneous additions,
deductions, and company contributions). You can store payroll information that most
employees have in common in employee defaults. Whenever you have a new
employee to add, simply enter information that’s specific to that employee (name,
address, and so on).
 Information about your payroll items
QuickBooks maintains a list of items that affect the amount on a payroll check,
including company expenses related to payroll. When you specify that you want to
use payroll, QuickBooks creates a number of payroll items for you. You add others as
you need them.
 Tax tables for federal, state, and local withholdings
QuickBooks uses tax tables to calculate payroll. You get the current tax tables and
keep them current when you subscribe to one of the Intuit Payroll Services mentioned
on page 274. If you choose not to subscribe to one of these payroll services, you
need to calculate and enter your payroll tax deductions manually for each paycheck.
Once you’ve set up your company, employee data, and payroll items, to run payroll
you enter the number of hours worked during the pay period for each employee.
QuickBooks calculates the gross wages for the employee, and then refers to its tax
tables (if you’ve subscribed to one of the Intuit Payroll Services—Standard Payroll,
Enhanced Payroll, or Assisted Payroll) and the company and employee information
you’ve entered to calculate all withholdings and deductions and to arrive at the net
pay figure. QuickBooks also calculates your company payroll expenses (for example,
your contributions to social security and Medicare).
Setting Up For Payroll
540.08 By default, the QuickBooks payroll feature is turned on.
To turn payroll off in a company data file:
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Processing Payroll with QuickBooks
1. From the Edit menu, choose Preferences, and click Payroll & Employees in the left
panel.
2. Click the Company Preferences tab and select “No payroll.”
3. Click OK.
Understanding Payroll Items
540.09 QuickBooks maintains a list for everything that affects the amount on a payroll check and for
every company expense related to payroll. This list is called the Payroll Item list. There are payroll items
for compensation, taxes, other additions and deductions, and employer-paid expenses. QuickBooks uses
payroll items to track individual amounts on a paycheck and accumulated year-to-date wage and tax
amounts for each employee.
540.10 QuickBooks adds some items to the list for you, and you can add others as you need them. For
common payroll items, such as compensation and benefits, QuickBooks provides extra assistance so
you can set them up quickly and accurately.
N12
540.11 You work directly with payroll items as you do payroll tasks. Behind the scenes, QuickBooks
tracks your payroll liabilities in the Payroll Liabilities account (an Other Current Liability account) and your
payroll expenses in the Payroll Expenses account.
To view the Payroll Item list:
1. From the Employees menu, choose Payroll Item List. (You must have payroll turned
on to see this choice.)
QuickBooks displays the Payroll Item list.
You’ve already used the QuickBooks Item list, so this list should look familiar. Just
like the regular Item list, each payroll item has a Name and a Type. The names of the
payroll items are what you’ll see on paychecks and in payroll reports.
2. Close the Payroll Item list.
You won’t add a new payroll item in this section, but if you need to add an item after
you’ve set up payroll in QuickBooks, you can use the following procedure.
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To add a payroll item:
1. From the Employees menu, choose Payroll Item list.
2. Click the Payroll Item menu button, and then choose New.
3. QuickBooks displays the Add new payroll item window, which steps you through the
payroll item setup process.
4. Select the type of payroll item you want to create. Then, click next and follow the onscreen
instructions.
Setting Up Employee Payroll Information
540.12 QuickBooks calculates payroll for each employee on the basis of that employee’s pay rate, filing
marital status, exemptions, and so on. The Employee list stores general information about each
employee, as well as payroll information.
What Information Does QuickBooks Store?
540.13 You’re going to add a new employee to Rock Castle Construction payroll in a moment. First, look
at the information QuickBooks stores in the Employee list.
To view information stored in the Employee list:
1. Click Employee Center on the navigation bar.
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Processing Payroll with QuickBooks
2. Select Dan T. Miller in the list, and then click Edit Employee.
QuickBooks displays the Edit Employee window for Dan T. Miller.
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The Personal tab contains general information about Dan Miller, such as his name,
social security number, and date of birth.
3. Click the Address and Contact tab.
This is where QuickBooks stores employees’ addresses, telephone numbers, and
other contact information.
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Processing Payroll with QuickBooks
4. Click the Additional Info tab.
The Additional Info tab lets you add custom fields to the Employee list.
5. In the Change tabs drop-down list, select Payroll and Compensation Info.
QuickBooks displays the Payroll Info tab of the Edit Employee window. This is where
QuickBooks stores payroll information.
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The Payroll Info tab contains an employee’s specific salary or hourly rate, and any
additions, deductions, or company contributions. You can see tax information for this
employee (the type of information you get from a W-4) by clicking the Taxes button.
6. Click Taxes.
QuickBooks displays the Federal tab of the Taxes for Dan T. Miller window.
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Processing Payroll with QuickBooks
The checkboxes indicate the types of taxes the employee should have deducted from
each paycheck. A checkmark in the Federal Unemployment checkbox indicates that
this employee’s pay is subject to the employer-paid federal unemployment tax.
7. Click the State tab to review the state withholdings.
This window stores information about state withholding taxes, state unemployment,
and state disability.
8. Click OK to return to the Edit Employee window.
9. Click OK again to return to the Employee Center.
Using the Employee Defaults to Store Common Information
540.14 QuickBooks stores a wealth of information about each employee, but it doesn’t require you to
enter the same information over and over. When you have information that applies to most of your
employees, you can enter it into your employee defaults. Then, when you add an employee, QuickBooks
automatically fills in the information stored with the defaults. You just need to add or change any
information that is different for a particular employee.
To view employee defaults:
1. With the Employee Center displayed, choose Employee Defaults from the Related Activities
menu button.
QuickBooks displays the Employee Defaults window.
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Use this window to set up the payroll information that most of your employees have in
common. QuickBooks saves the information so you won’t have to re-enter it when
you set up the payroll record for an individual employee.
All Rock Castle Construction employees have the same biweekly pay period, so that
is entered in the employee defaults.
In addition, all employees are subject to a deduction for health insurance, limited to a
maximum of $1,200. This information isn’t reflected in the defaults, so you can add it
now.
2. Select the “Use time data to create paychecks” checkbox to include pay for time
entered using the time tracking feature.
3. In the Additions, Deductions and Company Contributions area, click in the Item Name
column, and then choose Health Insurance from the drop-down list.
4. In the Amount column, type 50 and press Tab.
Your screen should look like the following.
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Processing Payroll with QuickBooks
5. Click Taxes.
QuickBooks displays the Federal tab of the Taxes Defaults window.
The withholding taxes that should be deducted from each employee paycheck are entered in
this window.
6. Click Cancel to close the Taxes Defaults window.
7. Click Sick/Vacation.
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QuickBooks displays the Sick & Vacation Defaults window.
Information regarding earned sick days and vacation days is entered in this window.
QuickBooks keeps track of the earned time each pay period.
8. Click Cancel to close the Sick & Vacation Defaults window.
9. Click OK to close the Employee Defaults window.
Adding a New Employee
540.15 Suppose you have a new employee on the payroll, and want to add him to your records.
To add a new employee:
1. With the Employee Center displayed, click New Employee.
QuickBooks displays the New Employee window.
2. On the Personal tab, enter the employee data as shown below.
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Processing Payroll with QuickBooks
3. On the Address and Contact tab, enter the employee data as follows.
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4.
5.
6.
7.
In the Change tabs drop-down list, select Employment Info.
In the Hire Date field, enter 11/28/2007.
In the Change tabs drop-down list, select Payroll and Compensation Info.
In the Earnings section of the window, click the Item Name column and press Tab.
(Notice that the Regular Pay item is displayed already.)
8. In the Hour/Annual Rate column for the Regular Pay payroll item, type 15. Then press
Tab.
The Payroll Info tab should look like the following.
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Processing Payroll with QuickBooks
9. Click Taxes.
QuickBooks displays the Federal tab of the Taxes for Michael M. Wilhite window.
10. From the Filing Status drop-down list, choose Married.
11. Click State.
QuickBooks displays the State tab of the Taxes for Michael M. Wilhite window.
12. In the Filing Status field, choose “Married (two incomes).”
13. Click OK.
QuickBooks returns to the New Employee window.
14. In the Additions, Deductions, and Company Contributions area, type 15 in the
Amount column for Health Insurance and press Tab.
QuickBooks enters –15.00 in the Amount column. The New Employee window should
now look like this.
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15. Click OK.
16. When QuickBooks asks whether you want to set up additional payroll information,
click Leave as Is.
QuickBooks returns to the Employee Center, where the new employee’s name is now
displayed.
17. Close the Employee Center.
Writing a Paycheck
540.16 QuickBooks lets you print payroll checks in a batch or one at a time. You may want to process the
paychecks of salaried employees in a batch, and do payroll for the hourly employee’s one at a time.
To run a paycheck:
1. From the Employees menu, choose Pay Employees.
QuickBooks displays the Select Employees to Pay window.
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Processing Payroll with QuickBooks
2. In the Pay Period Ends field, type 12/15/2007.
3. Click in the column to the left of Michael M. Wilhite’s name.
QuickBooks places a checkmark next to the name.
4. Make sure that “Enter hours and preview check before creating” is selected.
5. Click Create.
6. If QuickBooks indicates that there is no time data for this employee, click OK.
QuickBooks displays the Preview Paycheck window. Now you can enter the time
Michael worked.
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7. In the Earnings section, click in the Item Name column, and then select Regular Pay from the
drop-down list.
8. Tab to the Rate column and type 15, if the amount doesn’t pre-fill.
9. In the Hours column, type 80 and press Tab.
QuickBooks fills in the Employee Summary area of the Preview Paycheck window, showing
the gross regular pay and all of the deductions from Michael’s paycheck. The net amount of
the check appears at the bottom.
5-61
Processing Payroll with QuickBooks
Because payroll tax rates change regularly, your numbers may vary from this
illustration. The Company Summary area of the window shows company-paid taxes
and contributions that don’t affect the amount of the paycheck (company-paid
benefits).
10. Click Create.
QuickBooks writes a payroll check for the correct net amount, showing the deductions
in the voucher area. QuickBooks displays the Select Employees To Pay window.
11. You don’t want to pay another employee now, so click Leave.
Viewing the Paycheck
540.17 QuickBooks records payroll checks in your QuickBooks checking account register. You can see
the check by going to the register.
To view the paycheck from the register:
1. From the Lists menu, choose Chart of Accounts.
2. Double-click “Checking.”
QuickBooks displays the Checking account register.
3. Select the paycheck transaction for Michael M. Wilhite, and click Edit Transaction.
QuickBooks displays the Paycheck – Checking window for Michael. Notice that the
Paycheck Summary shows a summary of the check’s deductions. If you want to see
5-62
the deductions that make up this total, you can click the Paycheck Detail button.
12. Click Save & Close to close the Paycheck – Checking window.
13. Close the checking account register, but leave the chart of accounts open.
Printing Paycheck Stubs
540.18 You can print paychecks as you would any QuickBooks check. If you use voucher checks,
QuickBooks prints the payroll item detail in the voucher area. If you don’t use voucher checks, you can
print a paystub to give to your employees.
To print a paycheck:
1. From the File menu, choose Print Forms, and then choose Paychecks.
QuickBooks displays the Select Paychecks to Print window.
2. In the First Check Number field, type 301.
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Processing Payroll with QuickBooks
14. Make sure there’s a checkmark next to Michael Wilhite’s name, and then click OK.
15. Click Print.
Tracking Your Tax Liabilities
540.19 As an employer, you need to track both payroll expenses and payroll liabilities. These are the
company payroll expenses you need to track:
 Employees’ gross pay
 Employer payroll taxes, such as contributions to social security (FICA), Medicare,
federal and state unemployment insurance, and state disability insurance
540.20 QuickBooks uses an expense account called Payroll Expenses to track these actual costs to your
company. (The funds you deduct from employee paychecks aren’t considered an actual cost because
they’re monies you’re holding for the government; they don’t come directly from your company assets.)
Whenever you run your payroll, QuickBooks keeps track of your company’s expenses for each
employee. You can then see totals for these expenses on the payroll summary by employee report and
on the profit and loss statement.
540.21 QuickBooks uses the Payroll Liabilities account (an Other Current Liability account) to track what
you owe to the government. When you do your payroll, QuickBooks calculates how much you owe for
each tax, deduction, or company contribution payroll item and records that information as a transaction in
the liability account. This produces a record of how much tax you owe at any time, so you can plan to
have the cash available for payment. When you pay your payroll taxes or other payroll liabilities,
QuickBooks decreases the balance of the liability account.
540.22 Look at the payroll expense and liability accounts, so you can see how QuickBooks recorded
expenses and liabilities related to Michael Wilhite’s paycheck.
To display the payroll expenses QuickReport:
1. In the Chart of Accounts window, select the Payroll Expenses account.
2. From the Reports menu button, choose QuickReport: Payroll Expenses.
QuickBooks displays the QuickReport. You can scroll through the report to see the
5-64
expense items paid by the company for Michael Wilhite’s paycheck.
3. Close the QuickReport.
4. In the chart of accounts, double-click the Payroll Liabilities account.
QuickBooks displays the register for the account. The register shows a separate
transaction for each item from Michael’s paycheck. The running balance shows an
increase for every liability.
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Processing Payroll with QuickBooks
5. Close the register.
6. Close the chart of accounts.
Paying Payroll Taxes
540.23 As long as you have a valid subscription to one of the Intuit Payroll Services, QuickBooks uses
current tax tables to keep track of your tax liabilities as they accrue, so you know how much you owe at
any time.
Figuring Out What You Owe
540.24 If you’re about to pay taxes or other liabilities, the payroll liabilities report shows you how much to
pay. Suppose you are ready to make a tax payment, and you want to see how much you owe.
To create a payroll liabilities report:
1. From the Reports menu, choose Employees & Payroll, and then choose Payroll
Liability Balances.
2. Click Modify Report, select “Display columns by Year across the top,” and then click
OK.
QuickBooks displays a report that shows what you owe for each payroll item.
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3. Close the report.
4. Click No at the message asking if you’d like to memorize the report.
Writing a Check for Payroll Taxes
540.25 When it’s time to deposit payroll taxes with your deposit institution, use the Liability Check
window to fill out a QuickBooks check.
Note: Don’t just open the Write Checks window and write a check from there. QuickBooks can’t properly
adjust your Payroll Liabilities account unless you use the Pay Liabilities feature.
To pay payroll liabilities:
1. On the Home page, click Pay Liabilities.
QuickBooks displays the Select Date Range For Liabilities window.
2. In the “From” field type 11/30/2007, and then type 12/15/2007 in the “Through” field.
5-67
Processing Payroll with QuickBooks
3. Click OK.
QuickBooks displays the Pay Liabilities window.
4. Click in the column to the left of the Federal Withholding payroll item.
QuickBooks places a checkmark in the column to show that the item will be paid. It
also places a checkmark next to the Advanced Earned Income Credit item.
5. Click in the column to the left of the Medicare Company payroll item.
QuickBooks places checkmarks in the column for both Medicare Company and
Medicare Employee.
6. Click in the column to the left of the Social Security Company payroll item.
QuickBooks places checkmarks in the column for both Social Security Company and
Social Security Employee.
Now your Pay Liabilities window should look like the following.
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7. Make sure “Review liability check to enter expenses/penalties” is selected and then click
Create.
QuickBooks displays the Liability Check window, with your check displayed.
You should use a separate check for each type of deposit coupon (for example, 941
or 940).
8. In the Memo field, type EIN 96-4820567, Form 941.
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Processing Payroll with QuickBooks
The Liability Check window should now look like the following.
9. Click Save & Close to record the check.
10. Click Yes if QuickBooks asks if you wish to save changes made to this transaction.
Whenever you make a payment and record your check this way, QuickBooks
decreases the balance of the Payroll Liabilities account.
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Making Accounting Adjustments with QuickBooks
6
Table of Contents
Section
Description
Page
600
Introduction .......................................................................................................... 6-1
605
Recognizing Revenues and Costs....................................................................... 6-1
610
Accruing Expenses and Income .......................................................................... 6-6
615
Adjusting Asset Valuations .................................................................................. 6-16
620
Depreciating and Amortizing Assets ................................................................... 6-18
625
Making Other Adjustments .................................................................................. 6-22
630
Tracking Depreciation in QuickBooks................................................................. 6-24
635
Making General Journal Entries in QuickBooks ................................................. 6-36
TOC 6-1
TOC 6-2
Making Accounting Adjustments with QuickBooks
600
6
INTRODUCTION
600.01 After processing the day-to-day transactions covered in previous chapters, the general ledgers of
most small businesses are on a cash basis or modified cash basis. For example, cash received and cash
disbursed have been recorded and basic accrual transactions (such as trade accounts receivables and
trade payables) have been recognized. However, various noncash adjustments are often needed before
closing out the period if the company wishes its books to be on a full accrual basis or in accordance with
generally accepted accounting principles (GAAP).
600.02 Chapters 3 through 5 provided guidance on recording sales and cash receipts, accounts payable
and cash disbursements, and payroll. This chapter provides detailed guidance on making various periodend adjustments and recording certain other transactions, such as property and equipment, not
discussed in previous chapters and how adjustments are made in QuickBooks. The guidance assumes
the company prepares its financial statements on an accrual or GAAP basis, which differ in some
respects from financial statements prepared according to tax rules. (Accounting personnel typically
should consult with a tax professional for additional guidance if financial statements are prepared using
tax rules.)
600.03 The adjustments discussed in this chapter have been grouped into the following categories:







Recognizing Revenues and Costs.
Accruing Certain Income and Expenses.
Adjusting Asset Valuations.
Depreciating and Amortizing Assets.
Making Other Adjustments.
Tracking Depreciation in QuickBooks.
Making General Journal Entries in QuickBooks
Many of the worksheets in this chapter will also help save time during annual audits and when preparing
financial statements and tax returns.
605
RECOGNIZING REVENUES AND COSTS
605.01 This section provides guidance on when and how to recognize certain revenues and costs in a
small business. It discusses policies for recognizing general revenues, cost of sales, gains and losses on
fixed asset transactions, and for recording income taxes.
Revenues
605.02 Accounting personnel should recognize a sale as revenue only when the revenue has been
earned, generally when the goods or services have been delivered to the customer. Revenue should not
be recognized when the contract is signed or the order is taken. As discussed in Chapter 3, the typical
sales transaction is recorded by simply debiting accounts receivable and crediting sales for the invoice
amount. (Accounting personnel would also record any related costs of sales as discussed in Paragraphs
605.07-.11).
605.03 In most small businesses, the sales invoice triggers the general ledger entry to recognize
6-1
Making Accounting Adjustments with QuickBooks
revenues. However, as discussed in the following paragraphs, recognizing revenues based on customer
billings may not be appropriate in certain situations.
605.04 Delayed Billings. There is often a delay between when the goods or services are delivered and
when the customer is billed. This delay generally does not pose a day-to-day problem for accounting
personnel. However, at month ends, accounting personnel should prepare a journal entry to accrue the
revenues related to those goods that have been shipped but not billed. The entry should simply debit
accounts receivable and credit sales. In addition, accounting personnel should prepare a journal entry to
reverse the entry in the following month. Accounting personnel should also ensure that the related costs
of sales have been recorded in the same period (see Paragraphs 605.07-.11).
605.05 Advance Billings. If a customer is billed in advance, however, accounting personnel should
generally defer the amount until the related goods or services are delivered or provided. For example,
assume a customer is billed $2,400 under a six-month maintenance agreement. Accounting personnel
should make the following entry to record the initial transaction:
Accounts receivable
Deferred revenue
$2,400
$2,400
If, however, the accounting system made an automatic entry to record accounts receivable and revenue
(instead of deferred revenue) when the sales journal was posted, accounting personnel would simply
make a period-end adjusting entry to debit revenue and credit deferred revenue.
605.06 At the end of each month, accounting personnel typically would make the following entry to
recognize one-sixth of the amount as revenue:
Deferred revenue
Revenue
$ 600
$ 600
Cost of Sales
605.07 Accounting principles require that cost of sales be recorded in the same period as the related
revenues to properly match revenues and expenses. As discussed in Chapter 3, paragraph 325.13,
many accounting systems are designed to automatically record cost of sales at the same time sales are
recorded. However, if the company does not maintain a perpetual inventory system (a subsidiary ledger
listing inventory items and their costs) or a system to automatically record cost of sales, a month-end
entry must be made to record estimated cost of sales.
605.08 The approach used to estimate cost of sales depends on various factors, such as the company’s
inventory valuation method and type of business. Because of its complexity, the cost of sales estimation
process is often handled by the company’s controller or outside CPA. However, in companies where
accounting personnel are expected to calculate and prepare monthly cost of sales estimates, the cost of
sales percentage method (also called the gross profit method) is frequently used.
605.09 Companies that use the cost of sales percentage method generally record cost of sales by using
the historical cost of sales percentage. For example, assume the company’s cost of sales percentage
historically averages about 65% of sales. If monthly sales were $10,000, accounting personnel would
make a journal entry to record cost of sales of $6,500. Assuming inventory purchases during the month
were recorded to the inventory asset account in the general ledger, accounting personnel would prepare
the following entry:
6-2
Cost of sales
Inventory
$6,500
$6,500
605.10 Alternatively, assume inventory purchases were recorded during the month to the cost of sales
account in the general ledger. If the monthly total in the cost of sales account was $8,000, accounting
personnel would make the following entry to properly reflect inventory and cost of sales:
Inventory
Cost of sales ($8,000 - $6,500)
$1,500
$1,500
605.11 Under the cost of sales percentage method, accounting personnel must also periodically adjust
the inventory and cost of sales accounts when physical inventory counts are taken. After the physical
inventory count has been taken and valued, inventory per the general ledger should be increased or
decreased to agree with the physical inventory count total. Accounting personnel should record the
offsetting debit or credit to an inventory adjustment account (a subcomponent of the cost of sales
account).
Fixed Asset Transactions
605.12 The sale or disposal of fixed assets often requires month-end entries to properly reflect the
transactions. The following paragraphs provide guidance on recording gains or losses on fixed asset
sales and trade-ins. Paragraphs 620.06-.12 discuss recording depreciation on fixed assets.
605.13 Gain or Loss on Fixed Asset Sales. When a company’s fixed assets are sold, accounting
personnel often record the total sales proceeds by simply crediting a fixed asset gain/loss account or
miscellaneous income account in the general ledger. At month end, an adjusting entry must be made to
remove the fixed asset’s cost and accumulated depreciation from the general ledger and record the
proper gain or loss.
605.14 The appropriate gain or loss is calculated by comparing the sales proceeds with the asset’s net
book value (original cost less accumulated depreciation). A gain results if the sales proceeds exceed the
net book value, and a loss occurs if the sales proceeds are below the net book value. To properly
calculate the gain or loss, accounting personnel must ensure that depreciation has been calculated
through the date of sale (see Paragraphs 620.06-.12 for guidance on calculating depreciation).
605.15 To illustrate the calculation of the gain or loss on a fixed asset sale, assume the following facts:
Sales proceeds
Net book value:
Original cost
Accumulated depreciation at sale date
Difference—net gain
Income initially recorded in general ledger
Income adjustment needed
$ 5,000
$9,000
(4,600)
4,400
600
5,000
$(4,400)
6-3
Making Accounting Adjustments with QuickBooks
605.16 In the above situation, income is overstated by $4,400 because the $5,000 sales proceeds were
initially recorded to miscellaneous income. The adjusting journal entry needed to properly record the
above transaction is as follows:
Accumulated depreciation
Miscellaneous income
Fixed assets
$4,600
$4,400
$9,000
605.17 The journal entry properly writes off the fixed asset and accumulated depreciation amounts and
recognizes the appropriate gain of $600 ($5,000 - $4,400). In addition to making the above entry,
accounting personnel should also ensure that the fixed asset amount and related accumulated
depreciation have been removed from the fixed asset subsidiary ledger.
605.18 Gain or Loss on Fixed Asset Trade-ins. When a company acquires a fixed asset by trading in
another fixed asset, accounting personnel often initially record only the additional cash paid, if any, at the
trade-in date by debiting the fixed asset account in the general ledger. At month end, accounting
personnel must decide whether an adjusting journal entry is needed to properly reflect the accounts.
605.19 When similar fixed assets are exchanged, a gain or loss is generally not recognized. The
recorded amount of the new asset simply equals the net book value of the old asset plus any cash or
other monetary consideration given to the other party. Thus, the initial entry made by accounting
personnel to debit fixed assets for the additional consideration paid is appropriate; no additional entry is
generally needed. (If the transaction is significant to the company and cash or other monetary
consideration paid is more than 25% of the fair value of the asset received, special accounting rules
could apply. In that case, accounting personnel should consult with the company’s controller or outside
CPA.)
Income Taxes
605.20 The following paragraphs provide guidance to help accounting personnel make a rough income
tax estimate on a monthly basis. Because of the complexity of tax calculations, precise calculations are
typically made only at year end (sometimes at each quarter end) by the controller or outside CPA.
605.21 Accounting personnel can usually make a rough estimate of the monthly income tax expense by
performing the following steps:
a. Obtaining the expected average state and federal income tax rate.
b. Calculating tax expense by multiplying the company’s earnings (before any income
taxes have been deducted) by the rate.
605.22 Each step is described in the following paragraphs. Before making an estimated tax calculation,
accounting personnel should ensure any necessary income statement adjustments have been made,
including those discussed in the remainder of this chapter. However, if accounting personnel encounter
difficulty or unusual situations when estimating income tax expense, they should seek help from the
controller or outside CPA. Also, since many entities (such as sole proprietorships, Sub S Corporations,
and partnerships) are generally not subject to income taxes, accounting personnel should first consult
with an experienced tax professional to determine the company’s tax status.
605.23 Obtaining the Average Income Tax Rate. Typically, accounting personnel obtain the estimated
current year average income tax rate from their controller or outside CPA. The controller or outside CPA
6-4
usually calculates the rate by obtaining last year’s annual financial statements and dividing income tax
expense by income before taxes.
605.24 However, if the current year’s annual income is expected to differ significantly from the prior
year’s annual income, or if current year income tax rates are expected to change, the controller or
outside CPA will usually calculate the rate by estimating the current year’s annual income before taxes.
Once the estimated income amount is determined, the average federal income tax rate can then be
obtained for that tax bracket. Exhibit 6-1 shows 2005 average corporate federal income tax rates for
taxable incomes up to $10 million.
Exhibit 6-1
Average Corporate Federal Income Tax Rates
Annual Taxable Income
From
$
0
$ 50,000
$ 75,000
$ 100,000
$ 150,000
$ 200,000
$ 250,000
$ 300,000
Average
Tax Rate1
To
$
50,000
$
75,000
$
100,000
$
150,000
$
200,000
$
250,000
$
300,000
$ 10,000,000
15%
17%
20%
25%
29%
31%
33%
34%
1
The average federal income tax rates were calculated based on the 2005 corporate federal income tax
rates. The rates do not consider the alternative minimum tax (AMT) rate. If the company is subject to
AMT, that rate should be added to the above average tax rates.
605.25 Calculating Monthly Income Tax Expense. After accounting personnel obtain the appropriate
current year average tax rate, they can estimate monthly income tax expense by multiplying that rate by
the current month’s income before taxes per the general ledger. If the company has a loss in the current
month but expects to have income for the year, accounting personnel should simply calculate and record
a negative tax expense amount. (However, if the company expects to have a net loss for the year,
accounting personnel generally should not attempt a monthly tax calculation. In this situation, the tax
calculation should typically be made by the controller or outside CPA at year end.)
605.26 Accounting personnel would typically record the current period’s calculated tax expense to the
current tax expense account and the current taxes payable account in the general ledger. At year end,
the controller or outside CPA would adjust the estimated amount in these accounts to reflect actual tax
expense and any taxes for which payment is deferred to future years.
605.27 To illustrate, assume a company’s expected average tax rate for the current year is 31% (based
on last year’s total tax expense of $71,000 divided by income before taxes of $225,000). Based on the
current month’s income of $10,000, estimated tax expense is $3,100 ($10,000 x 31%). Thus, accounting
personnel would make the following entry to record the current month’s estimated tax account:
Current tax expense
Current taxes payable
$3,100
$3,100
6-5
Making Accounting Adjustments with QuickBooks
605.28 As estimated taxes are paid during the year, accounting personnel would record the payments
as a debit to current taxes payable. As mentioned above, the controller or outside CPA would typically
make an entry at year end to record the appropriate tax expense and properly reclassify any deferred
taxes.
605.29 If the company is subject to state income taxes, a separate, but similar calculation must be made
to accrue state income taxes. Close consultation with the controller or outside CPA is even more
important in these situations since each state has different tax rates and methods for calculating the
taxes. Also, some states even subject S Corporations to state income tax.
610
ACCRUING EXPENSES AND INCOME
610.01 Generally accepted accounting principles (GAAP) is built on accrual-based accounting instead of
cash basis accounting. That is, expenses are generally recorded when they are incurred regardless of
when they are actually paid. Similarly, income is generally recognized when it is earned rather than when
it is actually received. Unrecognized expenses and income at each month end often require accounting
personnel to record an accrued liability or asset.
610.02 Fortunately, most computerized software incorporates some accrual-based accounting. Thus,
most revenues and expenses are initially recorded by accounting personnel on an accrual basis. For
example, the accounts receivable and sales invoice processing system ensures that revenues are
recognized when the sale takes place, not when the cash is later collected from the customer. Also, the
accounts payable system helps ensure that expenses are recognized when incurred, not when the
vendor is paid.
610.03 Even though most transactions are handled on an accrual basis by accounting systems, certain
transactions still require an accrual adjustment at month end. Once the accruals have been recorded, the
process often can be simplified by reversing the accrual in the following month. This reversing entry
approach allows accounting personnel to ignore the accrual balance when recording the day-to-day
transactions in the following month.
610.04 This section provides accounting personnel guidance on making specific month-end accrual
adjustments and assumes the entries are reversed in the following period. Paragraphs 610.42-.46
discuss the reversal process in more detail.
Accruing Recurring Monthly Expenses
610.05 Certain expenses are billed to companies on a regular monthly basis, but the billing period often
does not end on the calendar month. For example, utility companies bill customers using a cycle billing
system unrelated to the calendar month. Accounting personnel generally should not be overly concerned
about making monthly accrual adjustments for these recurring monthly expenses. As long as each month
includes the expense for only one utility bill, accounting personnel should generally not attempt to accrue
the additional utility expense from the service cutoff date through the end of the month.
Accrued Interest Expense
610.06 The need to accrue interest expense on notes payable and other debt varies depending on how
the lender calculates and bills interest expense. If the lender calculates interest through the end of the
month and bills the company monthly, no accrual is generally needed. Accounting personnel simply
record the invoice for the applicable month’s interest. However, if interest is not calculated and billed on a
6-6
calendar month basis, accounting personnel should calculate and accrue interest through month end if
amounts are significant.
610.07 The approach used to make the accrued interest calculation will frequently vary depending on
the type of note instrument. There are basically two types of notes that small businesses deal with:
a. Term notes. Term notes generally have a fixed principal and interest payment
schedule and a stated maturity date. Interest rates may either be fixed or vary with
the prime rate. Payments are generally made monthly.
b. Line of credit. Lines of credit generally do not require regular principal payments.
Instead, principal payments are required whenever specified assets (referred to as
the borrowing base) fall below a predetermined minimum. Interest is usually paid
monthly based on a variable interest rate.
The following paragraphs provide practical guidance for accruing interest on both types of debt.
610.08 Accrued Interest on Term Notes. Accruing interest at month end on term notes is relatively
simple because the only changes to the principal balance are caused by the regularly scheduled note
payments. The banks typically send bills (but usually not at the company’s accounting period end) that
break out the principal and interest portion of the payment and show the current interest rate. Accounting
personnel can check the accuracy of the bill by referring to the loan amortization schedule. Accounting
personnel simply need to verify the information on the bill and calculate the accrued interest amount.
610.09 For example, assume the company has a $200,000 loan with a 10% interest rate, and interest is
billed through the 10th of each month. For the month of April, accounting personnel should accrue 20
days of interest equal to $1,120 calculated as follows:
Loan amount
$ 200,000
Interest rate
10%
Annual interest amount
$
20,000
Daily interest amount ($20,000/360 days)
$
55.56
Number of days to accrue (4/11 - 4/30)
Amount of interest to accrue ($55.56 x 20)
20
$
1,120
610.10 Accounting personnel would make the following entry at month end to accrue the 20 day of
interest:
Interest expense
Accrued interest payable
$1,120
$1,120
610.11 In the May general ledger, accounting personnel should post the following “reversing” journal
entry:
Accrued interest payable
Interest expense
$1,120
$1,120
6-7
Making Accounting Adjustments with QuickBooks
The logic of reversing entries is discussed at Paragraphs 610.42-.46.
610.12 Accrued Interest on Line of Credit. Because of the generally higher volume of monthly activity
on a line of credit, accounting personnel often maintain a worksheet that tracks both principal activity
(draws and repayments) and related interest on the line. Although accounting personnel could
conceivably use the worksheet discussed in Paragraphs 610.08-.10 to calculate accrued interest, the line
of credit worksheet shown in Exhibit 6-2 better serves this purpose.
Exhibit 6-2
(a)
Line of Credit Worksheet
(b)
(c)
Dates
Principal Activity
Receipts
Cumulative
(Payments) Balance
Transactions
Description
January,
2005:
Beg.
Balance—
Principal
Beg. Bal.—
Accrual
Interest
Payment
Draw
New Rate—
9.25%
Ending
Balance
EOM Totals
February,
2005:
Int.
Payment
12/31/04
(d)
$25,000
(e)
(f)
(g)
(h)
(i)
Interest Activity
Interest Rate
Data
Interest Expense/Payments
Days Computed Interest Diff.
Rates O/S
Expense
Paid
(if any)
(d) x (e) ÷
360 x (f)
(g) – (h)
9.50%
12/31/04
$ (195)
1/2/05
$ 195
$
$
$ 251
1/7/05
1/26/05
$7,500
1/31/05
1/31/05
2/1/05
$7,500
$32,000
$32,000
9.50%
9.50%
7
19
$ 46
163
$32,000
9.25%
5
42
31
$251
$32,000
0
$ 251
$
0
0
610.13 Exhibit 6-2 shows each principal change and each interest rate change. Each time there is a
change in either the principal amount or the interest rate, the number of days outstanding before the
change (column f) and the related interest expense for those days (column g) must be calculated. At
month end, accounting personnel must then make the following two calculations:
a. Calculate interest through month end. Interest expense must be calculated from
the last calculation date through month end. In the above example, this amount totals
$42 for the five days from 1/26/X5 through 1/31/X5.
b. Determine total accrued Interest. Total accrued interest is calculated by adding up
the applicable columns. The $251 difference (column i) between the calculated
interest expense ($251 per column g) and actual interest paid ($0 per column h) at
month end represents the unpaid interest expense for the month that should be
accrued.
610.14 The following entry would be made to record the accrued interest expense for January
2005:
6-8
Interest expense
Accrued interest payable
$ 251
$ 251
610.15 After making the entry, the total computed expense in column g should agree to interest expense
per the general ledger. Accounting personnel would usually reverse the entry in the following month (see
Paragraphs 610.42-.46 for a discussion of reversing entries).
610.15 In addition to calculating the month end accrual, the worksheet shown in Exhibit 6-2 allows
accounting personnel to check the accuracy of the bank’s monthly interest expense billing and monitor
available balances.
Accrued Payroll Expense
610.16 Generally, salaried employees are paid either once or twice a month, and hourly employees are
paid once a week or every two weeks. Because hours worked by hourly employees often vary from one
payroll to the next, there is typically a lag of one week between the last day of the workweek and the day
they are paid (that is, they are paid one week in arrears). For example, if a company pays its hourly
employees on Fridays, the paycheck they receive typically covers the work period that ended on the
previous Friday. Because of this time lag, accounting personnel generally must make an accrual
adjustment to properly reflect this unrecorded payroll expense at month end.
610.17 Accruals are typically calculated by using the most recent payroll register. The payroll register
typically calculates gross payroll by employee category, as well as the employer’s portion of payroll
taxes, such as social security, medicare, and unemployment taxes. Thus, accounting personnel can add
the two amounts (gross payroll and employer’s taxes) together and make a single accrued payroll
calculation.
610.18 The number of days of payroll to accrue each month will vary depending on the company’s pay
cycle and the date the payroll falls on in each month. For example, assume a company pays its hourly
employees once a week and its salaried employees every other week. The pay period ends on Saturday,
and hourly employees are paid one week in arrears. For the month ending November 30, 2005, the
company’s workweek ends on Saturday, the 26th. Thus, accounting personnel must accrue three days
(Monday, the 28th, through Wednesday, the 30th) of payroll and employer taxes for all employees and
one additional six-day week for hourly employees as shown in Exhibit 6-3.
6-9
Making Accounting Adjustments with QuickBooks
Exhibit 6-3
(a)
Description
Hourly:
Dept A
Dept B
Dept C
Salaried:
Marketing
Accounting
Executive
Totals
Gross Payroll Accrual
(b)
(c)
(d)
(e)
Latest Payroll Register
G/L
Gross
Co.’s
No.
Payroll
Taxes
Total
(c) x (d)
530.01 $ 8,500 $1,211 $ 9,711
530.02 $ 3,728 $ 531 $ 4,259
530.03 $ 6,480 $ 923 $ 7,403
(f)
(g)
(h)
(i)
Total Payroll Accrual
Days
Days
6
6
6
660.01 $ 5,872
720.01 $ 3,948
820.01 $ 4,500
$33,028
12
12
12
$ 837
$ 563
$ 641
$4,706
$ 6,709
$ 4,511
$ 5,141
$37,734
9
9
9
%
(g) ÷ (f)
1.50%
1.50%
1.50%
$
(e) x (h)
$14,567
$ 6,389
$11,105
3
3
3
25%
25%
25%
$ 1,677
$ 1,128
$ 1,285
$36,151
610.19 Accounting personnel would make the following entry to accrue the gross payroll and the
employer’s payroll tax for November:
Dept A payroll expense (#520.01)
Dept B payroll expense (#520.02)
Dept C payroll expense (#520.03)
Marketing payroll expense (#660.01)
Accounting payroll expense (#720.01)
Executive payroll expense (#820.01)
Accrued payroll (#220.01)
$14,567
$ 6,389
$11,105
$ 1,677
$ 1,128
$ 1,285
$36,151
Accounting personnel would then reverse the above entry in December (see Paragraphs 610.42-.46 for a
discussion of reversing entries).
Accrued Commission Expense
610.20 Companies with commission salespersons often must calculate and accrue commission expense
at month end if the actual commission amounts cannot be readily determined. Since commission
arrangements can be complex and often vary from one company to the next, accounting personnel
should not try to be too precise when making the estimated monthly accrual calculation. The calculation
should simply be a ballpark estimate of unrecorded commissions due through month end.
610.21 Commissions are usually paid on a monthly basis, although they are sometimes paid semimonthly. The simplest and most common commission arrangement used by small businesses is to base
them on sales, but they also may be based on product gross profit, units sold, etc. Commission rates
may be a flat rate, or rates may vary with sales volumes, products sold, or other factors.
610.22 For companies with a simple commission arrangement tied to sales, the accrual calculation is
straightforward. Accounting personnel simply obtain the sales summary for the month, calculate
commissions for the month (by salesperson if needed), and deduct any commission expense already
recorded in the month as shown in Exhibit 6-4:
6-10
Exhibit 6-4
(a)
Salesperson Commission Accrual
(b)
(c)
Salesperson G/L No.
Monthly
Sales
T. Smith
B. Davis
C. Graham
Total
$10,500
$ 6,700
$11,600
$28,800
625.01
625.02
625.03
(d)
(e)
(f)
Commission Expense
Estimated
Expense
Expense
Already
Commission for
Booked
Rate
Full Month
(if any)
(c) x (d)
22.5%
$2,362
$ 985
25.0%
$1,675
$ 458
21.0%
$2,436
$1,125
$6,473
$2,568
(g)
Monthly
Accrual
Needed
(e) – (f)
$1,377
$1,217
$1,311
$3,905
610.23 Exhibit 6-4 reveals that estimated commission expense for the full month is $6,473, of which
$2,568 has already been recorded in the general ledger for this month. Thus, accounting personnel
should record additional commission expense of $3,905 ($6,473 - $2,568) for the month as follows:
Commission expense (# 625.01)
$1,377
Commission expense (# 625.02)
$1,217
Commission expense (# 625.03)
$1,311
Accrued commission payable
$3,905
Accounting personnel would then typically reverse the entry in the following month’s general ledger (see
discussion of reversing entries at Paragraphs 610.42-.46).
610.24 Even when commissions are not based on sales, actual monthly commission expense as a
percentage of sales is usually fairly consistent from one month to the next. In these situations, sales
amounts often can still be used as the basis for making the rough accrual calculation. Thus, accounting
personnel can frequently calculate commission expense as a percentage of sales for the last several
months and use the average percentage for accruing monthly commission expense.
610.25 The following shows how to compute an average commission percentage for use in calculating a
month-end commission accrual:
Actual
Commission
Month
Actual Sales
Commissions
Rate
August, 2008
September, 2008
October, 2008
Total
$ 1,580,670
$ 1,675,352
$ 1,987,258
$ 5,243,280
$ 316,134
$ 301,563
$ 377,579
$ 995,276
20%
18%
19%
19%
The calculation reveals an average commission rate for the last three months of 19%. Accounting
personnel may generally use this rate to accrue sales commissions for the current month even if
commissions are not based simply on a percentage of sales.
6-11
Making Accounting Adjustments with QuickBooks
Accrued Vendor Payables
610.26 In addition to accruing the expenses discussed in the preceding paragraphs, accounting
personnel should also ensure that the cost of any other goods or services are recorded in the month they
are received. This often involves simply reviewing vendor invoices received after the end of the current
month and setting up an accrued liability for those invoices relating to that month. Accounting personnel
should also review any unmatched receiving reports representing goods received but not yet invoiced by
the
vendor.
This
review
process
is
often
referred
to
as
a
“search for unrecorded liabilities.”
610.27 Accounting personnel are sometimes less concerned about accruing payables at month end for
inventory items since the company’s earnings are thought to be unaffected. That is, the credit to trade
payables is merely offset by a balance sheet debit to the inventory account. Although this reasoning is
often accurate, failing to accrue inventory-related payables can be misleading if physical inventory counts
are being taken.
610.28 When physical inventory counts are taken at month end, inventory per the general ledger
is adjusted to agree to the inventory value per the physical inventory count. Thus, if inventory is counted
during the physical inventory, but the related invoice has not been recorded, costs of sales and trade
payables will be understated when the physical inventory adjustment is recorded.
610.29 For example, assume inventory per the general ledger is $200,000, but inventory per the
physical count is $210,000. The $10,000 difference is due to the receipt of inventory that accounting
personnel failed to reflect in the general ledger. If accounting personnel are unable to determine what
caused the difference, they would generally assume the physical count is accurate and adjust the
general ledger balance to agree to the physical inventory count by debiting inventory for $10,000 and
erroneously crediting cost of sales for $10,000 instead of trade payables.
610.30 When the vendor’s invoice is eventually received and recorded in the following month, inventory
will become overstated by $10,000 in the general ledger. When the next physical inventory count is
taken, accounting personnel will record the opposite of the above physical inventory adjustment to
correct the accounts in the following month. Although the inventory balance and year-to-date cost of
sales is now correct, cost of sales is still understated in the first month and overstated in the second
month by the $10,000.
610.31 Therefore, accounting personnel should ensure that all goods or services received during the
month are properly recorded at month end, particularly when physical inventory counts are being taken.
A reversing entry (see Paragraphs 610.42-.46) should generally be posted to the following month’s
general ledger for any vendor payables accrued at month end.
Accrued Interest Income on Notes Receivable
610.32 Debtors are typically required to make interest payments in monthly installments beginning 30
days after the date of the note. Thus, accounting personnel generally should make a monthly journal
entry to accrue interest income through the end of each month if amounts are significant. Accounting
personnel would make the following entry to record an accrued interest receivable for $1,120:
Accrued interest receivable
Interest income
$1,120
$1,120
However, if the debtor quits making payments, accounting personnel should generally cease accruing
6-12
any interest income until the debtor resumes making regular payments.
610.33 The process for accruing interest income on notes receivable generally follows the same
approach used for accruing interest expense on notes payable (see Paragraphs 610.08-.12). Accounting
personnel generally should record a reversing entry in the following month.
Accrued Interest Income on Short-term Investments
610.34 Companies with certificates of deposit (CDs) or similar short-term investments often require
financial institutions to remit interest payments monthly. Thus, at month end, there is generally no more
than 30 days of unremitted interest. In this situation, companies often record interest income as it is
received and record accrued interest receivable only at year end. However, if unrecorded interest
amounts are significant, accrued interest income should also be recorded at each month end.
610.35 Accounting personnel often track short-term investments and related interest using worksheets
or automated spreadsheets, such as Microsoft Excel. These worksheets typically include separate
columns showing all principal and interest activity. Automated spreadsheets allow “expected” interest
income to be recalculated and compared to actual interest income per the general ledger. A difference
between expected and actual interest income generally should be accrued since it usually represents
interest income earned, but not yet received.
610.36 Exhibit 6-5 shows how accrued interest may be calculated using an automated investment
spreadsheet. Column k computes “expected” income, which is compared to actual income per the
general ledger. The amounts should agree, except for any accrued interest income not recorded at
month end. The last column calculates the ending monthly accrual. The interest received amount
(column j) is revised each month to reflect any additional interest received since the last month. If the
worksheet is prepared using an electronic spreadsheet program, accounting personnel can easily revise
the interest received and other amounts.
6-13
Making Accounting Adjustments with QuickBooks
Exhibit 6-5
Sample Short-term Investment Interest Accrual Worksheet
Company Name:
Prepared by:
(a)
ABC Company
Current Month End:
D. Thomas
(b)
(c)
Date Prepared:
(d)
(e)
(f)
(g)
(h)
Description
Ban
Date
Date
Interest
Beg. Of Yr
k
Bought
Matures
Rate
Balance
4/5/08
(i)
Principal
3/31/08________________ _____
(j)
(k)
(l)
Interest
Additions
Maturities
This M/E
Beg. Of Yr
YTD
YTD
This M/E
Balance
Accrual
Received
Computed
Accrual
(Note 1)
(k)–[(j)–(i)]
(e) + (f) – (g)
CD # 1487053
CD # 1492048
SW
SW
11/15/03
02/13/04
5.25%
$125,000
-
125,000
1/18/04
4/18/04
5.45%
-
100,000
-
CD # 1498702
SW
2/13/04
3/15/04
5.00%
-
125,000
125,000
CD # 1499230
SW
3/15/04
6/14/04
5.30%
-
125,000
-
125,000
-
-
$125,000
350,000
250,000
225,000
839
2,162
Totals
100,000
-
Balance per G/L (before accrued interest adjustment)
Difference
1,641
-
-
-
225,000
$
839
-
802
1,090
521
521
1,090
-
294
294
2,707
1,384
1,323
-
$1,384
Note 1: the “YTD Computed” column should equal year-to-date interest income per the general ledger after making the month-end-journal entry to accrue interest.
6-14
-
1,384
610.37 Accounting personnel would make the following entry to accrue the interest receivable at month
end per Exhibit 6-5:
Accrued interest receivable
Interest income
$1,384
$1,384
A reversing entry generally should be prepared the following month.
610.38 The calculation in Exhibit 6-5 assumes the bank pays interest only at maturity of each C.D. If the
company had requested that interest be paid monthly, an accrual may not have been needed since the
unaccrued interest at month end would have been less significant.
610.39 Accounting personnel should use an automated spreadsheet to simplify the investment tracking
and interest calculation process whenever possible.
Reversing Month-end Accruals
610.40 Accounting personnel generally should prepare reversing journal entries in the following month
for the accrual entries discussed previously in this section. (Reversing entries generally do not apply to
adjustments discussed in the other sections of this chapter.) Reversing entries simply require accounting
personnel to prepare an entry in the following month that is exactly opposite the original accrual entry.
The following shows the original entry and reversing entry for the interest expense accrual discussed in
Paragraphs 610.08-.12:
Original Entry in April
Interest expense
Accrued interest payable
$1,120
$1,120
Reversing Entry in May
Accrued interest payable
Interest expense
$1,120
$1,120
610.41 Reversing entries simplify the general ledger account coding process. They allow accounting
personnel to process and code the subsequent vendor invoice or other source documents to the
appropriate expense or income account without considering how much had been accrued in the previous
period. If reversing entries were not used, accounting personnel would have to post a portion of the
subsequent transaction amount to the accrual account.
610.42 Continuing the above example, assume the company subsequently receives the May interest
expense billing from the bank totaling $1,667. Accounting personnel would simply code the entire invoice
amount to interest expense in the May general ledger, even though only $547 of the expense relates to
the current month. However, because of the reversing entry, interest expense is properly stated in May
as shown below:
Reversing entry
Subsequent invoice
May interest expense
$(1,120)
1,667
$ 547
610.43 If the reversing entry were not made, accounting personnel would have to adjust the accrual
balance at the next month end or split the May invoice by making the following entry:
6-15
Making Accounting Adjustments with QuickBooks
Interest expense
Accrued interest payable
Cash (or accounts payable)
$ 547
$ 1,120
$ 1,667
610.44 Thus, to simplify the account coding process, accounting personnel should prepare reversing
journal entries at the same time they prepare the original accrual entry. The reversing journal entry
should be filed in the next month’s journal entry binder for subsequent posting in that month.
615
ADJUSTING ASSET VALUATIONS
615.01 Generally accepted accounting principles (GAAP) require that certain asset accounts be written
down below their “book” or recorded value if it appears the book or recorded amounts will not be fully
recovered. The two most common accounts that require these “valuation adjustments” are accounts
receivable and inventory. Both types are discussed in this section.
Uncollectible Accounts Receivable
615.02 GAAP requires companies to record a loss when all or a portion of a receivable is estimated to
be uncollectible. The loss is generally recognized by debiting bad debt expense and crediting the
allowance for doubtful accounts. The allowance account is a balance sheet asset account that carries a
credit balance (referred to as a contra-asset account), which is offset against accounts receivable in the
company’s financial statements.
615.03 Accounting personnel generally estimate uncollectible accounts using the percentage of sales
method or the aging method, each of which are discussed below. When the company give up on
collecting a receivable, the company “writes off” the receivable, a process that is also discussed below.
615.04 Percentage of Sales Method. The percentage of sales method is most often used when a
company has a large number of uniformly sized accounts with a stable market and customer base.
Under this method, uncollectible accounts are estimated by applying a predetermined “bad debt”
percentage to each month’s sales. For example, if credit sales are $300,000 in the current month, bad
debt expense in the current month would be $7,500 using a 2.5% bad debt estimate. The percentage is
usually determined based on the trend of bad debt expense over the past few years. The calculated bad
debt expense amount is recorded by making the following entry:
Bad debt expense
Allowance for doubtful accounts
$7,500
$7,500
Each month, a similar entry is made. At year end, a more detailed analysis of uncollectible accounts is
made and the allowance account is adjusted upward or downward.
615.05 Aging Method. The aging method is generally used when accounts are less uniform in size and
sales activity fluctuates widely. Under this method, the balance for the allowance account is recomputed
each month by applying a predetermined percentage to each aging category per the aged accounts
receivable report. The percentages will vary from one company to the next depending on credit terms,
market conditions, and collection experience. (If the older aging categories contain unusually large
balances, accounting personnel should ask the credit manager to provide individual bad debt estimates
for those accounts.) For example, the following percentages might be used under the aging method:
6-16
(a)
(b)
(c)
Aging
Category
0 – 30
31 – 60
61 – 90
91 – 120
Over 120
Totals
Bad Debt
Percent
2%
4%
10%
25%
50%
N/A
Receivable
Balances
$ 335,000
$ 128,000
$ 75,000
$ 42,000
$ 28,000
$ 838,000
(d)
Bad
Estimate
(b) x (c)
$ 6,700
$ 5,120
$ 7,500
$10,500
$14,000
$43,820
Debt
615.06 The calculated bad debt estimate is then compared to the allowance for doubtful accounts
general ledger balance. The balance and related bad debt expense is then increased or decreased to
agree to the calculated balance. For example, assuming the general balance in the allowance for
doubtful accounts is currently $35,000, accounting personnel would make the following entry to record
additional bad debt expense of $8,820 ($43,820 - $35,000):
Bad debt expense
Allowance for doubtful accounts
$8,820
$8,820
615.07 Writing Off the Bad Accounts. After recording the allowance account under either of the above
methods, specific accounts that are written off because management believes further collection efforts
are futile should be charged against the allowance account. For example, if $2,500 due from a customer
is considered uncollectible, accounting personnel should make the following general ledger entry to write
off the account:
Allowance for doubtful accounts
Accounts receivable
$2,500
$2,500
Accounting personnel should also write off the account in the accounts receivable subsidiary ledger to
ensure the general ledger and subsidiary ledger remain in balance.
Inventory Reserves
615.08 Generally accepted accounting principles (GAAP) require that inventory be recorded at the lower
of its cost or estimated market value. If the inventory’s recorded cost is not expected to be recovered
through its normal selling price, GAAP requires that a loss be recorded as soon as the business
determines that a loss is likely to occur.
615.09 The process of applying this lower of cost or market rule is complex. If accounting personnel
suspect this rule may apply, they should consult with the controller or outside CPA. Some red flags that
accounting personnel should be alert for include the following:
6-17
Making Accounting Adjustments with QuickBooks




The company is experiencing overall operating losses.
Certain product lines are losing money.
Vendor purchase prices are increasing at a much faster rate than selling prices.
Quantities on hand of certain inventory items or inventory lines appear excessive.
615.10 Even though the lower of cost or market rule should not be applied without the help of the
controller or outside CPA, accounting personnel should still record losses for any inventory items or lines
that appear obsolete or damaged by writing them down to their “net realizable value.” Net realizable
value equals the estimated net price that the items could be sold for, which frequently equals the scrap
value for obsolete or damaged items.
615.11 Accounting personnel should record the estimated losses to an inventory reserve account. The
reserve account is essentially an asset account with a negative (credit) balance. The account is generally
referred to as a “contra” account since it offsets or is netted against the inventory account in the financial
statements. Assuming an inventory reserve of $12,000 is required, accounting personnel would make the
following entry to record the loss and reserve:
Inventory write-down expense
Inventory reserve
$12,000
$12,000
615.12 As the items are subsequently sold or disposed of, accounting personnel should charge the
items against the inventory reserve account. For example, assume all of the above obsolete and
damaged items, which have an original book value of $20,000, are later sold for $6,000. Accounting
personnel would make the following entry to record the sale and recognize an additional $2,000 loss:
Cash
Inventory reserve
Inventory loss (#585)
Inventory
620
$ 6,000
$12,000
$ 2,000
$20,000
DEPRECIATING AND AMORTIZING ASSETS
620.01 Expenditures that directly benefit a limited number of future periods must be initially recorded as
assets and written off to expense over those periods. The process of writing off the assets is called either
depreciation or amortization. Depreciation applies to tangible assets, such as property and equipment,
and amortization applies to intangible assets, such as prepaid insurance. This section discusses:
 Prepaid asset amortization.
 Fixed assets depreciation.
 Other long-term assets amortization.
Prepaid Asset Amortization
620.02 Certain expenditures commonly paid in advance by small businesses include property and
casualty insurance, property taxes, and advertising. Since these expenditures benefit more than one
month, they should be recorded as prepaid assets when paid and amortized over the appropriate
number of months covered by the expenditure. For example, insurance prepayments often cover six or
twelve months and property taxes generally cover one year.
620.03 Accounting personnel should initially record a $24,000 insurance prepayment as follows:
6-18
Prepaid insurance
Cash
$24,000
$24,000
620.04 Assuming the policy covers a 12 month period, the company would record an expense of $2,000
($24,000 ÷ 12) in each of the following 12 months as follows:
Insurance expense
Prepaid insurance
$ 2,000
$ 2,000
620.05 If a company has several types of prepaid expenses, it is often helpful to prepare a schedule that
shows the monthly amortization amount and ending asset balances. Exhibit 6-6 presents a schedule that
calculates prepaid amortization expense and monitors remaining unamortized asset balances.
Fixed Assets Depreciation
620.06 Generally accepted accounting principles (GAAP) allow businesses to choose among several
different methods to depreciate fixed assets, but the IRS requires the Accelerated Cost Recovery System
(ACRS) for assets acquired after 1980 and Modified ACRS (MACRS) for assets acquired after 1986. In
addition, many states require businesses to use state-mandated depreciation methods when calculating
state income taxes. Thus, many businesses are compelled to keep two or more sets of fixed asset
depreciation schedules.
620.07 The following paragraphs focus on GAAP depreciation methods. For companies that wish to
avoid calculating depreciation under both GAAP and tax methods, GAAP allows companies to use tax
methods if they do not produce significant differences from GAAP methods. Frequently, GAAP and tax
methods produce similar results for assets with short lives, say, less than seven years. Because of the
complexity of depreciation rules, accounting personnel should consult with their controller or outside CPA
when selecting or changing a depreciation method.
620.08 There are three common depreciation methods allowed by GAAP. Each method requires
accounting personnel to depreciate the fixed assets over their estimated useful lives. Some methods
require estimated salvage value (if significant) to be considered before making the calculation, but others
do not. Each of the methods is discussed below. The first depreciation method is the straight-line method
that allocates depreciation equally over the asset’s life, whereas the other two methods are accelerated
methods that allocate more depreciation during the asset’s early years.
6-19
Making Accounting Adjustments with QuickBooks
Exhibit 6-6
Prepaid Asset Amortization Worksheet
Description
Payee:
Amount Paid:
Date Paid:
Period Covered:
Monthly Expense:
Type of Prepaid Asset
Property Insurance
ABC Agency
$24,000
1/5/05
1/1/05 – 12/31/05
$2,000
Month End
January 31
February 28
March 31
April 30
May 31
June 30
July 31
August 31
September 30
October 31
November 30
December 31
Asset Activity and Balances—DR (CR)
Activity
Balance
Activity
($2,000)
$22,000
($2,000)
$20,000
($2,000)
$18,000
($2,000)
$16,000
($2,000)
$14,000
($2,000)
$12,000
($1,500)
($2,000)
$10,000
($1,500)
$ 8,000
($1,500)
($2,000)
$ 6,000
($1,500)
($2,000)
$ 4,000
($1,500)
($2,000)
$ 2,000
($1,500)
($2,000)
$
0
6-20
Auto Insurance
XYZ Insurance Co.
$9,000
6/8/05
6/1/05 – 110/05
$1,500
Property Taxes
Bexar County
$36,000
1/31/05
2/1/05 – 1/31/05
$3,000
Advertising
Sinc Advertising Co.
$42,000
3/31/05
4/1/05 – 9/30/05
$7,000
Balance
Activity
Balance
Activity
Balance
$7,500
$6,000
$4,500
$3,000
$1,500
$
0
($3,000)
($3,000)
($3,000)
($3,000)
($3,000)
($3,000)
($3,000)
($3,000)
($3,000)
($3,000)
$33,000
$30,000
$27,000
$24,000
$21,000
$18,000
$15,000
$12,000
$ 9,000
$ 6,000
$ 3,000
($7,000)
($7,000)
($7,000)
($7,000)
($7,000)
($7,000)
$42,000
$35,000
$28,000
$21,000
$14,000
$ 7,000
$
0
a. Straight-line method. Under this method, the fixed asset’s costless salvage value (if
significant) is allocated evenly over the asset’s estimated useful life. For example,
annual depreciation expense for a company owning a $15,000 asset with no
expected salvage value and a five year estimated life would be $3,000. The
bookkeeper would record monthly depreciation expense of $250 ($3,000/12).
b. Double declining balance method. This accelerated method allocates the asset’s
cost disproportionately over its life so that the early years are charged with most of
the cost. The rate used to depreciate the assets is twice the straight-line rate. In the
above example, the straight-line rate was 1/5 or 20%. Under the double declining
balance method, the rate would be 40%. Depreciation would equal $6,000 ($15,000 x
40%) in the first year and $3,600 ($9,000 x 40%) in the second year. Since a constant
rate is applied to a declining net book value, the DDB method will not fully depreciate
the asset. Companies either assume the remaining undepreciated balance equals the
salvage value, or they switch to the straight-line method in the year the depreciation
falls below the straight-line calculated amount.
c. Sum-of-the-years’ digits method. This accelerated method also allocates more of
the asset’s cost to its early years. The depreciation rate is based on a fraction tied to
the asset’s life. The numerator is the number of years remaining at the beginning of
each year and the denominator is the sum of the numerators that are used in each
year’s calculation. In the above example, the numerator for the first year is five and
the denominator for each year is 15 (5+4+3+2+1). Thus, depreciation is $5,000
($15,000 x 5/15 in the first year and $4,000 ($15,000 x 4/15) in the second year.
620.09 Under each method, monthly depreciation is calculated by simply dividing the annual depreciation
expense amount by 12. The monthly amount is then recorded by debiting depreciation expense and
crediting accumulated depreciation. For example, assuming a monthly depreciation expense of $500,
accounting personnel would make the following entry:
Depreciation expense
Accumulated depreciation
$500
$500
The accumulated depreciation account is a “contra” account to the fixed asset accounts. It carries a
negative (credit) balance and is presented as an offset against the fixed asset balances in the financial
statements.
620.10 Exhibit 6-7 presents depreciation calculations over a five year life under each of the methods.
Exhibit 6-7
Comparative Depreciation Calculations
Straight Line (SL)
Year
Rate
Expense
1
2
3
4
5
.20
.20
.20
.20
.20
$3,000
$3,000
$3,000
$3,000
$3,000
Book
Value
$15,000
$12,000
$ 9,000
$ 6,000
$ 3,000
$
0
Double Declining Balance (DDB)
Book
Rate
Expense
Value
$15,000
.40
$ 6,000
$ 9,000
.40
$ 3,600
$ 5,400
.40
$ 2,160
$ 3,240
.40
$ 1,296
$ 1,944
.40 0
$ 778
$ 1,166
Sum-of-the-year’s Digits (SYD)
Book
Rate
Expense
Value
$15,000
5/15
$ 5,000
$10,000
4/15
$ 4,000
$ 6,000
3/15
$ 3,000
$ 3,000
2/15
$ 2,000
$ 1,000
1/15
$ 1,000
$
0
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Making Accounting Adjustments with QuickBooks
620.11 Notice in Exhibit 6-7 that the DDB method leaves a net book value at the end of year 5 of $1,166
since that method does not fully depreciate assets as mentioned previously.
620.12 Most companies use fixed asset software, such as Best Programs, to track fixed assets and
calculate depreciation. Companies with fewer fixed assets, however, sometimes use automated
spreadsheets, such as Microsoft Excel, or occasionally use manual worksheets. Because of the
complexity of depreciation calculations, accounting personnel should seriously consider acquiring fixed
asset software. The software generally will not only calculate GAAP depreciation, but it will also make
separate tax depreciation calculations.
Other Long-term Assets Amortization
620.13 In addition to fixed assets, accounting personnel are sometimes confronted with how to record
and amortize certain other long-term intangible assets. The following paragraphs provide guidance on
accounting for goodwill and organizational costs.
620.14 Goodwill. When a company acquires another business, it often pays more than the fair market
value of the net tangible assets. When this occurs, the difference is recorded by the acquiring company
as an asset usually called “goodwill.” The goodwill is generally assumed to relate to intangible assets,
such as good customer relations, patents, trademarks, customer lists, company name, and sales force.
620.15 The company’s controller or outside CPA is generally heavily involved in calculating and
recording goodwill when an acquisition occurs. Accounting personnel must simply record the monthly
goodwill amortization. Generally, goodwill should be amortized over the estimated life of the intangible
assets underlying the goodwill, not to exceed forty years for GAAP purposes. For example, the monthly
entry to amortize $48,000 of goodwill over 20 years is as follows:
Amortization expense ($48,000/240)
Accumulated amortization
$200
$200
Although the expense is usually recorded to an accumulated amortization account, it is usually netted
against the goodwill asset account in the financial statements. In other words, only the net asset amount
appears in the financial statements.
620.16 Organizational Costs. Newly-formed businesses generally incur various legal costs and other
expenses relating to establishing the legal entity. Because the IRS allows these costs to be recorded as
assets and amortized over a five year period, businesses will occasionally treat them the same way for
GAAP purposes. However, for GAAP purposes, these costs do not qualify as assets and should not be
capitalized. Thus, accounting personnel should expense the costs as incurred for book purposes if the
amounts are significant.
625 MAKING OTHER ADJUSTMENTS
625.01 In addition to the adjustments covered in the preceding sections, this section addresses the
following miscellaneous adjustments:
 Life insurance cash surrender value.
 Retained earnings adjustments. Life Insurance Cash Surrender Value
625.02 Key executive officers’ lives are frequently insured by the company using either whole life or
6-22
universal live cash surrender value (CSV) policies. Unlike term insurance policies, the policies have an
investment element that allows a portion of the premiums to accumulate as CSV. At any point in time, the
policy holder may use the CSV by borrowing against it (referred to as a policy loan), paying premiums
with it, or withdrawing it.
625.03 Traditionally, the company pays for the policies and is entitled to the CSV and any death benefits.
In these situations, the CSV is considered an asset of the company under generally accepted accounting
principles (GAAP). Thus, even though accounting personnel typically record the premiums as an
expense when they are paid, an adjustment is needed at period end to record the CSV portion of the
premiums as an asset. How often the adjustment is made (monthly, quarterly, or annually) generally
depends on the significance of the change in the CSV amount from one period to the next. Many
companies choose to make only an annual adjustment.
625.04 If the company has borrowed against the CSV amount, the monthly statement received from the
insurance company will show both the CSV amount and the policy loan amount. For GAAP purposes,
accounting personnel should report only the net amount (CSV less policy loan) as an asset in the
financial statements. The following example shows how to record CSV at period end.
625.05 Assume a company pays premiums of $2,000 per month for a traditional whole life CSV policy.
The company recently borrowed $10,000 from the policy and recorded the cash received by debiting
cash and crediting the CSV amount in the general ledger. Interest of $500 has accrued on the policy
loan. The policy has a $35,000 CSV at period end. Since the general ledger shows a $22,000 net CSV
balance at period end, the following computes the $2,500 CSV adjustment needed at month end:
CSV per most recent insurance statement
$ 35,000
Less policy loan
10,500
Net cash surrender value
24,500
CSV per general ledger
22,000
CSV adjustment needed
$ 2,500
625.06 Accounting personnel would make the following entry to record the increase in cash surrender
value at period end:
Cash surrender value (asset)
Insurance expense
$ 2,500
$ 2,500
625.07 The above accounting treatment assumes the company combines the cash surrender value and
policy loan payable amount into a single general ledger account. This is acceptable since many
companies do not intend to repay the loan amount or the interest. In other words, the borrowing is
permanent and interest payments are simply deducted from the company’s CSV amount. If the company
intends to repay the loan and make regular interest payments, accounting personnel may prefer to set up
a separate general ledger account for the policy loan.
625.08 The above paragraphs apply to the traditional CSV policy. However, with some CSV policies
(such as split dollar arrangements) the company may be entitled to only a portion of the cash surrender
value amount. In that situation, only the portion of the CSV that the company is entitled to should be
6-23
Making Accounting Adjustments with QuickBooks
recorded as an asset. Because the accounting for these nontraditional types of policies can be complex,
accounting personnel should consult the controller or outside CPA if this situation is encountered.
Retained Earnings Adjustments
625.09 Accounting personnel frequently encounter revenue and expense transactions that apply to the
income statement of a previous period’s general ledger that has already been closed. Since net earnings
in the current period will be misstated if the transaction is recorded in the current period, accounting
personnel will sometimes decide to record the transaction to retained earnings instead.
625.10 Generally accepted accounting principles (GAAP), however, severely restrict the types of
transactions that may be recorded to retained earnings. Although GAAP does permit adjustments to
retained earnings for significant prior period errors that accounting personnel discover in a later period,
the controller or outside CPA should usually be consulted before posting such a transaction to retained
earnings.
625.11 Thus, retained earnings in most small businesses should generally include only the prior period’s
ending retained earnings balance plus or minus the current period’s net earnings or loss. If the company
pays dividends to shareholders, the dividends should also be posted as a debit to the retained earnings
account.
630
TRACKING DEPRECIATION IN QUICKBOOKS
Setting Up Asset Accounts to Track Depreciation
630.01 Fixed assets are equipment or property your business owns that are not for sale. Since they last
a long time, you don’t completely charge their cost to the year in which you buy them. Instead, you
spread their cost over several years. But because fixed assets wear out or become obsolete, their value
declines constantly from the day you purchase them. The amount of this decline in value is called
depreciation.
630.02 To determine the estimated value of a fixed asset at any point in time, you need to subtract its
accumulated depreciation (total amount of depreciation since the asset’s purchase) from its original cost.
630.03 Usually, you’ll want your balance sheet to show the original cost of an asset (plus any subsequent
improvements) on one line, with the accumulated depreciation subtracted from the original cost on a
second line, and the current value (net) on a third line. The method you’ll learn in this section lets you
see each asset’s cost and its accumulated depreciation separately on your balance sheet. You set up a
separate fixed asset account for each asset, and two subaccounts under each fixed asset account: one
for cost and one for accumulated depreciation.
To set up asset accounts to track depreciation on a new trailer purchased by Rock Castle Construction:
1. In the chart of accounts window, click the Account menu button, and then choose
New.
QuickBooks displays the New Account window.
2. In the Type field, choose Fixed Asset from the drop-down list.
3. In the Name field, type Trailer.
4. Leave the opening balance blank, and click OK.
6-24
QuickBooks displays the new fixed asset account in the chart of accounts.
Now you need to add two subaccounts: one for the asset’s cost, and the other for
depreciation.
To add subaccounts:
1. In the chart of accounts window, click the Account menu button, and then choose
New.
2. In the Type field, choose Fixed Asset from the drop-down list.
3. In the Name field, type Cost.
4. Select the “Subaccount of” checkbox, and then select Trailer as the parent account.
5. Leave the opening balance blank.
The opening balance is the original cost of the asset, if you purchased the asset
before your QuickBooks start date. If you’re buying the asset now, as the owner of
Rock Castle Construction is, you leave the opening balance for the Cost account
blank. When you enter information about the loan Rock Castle Construction takes out
to pay for the truck (later in this section), you’ll update the Cost account with the
truck’s original cost.
Your screen should resemble the following figure.
6-25
Making Accounting Adjustments with QuickBooks
6. Click OK.
7. Repeat the previous steps to add a second subaccount to the Trailer fixed asset
account. Call the subaccount “Depreciation,” and leave the opening balance blank.
The New Account window should look like this.
6-26
When you complete these steps, your chart of accounts should look like this.
If you wish, you can change the order in which the accounts are listed by dragging
the Cost account to the position just above the Depreciation account (the same way
the accounts are displayed under the Trucks parent account).
Note: The amount you enter as the opening balance depends on whether you
acquired the asset after or before your QuickBooks start date. If you acquired the
asset after your QuickBooks start date, you don’t enter an opening balance.
If you acquired the asset before your QuickBooks start date, you enter the
accumulated depreciation of the asset as of the start date—entered as a negative
number.
Entering Depreciation Transactions
630.05 When it's time to enter depreciation for an asset, you can use the register for the asset's
accumulated depreciation account.
To enter a transaction for depreciation:
1. In the chart of accounts, select the Depreciation subaccount for the Trailer.
2. Click the Activities menu button, and then choose Use Register.
QuickBooks displays the register for the Trailer:Depreciation asset account.
3. In the Decrease column, type 1300 and press Tab. This is the depreciation amount.
4. In the Account field, select Depreciation Expense from the drop-down list.
Your register should resemble the following figure.
6-27
Making Accounting Adjustments with QuickBooks
5. Click Record.
6. Close the register window.
When you record the transaction, QuickBooks does the following:
 Subtracts the depreciation amount from the current value of the asset in the asset's
fixed asset account.
 Enters the depreciation amount as an increase to your company's depreciation
expense in the expense account that tracks depreciation.
Tracking a Loan with a Long-Term Liability Account
630.06 You’ve already added an asset account to track the value of the new trailer. Because the trailer
loan is not going to be paid off in a year or less, you need to add a long-term liability account.
To add a long-term liability account:
1.
2.
3.
4.
In the chart of accounts, click the Account menu button, and then choose New.
In the New Account window, select Long Term Liability in the Type drop-down list.
In the Name field, type Trailer Loan.
Leave the Opening Balance field blank.
Your screen should resemble the figure below.
6-28
5. Click OK.
QuickBooks displays the new liability account in the chart of accounts.
Because this is a new loan, you are either receiving money to deposit in your bank account or receiving a
new asset. In this example, you received an asset (the new trailer), so you need to show an increase in
the asset’s Cost account.
To record an increase in the asset’s Cost account:
1. In the chart of accounts, double-click the Trailer:Cost subaccount.
6-29
Making Accounting Adjustments with QuickBooks
QuickBooks displays the Trailer:Cost register.
2. In the Increase field, type 30,000.
3. In the Account field, select the Trailer Loan liability account from the drop-down list.
Make sure that you select the Trailer Loan long-term liability account, not the Trailer
fixed asset account.
4. Click Record.
Your screen should resemble the following.
5. Close the register window.
6. Close the chart of accounts.
When you complete these steps, QuickBooks increases the value of your Cost asset
6-30
account to 30,000. (This effectively sets the opening balance.) It also enters a liability
of 30,000 in the liability account you use to track the loan. (Again, this sets the
opening balance.)
Tracking Fixed Assets
630.07 You can enter the Trailer on the Fixed Asset Item list. Tracking fixed assets using the Fixed Asset
Item list enables you to record such information about an asset as purchase date and price, whether the
asset was new or used when purchased, and the asset's sale price if you decide to sell it. You can also
generate customizable reports listing all your fixed assets.
The information you enter in the Fixed Asset Item list does not transfer to the chart of accounts.
To create a fixed asset item:
1. From the Lists menu, choose Fixed Asset Item List.
QuickBooks displays the Fixed Asset Item list.
2. Click the Item menu button, and select New.
QuickBooks displays the New Item window.
6-31
Making Accounting Adjustments with QuickBooks
The item type is preset as Fixed Asset.
3. In the Asset Name/Number field, type Trailer.
4. Enter the following information to complete the Purchase Information section:





Item is: new
Purchase Description: Trailer
Date: 12/15/2007
Cost: 30,000
Vendor/Payee: East Bayshore Auto Mall
The New Item window should look like the following graphic.
6-32
5. Enter the following information to complete the Asset Information section:
 Asset Description: White trailer with company logo
 Serial Number: 123456789
 Warranty Expires: 12/15/2010
6. From the Asset Account drop-down list, choose Trailer:Cost.
The New Item window should look like the following graphic.
6-33
Making Accounting Adjustments with QuickBooks
7. Click OK.
8. Close the Fixed Asset Item list.
If you work with a bookkeeper who uses the QuickBooks Fixed Asset Manager (a
separate application used to work with fixed assets), he or she can determine the
depreciation of your assets and update your company file with that information. A
summary of information calculated in the QuickBooks Fixed Asset Manager and sent
to QuickBooks displays in the Fixed Asset Item list.
Recording a Payment on a Loan
630.07 When it's time to make a payment on a loan, use the Write Checks window to record a check to
your lender. You’ll want to assign part of the payment to a loan interest expense and the remainder to
loan principal.
To record a payment on a loan:
1. From the Banking menu, choose Write Checks.
QuickBooks displays the Write Checks window.
2. In the “Pay to the Order of” field, type Great and then press Tab.
QuickBooks fills in the field with Great Statewide Bank. If QuickBooks asks whether
you want to use the last transaction for this vendor, click No.
6-34
3. For the dollar amount of the check, type 500.00.
4. Click the Expenses tab, and then click in the Account column and choose the Interest
Expense:Loan Interest expense account from the drop-down list.
5. In the Amount column highlight the amount that QuickBooks prefilled and then type
225.00.
6. Assign the remainder of the expense (275.00) to the Trailer Loan liability
account.
7. Click Save & Close to record the payment.
When you record the transaction, QuickBooks automatically updates the accounts affected by this
transaction:
 In your checking account, QuickBooks subtracts the amount of the check from
your balance.
 In the expense account that tracks interest, QuickBooks enters the interest amount
as an increase to your company's interest expense.
 In the Trailer Loan liability account, QuickBooks subtracts the principal amount
from the current value of the liability (reducing the amount of your debt).
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Making Accounting Adjustments with QuickBooks
635
MAKING GENERAL JOURNAL ENTRIES IN QUICKBOOKS
QuickBooks General Journal Entries
635.01 In traditional accounting, a record of a transaction in which the total amount in the Debit column
equals the total amount in the Credit column, and each amount is assigned to an account on the chart of
accounts. For day-to-day transaction entry, QuickBooks uses familiar forms (invoices, bills, checks).
635.02 QuickBooks has a General Journal Entry window that you can use for special transactions (such
as selling a depreciated asset) or for all transactions if you prefer the traditional system.
635.03 Also, when you enter a transaction directly into an asset, liability, or equity account register,
QuickBooks automatically labels the transaction "GENJRNL" in the register and "General Journal" on
reports that list transactions.
635.04 General journal entries appear in the register for any balance sheet account involved and in
reports that include any balance sheet, income, or expense accounts entered in the Account field.
635.05 To open the Make General Journal Entries window go to the Bookkeeper menu and click Make
General Journal Entries or when you are using the Working Trial Balance window, click Make
Adjustments.
To make an adjusting entry in the Make General Journal Entries window:
1. Fill in the transaction date. To ensure proper reporting of adjusting entries, be sure to
use the last date in the accounting period (usually the last day of the month) as the
date for your adjustments.
2. Fill in the entry number.
If you have already created an adjusting entry, QuickBooks automatically populates
the Entry No. field with the next number. You can change this number; however,
QuickBooks does not monitor entry numbers. Be careful not to enter a duplicate
number.
3. Choose the adjusting entry checkbox.
4. In the detail area, enter the first account in your transaction, the debit or credit
amount, any memo, related name, and class. Continue to enter distribution lines until
your transaction reaches a zero balance.
5. Save the journal entry.
To view and print a report of adjusted journal entries:
1. Go to the Reports menu, choose Bookkeeper & Taxes, and then click Adjusting
Journal Entries.
2. Enter the date range in which you want to search.
3. Click Refresh.
4. Click Print.
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Maintaining the General Ledger in QuickBooks®
7
Table of Contents
Section
Description
Page
700
Introduction .......................................................................................................... 7-1
705
Overview: Controlling the Monthly Closing Process ........................................ 7-2
710
Maintaining General Ledger Supporting Workpapers ........................................ 7-4
715
Preparing Journal Entries .................................................................................... 7-12
720
Reviewing the General Ledger and Financial Statements ................................. 7-13
725
Backing Up and Storing General Ledger Records ............................................. 7-16
730
QuickBooks Year End Closing............................................................................. 7-17
735
QuickBooks Backup Options ............................................................................... 7-19
TOC 7-1
Maintaining the General Ledger in QuickBooks
TOC 7-2
Maintaining the General Ledger in QuickBooks®
700
7
INTRODUCTION
700.01 Processing and closing out the general ledger at month end is a stressful project in many small
businesses. Management often imposes tight deadlines to ensure financial reports are received timely
after month end. Financial statement deadlines of 10 days to one week or less are becoming the norm.
In addition, last minute problems related to analyzing and adjusting specific general ledger accounts
always seem to come up.
700.02 The tight deadlines and unexpected last minute problems encountered during month-end general
ledger closings often frustrate accounting personnel. However, the frustration and problems can be
reduced by following a simple closeout routine and using some basic tools, such as checklists and
workpapers.
700.03 This chapter includes the following key sections to help accounting personnel better handle
general ledger processing and closeouts:
 Overview: Controlling the Closing Process. Section 705 provides accounting
personnel with an overview of the closing process and suggestions, along with a closing
checklist, to help control the monthly closing process.
 Maintaining General Ledger Supporting Workpapers. Section 710 discusses five
types of workpapers that accounting personnel should maintain to support monthly
general ledger balances.
 Preparing Journal Entries. Section 715 discusses standard and adjusting journal
entries and how to better control them using a basic checklist.
 Reviewing the General Ledger and Financial Statements. Section 720 recommends
certain approaches that accounting personnel should use for reviewing the general
ledger and financial statements.
 Backing Up and Storing General Ledger Records. Section 725 provides guidance on
general ledger backup and storing hard copies and computer records.
 QuickBooks Year End Closing. Section 730 addresses QuickBooks year end closing.
 QuickBooks Backup Options. Section 735 addresses the various backup options with
your QuickBooks company data file.
705
OVERVIEW: CONTROLLING THE MONTHLY CLOSING PROCESS
705.01 General ledger processing is an ongoing activity in most small businesses. It consists of various
phases that are repeated each month. If the phases are performed in a routine and systematic manner,
the closing process becomes much more predictable and manageable.
705.02 This section discusses the following four phases that are common to a well managed monthly
general ledger closeout:




Phase One: Generating the General Ledger Trial Balance.
Phase Two: Generating the Preliminary Detailed General Ledger.
Phase Three: Generating the Preliminary Financial Statements.
Phase Four: Generating the Final Ledger and Statements.
7-1
Maintaining the General Ledger in QuickBooks
Accounting personnel generally should be able to limit the close out process to the steps covered in the
four phases. However, if unforeseen problems are encountered, an additional draft general ledger or
financial statement copy could be required in any of the phases.
705.03 Accounting personnel may use a summary closing checklist to control each phase of the closing
process. This checklist presents a brief, high-level summary of the key general ledger closing steps.
Certain steps that lend themselves to a more detailed checklist, such as preparing supporting
workpapers and specific journal entries, are supplemented by more detailed checklists discussed in
subsequent sections of this chapter. Each phase of the closing process is briefly discussed below.
Phase One: Generating the General Ledger Trial Balance
705.04 The first processing phase involves generating the general ledger trial balance. The trial balance
presents each account’s ending balance and the total of all general ledger debit and credit balances. In
contrast to a complete general ledger, it does not show any entries posted to the accounts. As discussed
in Paragraph 705.07, accounting personnel use the trial balance to ensure the general ledger is in
balance (that is, total debits equal total credits) and to obtain ending account balances for preparing
additional journal entries. If the accounting system offers this option, some accounting personnel prefer
to generate and use a summary general ledger for this phase instead of the general ledger trial balance.
705.05 Accounting personnel typically perform the following steps to generate the trial balance:
 Process and post summary journals. Most accounting transactions are processed
by accounting personnel throughout the month. These transactions, which are
covered in Chapters 3 through 5, generally consist of processing sales and cash
receipts, purchasing and cash disbursements, and payrolls. As transactions are
batched and processed, they are typically summarized on journals for posting to the
general ledger. At month end, accounting personnel must simply ensure that all
summary journals were posted to the general ledger.
 Make standard journal entries. Certain standard journal entries involving fixed
amounts, such as prepaid amortization and monthly accrual entries, can often be
made without knowing the preliminary ending general ledger balance. Before
generating the trial balance, accounting personnel should prepare and post these
standard journal entries. (If reversing entries are needed in the following month,
accounting personnel should also prepare them and file them in the next month’s
journal entry file. Reversing entries are discussed in Chapter 6, paragraphs 610.42.46.)
After completing the above steps, accounting personnel can then instruct the system to generate the
month-end general ledger trial balance. If adjustments were numerous, accounting personnel may wish
to generate a second trial balance or a summary general ledger before generating the preliminary
detailed general ledger.
Phase Two: Generating the Preliminary Detailed General Ledger
705.06 After generating the general ledger trial balance, the next phase involves using the trial balance
to generate a preliminary detailed general ledger. Unlike the trial balance, which just shows the ending
account balance, the detailed general ledger also presents the beginning of the month balance and
entries posted to each account during the month. As discussed in Paragraphs 705.08-.10, accounting
personnel use the preliminary detailed general ledger to identify any additional adjustments that might be
7-2
needed.
705.07 Accounting personnel typically use the trial balance to perform the following steps before
generating the preliminary detailed general ledger:
 Balance the trial balance. Accounting personnel should ensure that total debits
equal total credits per the trial balance. if not, the cause of the difference must be
determined.
 Reconcile appropriate accounts to supporting records. Accounting personnel
should agree ending asset and liability accounts to appropriate supporting records,
such as subsidiary ledgers, amortization schedules, or workpapers. (Section 710
discusses in more detail the appropriate workpapers for various accounts.) If
differences exist, accounting personnel must determine the reason for the difference.
 Prepare any required journal entries. After performing the above steps, accounting
personnel should prepare any adjusting journal entries that are needed. In addition,
accounting personnel should prepare any additional standard journal entries for which
the ending account balance was needed before the journal entry could be made.
After performing these procedures, accounting personnel should instruct the system to generate the
preliminary detailed general ledger.
Phase Three: Generating the Preliminary Financial Statements
705.08 After generating the preliminary detailed general ledger, accounting personnel should perform
certain procedures in preparation for generating the preliminary financial statements. The preliminary
financial statements generally include a summary of the general ledger accounts grouped into specified
balance sheet and income statement captions.
705.09 Before generating the preliminary financial statements, accounting personnel should scan
account balances and monthly activity in the preliminary detailed general ledger to identify any unusual
items. Accounting personnel are typically looking for account coding errors or other posting errors not
detected earlier. However, finding errors at this stage is more difficult and requires an experienced
person who is very familiar with the company’s overall accounting process.
705.10 Accounting personnel should note any unusual items and prepare adjusting journal entries when
needed. After posting the journal entries, accounting personnel should instruct the system to generate
the preliminary financial statements.
Phase Four: Generating the Final Ledger and Statements
705.11 After generating the preliminary financial statements, accounting personnel should review the
balance sheet and income statement amounts for reasonableness. This review represents a high level
analytical review of financial statement amounts to locate unusual items indicating a possible undetected
error.
705.12 The controller or accounting manager sometimes performs this analytical review of the
preliminary financial statements. The reviewer typically notes any unusual items and follows up on them
personally or with the help of other accounting personnel. If an error is detected, accounting personnel
should prepare an adjusting journal entry to correct the accounts. Section 720 discusses the review
process in more detail.
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Maintaining the General Ledger in QuickBooks
705.13 After posting any additional adjusting entries, accounting personnel may wish to generate a
revised set of preliminary financial statements if adjustments were numerous. Otherwise, accounting
personnel should instruct the system to generate the final general ledger and financial statements for
distribution to management.
710
MAINTAINING GENERAL LEDGER SUPPORTING WORKPAPERS
710.01 Closing out the general ledger accurately and in a timely manner is extremely difficult without
supporting workpapers. The workpapers show what makes up the balance sheet account balances and
reduce time spent constantly analyzing account balances. At month end, the workpapers are updated
and agreed to general ledger balances. If the two amounts agree, accounting personnel have additional
assurance that the general ledger balances are accurate.
710.02 Accounting personnel should maintain supporting workpapers for most general ledger accounts.
The types of supporting workpapers and the methods for generating them vary by account. The various
types of supporting workpapers include those generated manually and by computer spreadsheets, as
well as those generated by the accounting system itself, such as subsidiary ledgers and amortization
schedules.
710.03 Accounting personnel should use the most efficient type of workpaper for each account.
Whenever possible, accounting personnel should rely on workpapers and records generated
automatically by the accounting system instead of those that require manual input or preparation.
710.04 This section discusses the following five basic types of supporting workpapers appropriate for
most small businesses:





Bank reconciliation workpapers.
Subsidiary ledger reconciliation workpapers.
Amortization schedules.
Continuing workpaper schedules.
Detailed account analysis schedules.
Exhibit 7-1 presents an overview of the common balance sheet accounts and the type of supporting
workpapers generally used. Accounting personnel should maintain a monthly closing binder that includes
the closing checklists and related supporting workpapers. In addition to the closing workpapers
discussed in this section, Chapter 6 discusses various workpapers used for making monthly journal
entries.
Bank Reconciliation Workpapers
710.05 This workpaper category is simply a copy of the bank reconciliation prepared for each of the
company’s checking accounts. The basic bank reconciliation generally provides sufficient supporting
documentation for the company’s checking accounts since it reconciles the general ledger balance with
actual cash in the bank.
710.06 The reconciliation is frequently manually prepared, but many accounting systems now include
features that automate the reconciliation process. Chapter 3, paragraphs 325.02-.07, provides guidance
on preparing a bank reconciliation.
7-4
710.07 Accounting personnel should simply list each checking account on the a supporting workpapers
checklist. The assigned person should initial and date the spaces provided on the checklist when the
related account has been reconciled and any required adjustments have been made.
Subsidiary Ledger Reconciliation Workpapers
710.08 Subsidiary ledgers serve as the primary supporting records for many significant balance sheet
accounts, such as trade accounts receivable, inventory, fixed assets, and accounts payable. The
workpaper showing the reconciliation of the subsidiary ledger to the general ledger represents the
supporting workpaper for these accounts.
710.09 The supporting workpaper should simply compare the general ledger balance for the applicable
account to the related subsidiary ledger and identify any reconciling items. Differences are usually
caused by journal entries posted to the general ledger that were not posted to the subsidiary ledgers.
Exhibit 7-2 presents a sample reconciliation of trade accounts receivable to the general ledger.
7-5
Maintaining the General Ledger in QuickBooks
Exhibit 7-1
Supporting Workpapers for Common General Ledger Accounts
Workpaper Category
Account
Assets:
Cash
CDs
Securities
Receivables:
Trade
Notes
Other
Prepaids
Inventory
Fixed assets
Suspense
Other
Liabilities:
Trade payables
Accruals
Line of credit
Long-term debt
Suspense
Equity:
Capital stock
Retained
earnings
1
Bank
Subsidiary
Reconciliation
Ledger
Amortization
Copy
Reconciliation
Schedule
Continuing
Workpaper
Schedule1
Detailed
Account
Analysis
Schedule1
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
If continuing workpapers or detailed account analysis schedules are essentially functioning as
subsidiary ledgers to show the composition of the ending balance, eliminating the workpapers is
sometimes possible by simply using additional general ledger subaccounts.
7-6
Exhibit 7-2
Accounts Receivable Subsidiary Ledger Reconciliation Workpaper
Company Name: ABC Electronics, Inc.
Prepared by: D. Jones
Month End: October 31, 2008
Date Prepared: November 4, 2008
G/L Account Name: Accounts Receivable
G/L Account Number: 115
Description
Balance per general ledger
PART A: RECONCILIATION
Preliminary
Correction
Balance
Needed
$ 350,000
$ 10,000
Balance per subsidiary ledger
$ 377,000
Difference: G/L over (under) sub. Ledger
$ (27,000)
$ (17,000)
$ 27,000
(From Part B)
PART B: DETAIL OF DIFFERENCES
Description
Date
Ref. No.
Items in general ledger, not in subsidiary ledger:
Account write-offs (not posted to sub
10/28/05
JE-1043
ledger)
Items in subsidiary ledger, not in general ledger:
Sales (batch not posted to G/L)
Total Difference
10/31/05
Adjusted
Balance
$ 360,000
$ 360,000
$
0
Amount
$ (17,000)
S-102
$ 10,000
To Part A:
$ (27,000)
7-7
Maintaining the General Ledger in QuickBooks
710.10 Part A of Exhibit 7-2 reflects a $27,000 net difference between the accounts receivable general
ledger account and its subsidiary ledger. The difference is made up of two errors as shown in Part B. The
first error was caused by a $17,000 general ledger write-off for accounts considered uncollectible, which
were not adjusted off the subsidiary ledger. The second error resulted from a $10,000 batch of sales
invoices that was posted to the subsidiary ledger but not to the general ledger.
710.11 When the related account has been reconciled and any required adjustments have been made,
the assigned person should initial and date the reconciliation.
Amortization Schedules
710.12 Amortization schedules should serve as the primary supporting workpapers for accounts whose
monthly balances decline by a predictable amount, such as prepaid assets and long-term debt with fixed
principal and interest payments. The schedules generally show the beginning balance and monthly
decreases until the balance reaches zero.
710.13 Accounting personnel simply set up an amortization schedule (either manually or using the
computer) when entering into the original transaction, such as purchasing a one-year insurance policy.
The schedule is then used to record monthly amortization transactions. At month end, accounting
personnel compare the amounts per the schedule to the related general ledger balances. If the schedule
has been prepared accurately and updated when any changes occur, the schedule provides accounting
personnel with monthly check figures for comparison to the related general ledger balances.
710.14 Accounting personnel can generally obtain amortization schedules for the company’s long-term
debt by requesting copies from the company’s lenders or by creating them using common commercial
software packages.
710.15 Accounting personnel should list the accounts subject to amortization. As monthly general ledger
balances are agreed to the amortization schedules, assigned personnel should simply initial and date the
checklist in the spaces provided.
Continuing Workpaper Schedules
710.16 Subsidiary ledgers and amortization schedules are generally not appropriate for monitoring
certain key accounts. For these accounts, continuing workpaper schedules are usually best. Continuing
workpaper schedules, in essence, play a role similar to subsidiary ledgers, but the schedules are
updated manually by accounting personnel instead of automatically by the accounting system. The
schedules are typically updated as each transaction occurs, instead of waiting until month end. Common
continuing workpaper schedules are discussed in the following paragraphs.
710.17 Certificates of Deposit (CD) Workpaper. Continuing workpaper schedules are often used to
keep track of key information on CDs (for example, financial institution’s name, balance outstanding, date
purchased, maturity date, interest rate) and related interest income. At month end, accounting personnel
should agree workpaper amounts (CD balance, accrued interest, and interest income) to the
corresponding amounts in the general ledger.
710.18 Notes Receivable Workpaper. Since most companies only have a few notes receivable
outstanding at any time, continuing workpapers work well for monitoring them. Similar to CD workpapers,
the workpaper tracks key information about the notes (debtor’s name, original and current outstanding
balance, due dates, interest rates, principal and interest received, and interest due).
7-8
710.19 Exhibit 7-3 presents a sample notes receivable continuing workpaper schedule. It shows activity
on a $20,000 note receivable from ABC Supply Co. Principal payments of $2,000 are due at the end of
each quarter, and interest at a 10% annual rate is due monthly.
Exhibit 7-3
Sample Notes Receivable Workpaper
Debtor Company’s Name: ABC Supply Co.
Principal Payments: $2,000 at each quarter end
(a)
(b)
(c)
(d)
(e)
Contact Person: Dave Thomas, President
Interest Payments: 10% rate; due monthly
(f)
(g)
(h)
(i)
Interest Activity
Transactions
Description
Date
Principal Activity
Increase
Cumulative
(Decrease)
Balance
Beg. Bal +
(c)
Interest Rate
Data
Days
Rate
O/S
Beginning Bal.
7/1/05
$20,000
10%
M/E calculation
7/31/05
$20,000
10%
Interest receipt
8/5/05
M/E calculation
8/31/05
$170
$(170)
$(170)
M/E calculation
P&I receipt
31
Interest Income/Receipts
Interest
Interest
Income
Received
Diff. (int. due)
(d)x(e)/365
x(f)
(g)-(h)
$(2,000)
$20,000
10%
31
$170
$20,000
10%
30
$164
$18,000
$
0
$(170)
$(334)
$(334)
$
0
710.20 Exhibit 7-3 shows that ABC Supply Co. made the July 31 interest payment on August 5. The
August 31 and September 30 interest payments and the September 30 principal payment were not made
until October 6. At each month end, the schedule calculates interest income (column g) for that month.
Any difference between calculated interest income and interest received is shown as interest due in the
last column. At month end, accounting personnel would calculate and record accrued interest income
due (see Chapter 6, paragraphs 610.34-.35) and agree the ending note balance, interest income, and
accrued interest receivable to the general ledger.
710.21 Line of Credit Workpaper. Continuing workpapers also work well for companies with
outstanding lines of credit with a bank or other financial institution. The worksheet is very similar to the
note receivable workpaper presented in Exhibit 7-3. A line of credit workpaper typically shows more
activity than a note receivable workpaper since the principal balance fluctuates and rates generally vary
with the prime rate. At month end, accounting personnel would calculate and record accrued interest
expense (see Chapter 6, paragraphs 610.13-.17) and agree the ending line of credit balance, interest
expense, and accrued interest payable to the general ledger.
710.22 Equity Accounts Workpaper. The equity accounts workpaper simply lists the number of shares
outstanding and the related par value and paid-in-capital amounts. However, unless a company has
occasional capital activity, such as stock offerings or buybacks, this workpaper will not require regular
updating during monthly closeouts. Exhibit 7-4 presents a sample equity accounts workpaper.
7-9
Maintaining the General Ledger in QuickBooks
Exhibit 7-4
(a)
Description
Sample Equity Accounts Workpaper
(b)
(c)
(d)
(e)
(f)
No. of
Shares
Par
Pref.
Stock
Comm.
Stock
Date
(g)
(h)
(i)
General Ledger Amounts
Paid-in
Retained Treasury
Capital
Earnings
Stock
$50,000
(j)
Total
Equity
Original issue
1/1/04
10,000
$5
$ 50,000
Original issue
2004
earnings
1/1/04
20,000
$1
EOY balance
12/31/04
Buy back C/S
6/30/05
Pay dividend
2005
earnings
12/30/05
$(20,000)
$(20,000)
12/31/05
$ 75,000
$ 75,000
EOY balance
12/31/05
$20,000
$130,000
12/31/04
$50,000
$20,000
$130,000
$150,000
$ 45,000
$ 45,000
$ 45,000
$ 45,000
(5,000)
$(70,000)
$50,000
$20,000
$130,000
$100,000
$(70,000)
$(70,000)
$230,000
710.23 Exhibit 7-4 lists activity in each of the equity accounts. It begins by showing the number of shares,
par value, and the paid-in-capital amounts for both the preferred and common stock issues. The
workpaper was updated through 12/31/X3 by simply adding 1 9X3 earnings of $45,000. The workpaper
was updated through 12/31/X4 by reflecting 5,000 shares of common stock that were bought back by the
company for $70,000. (The stock is considered treasury stock, which is reflected as a negative amount
on the workpaper.) The workpaper also reflects a $20,000 decrease in retained earnings because of a
dividend paid to common stockholders on 12/30/X4. Finally, retained earnings was increased to reflect
2005 earnings of $75,000.
710.24 Accounting personnel should update the schedule on a monthly basis when equity activity other
than normal monthly earnings or losses occurs. Balances should then be agreed to the corresponding
general ledger balances. If the retained earnings account does not agree with the workpaper because it
appears to include unusual entries, accounting personnel should prepare a detailed analysis of the
account (as discussed in the following paragraphs) to isolate the entries.
Detailed Account Analysis Schedules
710.25 Detailed account analysis schedules are generally prepared at month end to determine the
makeup of a general ledger account balance. In contrast to continuing workpaper schedule detailed
account analysis schedules are prepared after the general ledger has been closed.
710.26 A detailed account analysis can be prepared on an as-needed basis for any account, but they are
often routinely prepared for suspense accounts and miscellaneous assets or liability accounts. They are
also occasionally prepared to analyze nonreversing accrued liability accounts and retained earnings.
After preparing a detailed account analysis, accounting personnel can then decide what should be in the
account balance and make any required adjusting entries.
7-10
710.27 Because of the time required to routinely analyze account balances, accounting personnel should
take steps to reduce the number of accounts for which detailed account analyses are prepared each
month. For example, an account analysis is frequently needed because a single general ledger account,
such as miscellaneous accrued liabilities, is used to capture several similar, but unlike transactions. The
detailed account analysis is prepared to separate the transactions into like categories. In this situation, it
is often preferable to simply set up separate general ledger accrued liability accounts for capturing each
transaction.
710.28 The process for preparing the detailed account analysis workpaper is straightforward. Accounting
personnel start by listing on a four-column worksheet what entries make up the beginning balance in the
account. Accounting personnel then obtain the general ledger detail of entries posted to the account for
that month and cross out those that offset each other. Entries that do not offset each other make up the
ending balance. Once the ending balance’s composition is known, accounting personnel should then
review each item to decide whether the overall account balance is proper.
710.29 Exhibit 7-5 illustrates a detailed account analysis for the employee advances general ledger
account. It begins by showing the composition of the $3,785 beginning balance and the general ledger
debit and credit activity for the current period. The last column shows the makeup of the $2,248 balance
remaining after netting out like terms.
7-11
Maintaining the General Ledger in QuickBooks
Exhibit 7-5
Detailed Account Analysis—Employee Advances
Account Name: Employee Advances
Prepared by: L. Church
Date
Journal
Description
Account Number: 165-01
Date Prepared: 12/04/07
General Ledger Activity for the Current Period
Beginning
Ending
Balance
Debit Credit
Balance
Net Ending Balance
Composition of beginning balance:
9/29/05
D. Kelly advance
10/07/05
T. Wilson due
10/25/05
S. Moody advance
2000
2000
(65)
(65)
1850
0
0
1850
0
550
25
2027
(27)
Current period general ledger activity:
11/01/05
AP-03
B. Thomas advance
11/08/05
PR-01
D. Kelly travel expenses
11/10/05
AP-03
S. Smith advance
11/12/05
AP-08
T. Wilson—balance due
11/18/05
AP-09
S. Moody travel expenses
11/20/05
AP-12
G. Ramey advance
11/28/05
AP-17
T. Malone
11/29/05
PR-03
B. Thomas travel expense
550
2027
800
800
800
65
65
0
1900
3785
1900
(50)
1000
1000
1000
500
500
500
525
525
0
4452
2248
2248
2915
710.30 Accounting personnel may complete the detailed account analysis manually or by using a
computer spreadsheet, such as Microsoft Excel.
715
PREPARING JOURNAL ENTRIES
715.01 Journal entries generally fall into two categories: standard journal entries and adjusting journal
entries. Standard journal entries are prepared to make regular entries to the general ledger, such as
those discussed in Chapter 6. Adjusting journal entries are made to correct errors noted in the general
ledger. As a general rule, standard journal entries are made earlier in the monthly closing process and
adjusting journal entries are made in the later stages. Also, as discussed in Chapter 6, paragraphs
610.42-.46, certain standard and adjusting journal entries also require “reversing entries” in the following
month. Journal entries are typically filed in a separate three-ring binder for each month.
Journal Entry Checklist
715.02 Accounting personnel can better control journal entries during the closing process by using a
7-12
journal entry checklist. The checklist should be separated into standard entries and adjusting entries.
Each checklist should include the journal entry number, description, person assigned to the journal entry,
and space for the person to sign off each one as it is completed. In addition, accounting personnel
should indicate whether or not the entry should be reversed in the following month.
Journal Entry Form
715.03 A standard form is generally used to document both standard and adjusting journal entries.
However, since the account numbers and sometimes the amounts are the same each month for
standard journal entries, accounting personnel typically complete a form for each standard entry and
photocopy it for use in subsequent months. The photocopies are often placed in the journal entry binders
for each month.
715.04 To distinguish reversing from non-reversing journal entries, some accounting personnel find it
helpful to use different color paper when photocopying the form. For example, journal entries that do not
require reversals could use white paper, those that require reversals could use blue paper, and the
actual reversing entries could use yellow paper. This color coding allows controllers to determine quickly
whether all required reversing entries have been made.
715.05 After completing a journal entry form, accounting personnel should attach any supporting
documentation and file the journal entry and supporting documentation in the journal entry binder for that
month. Alternatively, some bookkeepers prefer to file the supporting documentation for journal entries in
the monthly closing binder mentioned in Paragraph 710.04. Chapter 6 provides guidance on the
appropriate supporting documentation for specific journal entries.
720
REVIEWING THE GENERAL LEDGER AND FINANCIAL STATEMENTS
720.01 As the general ledger and related financial statements are generated, accounting personnel
perform various procedures to help ensure their accuracy. Certain procedures, such as completing the
general ledger closing checklists and supporting workpapers, are covered in earlier sections of this
chapter. This section deals primarily with how to perform an effective review of the general ledger and
statements to detect possible errors. The general ledger review tends to focus more on balance sheet
accounts, whereas the financial statement review focuses more on income statement accounts.
General Ledger Review
720.02 The review process for the general ledger generally consists of scanning the ending balances
and the entries posted to each general ledger account to detect any unusual entries or unexpected
ending balances. This review should be done by an accounting person with an in depth knowledge of the
general ledger accounts. Otherwise, the odds of identifying an entry that is out of the ordinary or an
unreasonable ending balance will be low.
720.03 Although the review’s effectiveness generally depends on the reviewer’s abilities and experience,
some common “red flags” that may indicate a problem in a specific account include the following:
 Debit vs. credit balance. Some accounts naturally carry debit balances (assets and
expenses) and others carry credit balances (liability, equity, and revenues), if one of
these accounts are unexpectedly in a debit or credit position, there may be a potential
problem.
 Debit vs. credit postings. Similar to the above, some accounts normally receive
7-13
Maintaining the General Ledger in QuickBooks




debit entries (expense accounts) and others receive credit postings (revenues). If
credit entries were posted to an expense account or debit entries were posted to a
revenue account, further investigation may be warranted.
Unusually large or small amounts. Most accounts have a normal monetary range
of transactions. Unusually large or small amounts may indicate coding or data entry
errors.
Unexpected posting source. Some accounts primarily receive postings from
specified journals. For example, entries to accounts receivable typically come from
the sales and cash receipts journals. Entries to salaries and labor accounts typically
come from the payroll journal. If entries from other journals are noted, the entries may
have been misposted.
Beginning and end of period balances. Balance sheet account balances are often
comparable from one period to the next. If the ending balance for an account differs
significantly from the balance at the beginning of the period, a potential problem could
exist.
Absence of an entry. Most accounts have one or more types of journal entries that
are regularly posted to them each month. If one of these entries seems to be missing,
accounting personnel may need to follow up.
720.04 Normally, the extent of the general ledger review will depend on the effectiveness of other
procedures. For example, if accounting personnel maintain comprehensive supporting workpapers (see
Section 710) or perform an extensive analytical review of the financial statements (see Paragraphs
720.07-.14), a less-detailed general ledger review will usually suffice.
720.05 When performing the general ledger review, accounting personnel should typically make “review
notes” on a separate sheet of paper. Each review comment should be sequentially numbered and, if
possible, assigned to a specific person to resolve. Each comment should leave room for a response after
the potential problem has been investigated.
720.06 After the review comments have been cleared, they should also be filed for future reference in the
closing binder with other closing checklists and workpapers. If several accounting persons will be
answering the review comments, photocopies of the review comments should be given to all employees
to respond to those comments assigned to them.
Financial Statements Review
720.07 Unlike the detailed, account-by-account approach used when reviewing the general ledger, the
financial statement review uses a high-level analytical review approach. This approach takes a big
picture look at the company’s overall financial statements. In other words, instead of assessing the
reasonableness of an amount by looking at it in isolation, the analytical approach assesses the
reasonableness of an amount by comparing it to other amounts and relationships within the financial
statement. The type of review generally varies depending on whether balance sheet or income statement
accounts are being reviewed.
720.08 Income Statement. Analytical procedures are generally very effective when applied to income
statement amounts. Certain income statement amounts are often fairly fixed from one period to the next,
while others tend to fluctuate in relation to sales. Once these relationships are understood, accounting
personnel can use them to identify potential income statement errors.
720.09 Most general ledger packages generate income statements that show current period and year-to-
7-14
date (YTD) amounts. Frequently the statements also show side-by-side comparisons to the
corresponding amounts for the prior year or to the current budget. In addition, the packages often show
each income statement line item as a percentage of sales.
720.10 Accounting personnel should determine each line item’s general nature (that is, remains relatively
constant or fluctuates with sales) and use the information each month to review the income statement
amounts. Accounting personnel should then review each income statement line item by performing the
following activities:
 Comparing the current period amount to the corresponding amount for the prior year
(and/or the current year budgeted amount).
 Comparing the current YTD amount to the prior YTD amount.
 Reviewing the reasonableness of the current period and current YTD amounts as a
percentage of sales.
Depending on how the amounts are presented in the financial statements, accounting personnel may
wish to focus first on all of the current period amounts and then review the YTD amounts.
720.11 If any income statement amounts seem out-of-line, the reviewer should document the situation for
resolution. Accounting personnel can then review specific general ledger entries to determine if errors
may have occurred.
720.12 Balance Sheet. In comparison to income statement amounts, balance sheet amounts are
typically less predictable from one period to the next. Therefore, analytical reviews are generally less
effective on balance sheet amounts. Even though balance sheet analytical reviews are less precise, they
are still an important review technique for ensuring that accounting personnel step back and look at the
overall reasonableness of balance sheet amounts.
720.13 Similar to income statements, analytical reviews on balance sheets generally include comparing
current period balances with the corresponding balances for the prior year or prior month. Percentage
comparisons are less useful, but occasionally accounting personnel will compute the percentage of each
balance sheet line item to total assets (or to total liabilities plus equity) and compare the percentage to
the company’s historical percentages.
720.14 The reviewer should note any balances that appear out of line. Accounting personnel can then
review the accounts comprising the particular balance sheet line item and the entries posted to the
accounts for any unusual items.
725
BACKING UP AND STORING GENERAL LEDGER RECORDS
725.01 Accounting personnel should regularly back up the general ledger records to allow the files to be
restored in case of a system failure or disaster. Also, to protect the backed up files from destruction, a
backup set should be kept off premises. This section discusses the typical backup process and
traditional backup devices.
Backup Process
725.02 Accounting personnel generally should back up the accounting system’s data files daily. If the
company is subject to frequent system failures resulting from electrical or system problems, more
7-15
Maintaining the General Ledger in QuickBooks
frequent backup may be necessary until the problems are resolved. Typically, the backup is done either
at the end of the day or during evening hours if the backup is time consuming. As discussed in
Paragraphs 725.05-.06, floppy disks and magnetic tapes are the most common backup devices for small
businesses.
725.03 Accounting personnel should use a daily rotation of diskettes or tapes (one for each workday)
when backing up data files. In other words, each tape or set of diskettes should be labeled for each
workday and used for data backup on that day. The daily backup disks are rotated so that each is reused
once a week. Since accounting data files sometimes become damaged for various reasons, this
rotational method helps ensure a good backup copy still exists even if damaged files go undetected for a
day or so. If only a two-day rotation is used, accounting personnel may erroneously back up bad data
(say, because of a data-integrity error) over both copies, which eliminates any possible recovery.
725.04 At least once a week, accounting personnel should store one backup set off-site to allow
recovery from a fire or other disaster. When taking next week’s backup off-site, the previous week’s
backup may be returned to the backup rotation. At the close of the accounting period, a special backup
should be labeled properly and stored off-site. The diskettes or tapes used for the monthly backup should
be different from the daily sets. A similar backup process should be performed at the fiscal year end with
two copies retained (an on-site copy and an off-site copy). A backup copy of the program files should
also be made at year end to ensure the data files can be read after restoring them. Periodically,
accounting personnel should restore the backup diskettes or tapes into a test directory to verify that
proper backup procedures were followed and the backup process is working.
Backup Devices
725.05 As mentioned above, backup copies of data files are usually made either on diskette or magnetic
tape. When using diskettes, high density floppy disks are preferable because they reduce the time and
effort required to back up. If the backup process requires several diskettes, the time required to run the
procedures may be excessive, increasing the chances that the accounting person responsible for making
the backup will neglect to do so. To reduce the number of diskettes required, companies frequently
purchase backup programs that compress the data before copying it to the diskette.
725.06 When using a tape backup system, all data files can be backed up with the push of a button.
Often, one tape can back up all of the necessary data files with minimal staff involvement. A tape backup
system not only saves accounting personnel time (when compared to a disk backup), but it also reduces
the likelihood that improper backup procedures will be performed. When using tape backups, accounting
personnel should change the tapes periodically because they can become worn or stretched with
frequent use.
730
QUICKBOOKS YEAR END CLOSING
730.01 You can choose whether to close your books at the end of the year or not. QuickBooks doesn't
require you to do so.
Advantages to Closing Your Books:
 Restricted access: You can set a password to restrict access to data from the prior
accounting period, including the details of every transaction. Transactions can't be
changed without your knowledge. To modify or delete a transaction in a closed period, a
user must know the closing date password and have the appropriate permissions.
7-16
 Reporting: Any changes made after the closing date to transactions dated on or before
the closing date will appear in the closing date exception report.
Advantages to not Closing Your Books:
 Detail: You always have easy access to last year's data, including the details of every
transaction.
 Reporting: You can create comparative reports between this year and last year.
Year-end Adjustments QuickBooks Makes Automatically
730.02 QuickBooks performs certain year-end adjustments, based on your fiscal year start month.
 QuickBooks adjusts your income and expense accounts at year-end to zero them out.
Therefore, you start your new fiscal year with a zero net income.
 QuickBooks makes an adjusting entry to your net income. For example, if your profit for
the year was $12,000, on the last day of your fiscal year the equity section of your
Balance Sheet would show a line for net income of $12,000.
 On the first day of the new fiscal year, QuickBooks increases your Retained Earnings
equity account by the previous year's net income ($12,000 in this example) and
decreases your net income by the same amount. This way, you start each new fiscal year
with a net income of zero.
Setting a Closing Date
730.03 You close your books in QuickBooks by setting a closing date. You can also limit access to the
closed accounting period by setting a closing date password.
730.04 If you decide to set a password, QuickBooks requires the password for changes that would alter
balances for the accounting period you have closed. This includes adding, modifying, or deleting
transactions dated on or before the closing date. You can change the password at any time.
To set a closing date and closing date password:
1. Open the accounting preferences.
2. Click the Company tab.
3. In the Closing Date section at the bottom of the window, select the date through
which you want your books to be closed.
4. (Optional, but recommended) Create a password to limit access to the closed
accounting period.
a. Click Set Password.
b. Enter the new password in both the Password and Confirm Password fields.
c. Click OK.
5. Click OK.
QuickBooks has a QuickBooks Year-End Guide that shows you how to wrap up the business year,
archive your QuickBooks files, and get ready for the new year. In addition, QuickBooks also has a link to
a QuickBooks Year-End Center that provides news and updates, FAQs, and tips to help make your yearend transition as smooth as possible.
7-17
Maintaining the General Ledger in QuickBooks
QuickBooks General Ledger Report
730.05 This report shows the activity in your accounts over a specific period of time. For each account in
your chart of accounts, the report shows all the transactions that occurred in that account. The report
covers the current month to date. To change the period covered, click the Dates drop-down list and
choose a different date range. To open any of the transactions listed, double-click the transaction.
730.06 By default this report displays the adjustments column, which indicates if an account has had any
manual adjustments made to it. If you prefer, you can hide the adjustments column.
730.07 By default this report is collapsed; in other words, for each item containing multiple amounts,
QuickBooks combines the amounts into a single amount. Shortening the report in this fashion makes it
easier to print.
QuickBooks General Journal Entries
730.08 In traditional accounting, a record of a transaction in which the total amount in the Debit column
equals the total amount in the Credit column, and each amount is assigned to an account on the chart of
accounts. For day-to-day transaction entry, QuickBooks uses familiar forms (invoices, bills, checks).
730.09 QuickBooks has a General Journal Entry window that you can use for special transactions (such
as selling a depreciated asset) or for all transactions if you prefer the traditional system.
730.10 Also, when you enter a transaction directly into an asset, liability, or equity account register,
QuickBooks automatically labels the transaction "GENJRNL" in the register and "General Journal" on
reports that list transactions.
730.11 General journal entries appear in the register for any balance sheet account involved and in
reports that include any balance sheet, income, or expense accounts entered in the Account field.
730.12 To open the Make General Journal Entries window go to the Bookkeeper menu and click Make
General Journal Entries or when you are using the Working Trial Balance window, click Make
Adjustments.
To make an adjusting entry in the Make General Journal Entries window:
1. Fill in the transaction date. To ensure proper reporting of adjusting entries, be sure to
use the last date in the accounting period (usually the last day of the month) as the
date for your adjustments.
2. Fill in the entry number.
If you have already created an adjusting entry, QuickBooks automatically populates
the Entry No. field with the next number. You can change this number; however,
QuickBooks does not monitor entry numbers. Be careful not to enter a duplicate
number.
3. Choose the adjusting entry checkbox.
4. In the detail area, enter the first account in your transaction, the debit or credit
amount, any memo, related name, and class. Continue to enter distribution lines until
your transaction reaches a zero balance.
5. Save the journal entry.
To view and print a report of adjusted journal entries:
7-18
1. Go to the Reports menu, choose Bookkeeper & Taxes, and then click Adjusting
Journal Entries.
2. Enter the date range in which you want to search.
3. Click Refresh.
4. Click Print.
735
QUICKBOOKS BACKUP OPTIONS
735.01 You can backup your QuickBooks data file:
 Have QuickBooks back up your data file when you close it with no prompting from
you. This is the simplest option. On the Schedule a Backup tab of the QuickBooks
Backup window, select Automatically back up data when closing data file and type a
number in the field provided to determine how frequently your data is backed up.
QuickBooks will automatically back up your data when you close the company file.
How often it does so depends on the number you specified.
You can't choose the name or location of the backup file. The last three backups will
be automatically saved to the /Autobackup directory in the directory where you
installed QuickBooks. Older backups will be overwritten.
 Manually back up your data to a writable CD or other local media. You can even have
QuickBooks remind you to back up your company file each time you close it (or at
whatever interval is convenient for you).
This option gives you maximum control over your backups. You can choose a
filename for your backup and where you want to save it each time you back up, or
you can set default values. You can also have the date and time automatically
appended to each backup so you don't overwrite previous backups.
Note: This option is the most flexible but requires the largest investment of your time.
 Schedule automated daily backups to your local media.
Once you set the schedule and how many backups you want to keep, you're done.
Note that at the scheduled time of backup your computer must be on and the data file
you want backed up must be closed (however, you can be working in another
QuickBooks data file).
 You can backup your data online using the Online Backup Service.
If you register for and use this service, you will no longer need to remember to make these
backups, nor will you need to worry about loss or damage of local storage media.
Backing Up Your Data
735.02 Back up your QuickBooks company files daily. Backup copies are important insurance—if you
lose data for any reason, you can restore the data from your backup copy.
7-19
Maintaining the General Ledger in QuickBooks
You can choose to:
 Back up locally to a CD drive or other local media
 Schedule local backups to occur when you close your company file or at regular intervals
 Automate your backup routine using the Online Backup service.
Backing Up Manually to a CD
735.03 To back up your QuickBooks company file to a CD, you must have a read-writable CD drive and
software for writing to a recordable CD.
735.04 A read-writable CD drive will be labeled a CD-R or CD-RW drive. This type of CD drive allows
you to write to a recordable CD, otherwise known as "burning a CD."
735.05 If your computer is running Microsoft® Windows XP, software for writing to a recordable CD is
included your operating system. If you are running an operating system other than Windows XP, you
must use third-party CD writing software. In most cases, this software comes with your CD-R or CD-RW
drive.
Back Up Manually to Local Media
735.06 Use this procedure to back up your company file to local media, such as a 3.5 inch diskette, Zip
disk, or tape.
Note: If you are backing up to a recordable CD, refer to the information about CD backups.
1. Go to the File menu and click Back Up. Make sure the Back Up Company File tab is
selected.
2. (Optional) If you want to change the name or location that QuickBooks suggests for
the backup file, type your changes in the Filename and Location fields. If necessary,
click Browse to browse to the new location.
3. (Optional) Set backup defaults. Click Set Defaults and specify the defaults for your
manual backups.
4. (Optional) Select backup options. Click Verify data integrity to verify your data before
backing up. If you've selected to back up to floppy disks, select Format each floppy
disk during backup to format the disks as you back up, instead of before.
If the disk needs to be formatted prior to backup, do not choose Quick Format.
Instead, we recommend that you fully format your disk.
Note: Even if the disk is labeled as preformatted, you should fully format a new disk
before using it. Sometimes new disks can be stripped of their formatting during
shipping.
5. Click OK.
If you need more than one disk: QuickBooks asks you to insert an additional disk as each disk fills up. Be
sure to label the disks so that you'll know which one was first, which was second, and so on. This will
help you if you ever need to restore the data from the disks.
The QuickBooks Backup command doesn't simply copy the data for your QuickBooks company. Instead,
it compresses the data into a compact file that is smaller than your company file. To open a backup file,
go to the File menu and click Restore.
7-20
Scheduling Regular Backups of Your Data
735.07 You have two options when scheduling backups of your data on local media:
 You can schedule automatic backups that take place when you close your company
file.
 You can schedule backups that take place at regular intervals, even when you're
away from your desk. (Your computer must be on and your data file closed.)
To schedule automatic backups:
1. Go to the File menu and click Back Up.
2. Click the Schedule a Backup tab.
3. Select Automatically backup data when closing data file and specify how often you
want your data file automatically backed up. For example, to back up your data file
every fifth time you close it, type 5 in the field provided.
4. Click OK.
To schedule regular backups:
Note: For the backup to take place, the computer you use to run QuickBooks must be on, but the data
file you want to back up cannot be in use. (You can be working in a different data file, though.) Be sure to
schedule your backups accordingly.
1.
2.
3.
4.
Go to the File menu and click Back Up.
Click the Schedule Backup tab.
Click New to open the Schedule New Backup window.
Type a description for your scheduled backup. This description will appear in the
backup list on the Schedule Backup tab.
5. Specify a location for your scheduled backup. If necessary, click Browse and navigate
to the location you want.
6. (Optional) If you want to keep more than one backup, select Number of backups to
keep and specify how many. For example, if you want to keep three backups, type 3
in the field provided. Each time your data file is backed up as scheduled, the new
backup replaces the oldest one, always leaving a total of three backups.
If you want to keep all backups, make sure Number of backups to keep is deselected.
7. Select the time and day you want your backup to run. You can select as many days
per week as you want. You can also select whether you want the backup to run every
week, every two weeks, and so on up to every five weeks.
8. If necessary, set a password.
9. Click OK.
Backing Up Or Restoring a Company File (Online Backup Service)
735.08 Before you can back up or restore your company file with the QuickBooks Online Backup Service,
you must first subscribe to it.
1. Go to the File menu and click Back Up.
2. In the QuickBooks Backup window, select Online and click Tell Me More. Follow the
instructions to subscribe.
7-21
Maintaining the General Ledger in QuickBooks
To back up or restore your company file using the QuickBooks Online Backup Service:
Note: Once you have subscribed to the Online Backup Service, QuickBooks will default to this option
when you attempt to back up or restore your data.
1. Go to the File menu and click Back Up or Restore. QuickBooks will close the
company file and start the online backup application.
2. After the application has started, click Back Up Now or Retrieve Files to restore your
data.
Recommended Backup Routine
735.09 Back up your data at the end of each session or each day. You can:
 Have QuickBooks back up your data file when you close it with no prompting from you.
 Manually back up your data. You can even have QuickBooks remind you to back up
your company file each time you close it (or at whatever interval is convenient for you).
 Schedule automated daily backups either to your local media or to a remote site by
using the Online Backup service (for more information, click "Tell Me More" in the
QuickBooks Backup window).
 A combination of the above (for example, schedule daily backups but manually run the
backups you take offsite).
735.10 If you back up locally and your hard disk has more than one drive, back up onto a different drive
from the one where you keep your working data. If you have only one hard disk drive, back up onto a
removable medium such as 3.5 inch diskettes, Zip disk, CD-ROM or tape. Remember that an important
purpose for backing up data is to protect against a hard disk failure.
1. Each day, back up onto removable media to keep in the office. (If you're using 3.5
inch diskettes that need to be formatted prior to backup, do not choose Quick Format.
Instead, choose Full Format.)
The first time you do a daily backup, we suggest that you make several sets of
backup disks and label the sets "QuickBooks Backup Monday," "QuickBooks Backup
Tuesday," etc.
2. At least once a month, make a backup copy to keep off your premises.
For your monthly backups, you may want to alternate between two sets of disks. If
disaster strikes your office, you'll want to have a reliable record of your data to fall
back on.
3. At the end of your fiscal year, make a copy of your data to keep off-premises.
Restoring Data You’ve Backed Up
735.11 Under certain circumstances you may need to restore QuickBooks data from a backup copy. The
way you do this depends on whether you are restoring a local backup or a remote online backup.
Restoring a Local Backup:
7-22
1.
2.
3.
4.
If the backup copy is on a removable disk, put the disk in your disk drive.
If the backup copy is on several disks, insert the first disk in the disk drive.
Go to the File menu and click Restore.
In the upper section of the window, click Disk and click Browse to select the location
and filename of the backup file.
5. In the lower section, click Browse to select or change the location and filename to
which you want to restore your backup file.
6. Click Restore.
7. Respond to any messages QuickBooks may display.
This procedure uncompresses your backup file and creates a new company file using the data from the
backup.
Restoring an Online Backup:
If you backed up your company file using the online backup service, you must restore it through that
same service.
1. Go to the File menu and click Restore.
2. Select Online to restore a company file that you backed up using the Online Backup
service (for more information, click "Tell Me More" in the QuickBooks Backup
window).
3. Click Restore and follow the onscreen directions until you have retrieved the file.
4. Go to the File menu and click Open Company.
5. Select the file you have retrieved and click Open.
7-23
Maintaining the General Ledger in QuickBooks
7-24
Preparing Financial Reports with QuickBooks®
8
Table of Contents
Section
Description
Page
800
Introduction .......................................................................................................... 8-1
805
Generating the Basic Monthly Financial Statements ......................................... 8-2
810
Modifying Financial Statement Presentation ...................................................... 8-9
815
Preparing Other Financial Management Reports ............................................... 8-20
820
QuickBooks Financial Statements, Reports, and Graphs .................................. 8-35
TOC 8-1
TOC 8-2
Preparing Financial Reports with QuickBooks
800
8
INTRODUCTION
800.01 This chapter covers key aspects of the small business financial reporting process with which
accounting personnel typically have some degree of involvement. This process often includes generating
the basic monthly financial statements, modifying the financial statements, and preparing other selected
management reports.
800.02 The extent of accounting personnel involvement in the financial report preparation process vanes
greatly from one small business to the next. On one extreme, the controller or outside CPA handles most
of this process with little help from other accounting personnel. On the other extreme, an accounting
manager and other accounting personnel are primarily responsible for the entire financial report
preparation process. Many small businesses fall somewhere in between these two extremes.
800.03 This chapter separates the small business financial reporting process into three general
categories and discusses each one separately. Accounting personnel may review the entire chapter or
only those areas for which they are responsible. The three categories are covered in the following
sections:
 Generating the Basic Monthly Financial Statements. Section 805 provides an
overview of accounting personnel’s involvement with generating the monthly financial
statements. It discusses the types of financial statements, some general presentation
considerations, and linking the chart of accounts to the financial statements.
 Modifying Financial Statement Presentation. Section 810 addresses specific
content and presentation considerations relating to the balance sheet and income
statement. This section provides a more detailed financial statement discussion that
should be read by those with broader financial reporting responsibilities.
 Preparing Other Financial Management Reports. Section 815 provides guidance
on preparing four other common management reports: owner’s weekly flash report,
weekly cash flow report, accounts receivable monthly management report, and
inventory monthly management report. This section is helpful for accounting
personnel having financial reporting responsibilities that extend beyond the basic
financial statements.
 QuickBooks Financial Statements, Reports and Graphs. Section 820 discusses
how you create QuickBooks financial statements, reports, and graphs including (1)
creating QuickReports, (2) creating and customizing preset reports, (3) saving report
settings, (4) printing reports, (5) exporting reports to Microsoft Excel, and (6) creating
QuickInsight graphs.
805
GENERATING THE BASIC MONTHLY FINANCIAL STATEMENTS
805.01 Of all the financial reporting areas, generating the basic monthly financial statements is typically
the most common area of involvement for accounting personnel. This involvement primarily consists of
generating the balance sheet and income statement, and occasionally, the statement of cash flows,
through the company’s accounting software package. Once the general ledger chart of accounts has
been linked to the financial statements, generating the financial statements is automatic for the most
part. This section covers the following topics:
8-1
Preparing Financial Reports with QuickBooks
 Types of financial statements.
 General presentation considerations.
 Linking the chart of accounts to the financial statements.
Types of Financial Statements
805.02 There are four types of financial statements required by generally accepted accounting principles:
balance sheet, income statement, statement of retained earnings or changes in stockholders’ equity, and
statement of cash flows. Most small businesses prepare a balance sheet and an income statement on a
monthly basis, but fewer businesses routinely prepare a statement of retained earnings (or changes in
stockholders’ equity) and a cash flow statement. This practice occurs partially because accounting
software packages have traditionally had a balance sheet and income statement focus, with less
emphasis on the other statements. The complexity of the cash flow statement also contributes to the
tendency of small businesses to forgo preparing it on a monthly basis.
805.03 The following briefly discusses each of the statements.
 Balance sheet. The balance sheet presents a company’s assets, liabilities, and
equity balances at the end of a company’s accounting period, such as the end of the
calendar month. Generally, the assets are presented on one page and the liabilities
and equity balances are presented on the following page. The total assets must equal
the combined total of the liabilities and equity balances. The traditional balance sheet
presents a summary version of the numerous general ledger account balances, but it
may also present each account balance individually.
 Income statement. The income statement presents a company’s operating results
(that is, revenues, expenses, and other income and expense) for a specified financial
reporting period, such as the current month or current year. (The net income or loss
for the period is carried forward to the retained earnings caption in the balance
sheet.) The income statement amounts are typically presented under the general
captions: operating revenues, cost of sales, operating expenses, and other income
and expenses.
 Statement of retained earnings (or changes in stockholders’ equity). This
statement simply shows the changes in retained earnings or stockholders’ equity that
have occurred during the period. This statement is not commonly presented on a
monthly basis since the only change that affects these balances in most companies is
net earnings or loss. Moreover, most accounting software packages show the
retained earnings change caused by the current year earnings or loss as a separate
line item on the balance sheet. However, if a company has other equity transactions,
such as dividend payments or company stock sales, a separate statement should be
presented.
 Statement of cash flows. The statement of cash flows shows the company’s cash
transactions during the period. Using balance sheet and income statement amounts,
the cash flow statement reconciles the company’s beginning and ending cash
balances by showing all cash receipts and disbursements during the period. The
statement classifies the receipts and disbursements into three broad categories:
operating, investing, and financing activities. Although many software packages now
include a statement of cash flows, some older packages still include its predecessor,
the statement of changes in financial position. In both cases, however, adjustments
are usually needed to make the statements fully conform to generally accepted
8-2
accounting principles.
A statement of retained earnings is not separately presented since the current period’s net income is the
only equity transaction. Instead, net income is clearly shown on the balance sheet.
General Preparation Considerations
805.04 Before generating monthly financial statements, accounting personnel typically must make some
general financial statement presentation decisions. These decisions include deciding on an appropriate
basis of accounting, whether prior-year comparative financial statements will be presented, and whether
budgeted figures will be shown alongside the actual figures each month. Each of these decisions are
discussed below.
805.05 Choosing the Basis of Accounting. Small businesses typically maintain their accounting
records throughout the month on a modified cash (or pure cash) basis of accounting. At month end,
accounting personnel often make certain journal entries to convert the records to an accrual accounting
basis for monthly financial statement purposes. Although the basis of accounting decision has already
been made in most small businesses, accounting personnel should understand the differences between
the common accounting bases. Each basis is briefly discussed below:
 Cash basis. The pure cash basis of accounting simply records only cash receipts
and disbursements. The financial statement reflects beginning and ending cash
balances along with receipts and disbursements. Generally, only very small
businesses present financial statements on the pure cash basis.
 Modified cash basis. The modified cash basis is a variation of the pure cash basis.
Substantially all transactions recognized are cash receipts and disbursements, but
some noncash transactions are also recognized. For example, fixed assets are
normally capitalized and depreciated over their estimated useful lives.
 Accrual basis. The accrual basis presents financial statements in accordance with
generally accepted accounting principles. Under the accrual method, revenues and
expenses are recorded when they are earned or incurred, which may or may not
coincide with the time cash is actually received or paid. This method is generally the
only one that reasonably shows the company’s financial position (balance sheet) at a
point in time and its results of operations (income statement) for a given period.
Records and financial statements maintained on the cash basis are the simplest to maintain and prepare,
but for many businesses, cash-basis financial statements present misleading financial information for the
company since they only show cash transactions. On the other hand, accrual basis records and financial
statements are more difficult to maintain, but they present a much more accurate financial picture of the
company.
805.06 Companies that are preparing cash or modified cash basis financial statements should carefully
assess their financial information needs and accounting personnel capabilities. If the company has the
accounting manpower to account for most day-to-day transactions (recording sales, expenses, and
inventory purchases) on an accrual basis, making the additional noncash adjustments (see Chapter 6) at
month end should not be too difficult.
805.07 If the company is accounting for day-to-day transactions primarily on a modified cash basis, it
may or may not have the manpower to begin recording those daily transactions on an accrual basis, as
described in Chapters 2 through 5. In that case, accrual financial statements can still be obtained by
8-3
Preparing Financial Reports with QuickBooks
making a few additional month-end entries to record trade accounts receivable, trade accounts payable,
and inventory. Usually, accounting personnel will either reverse these entries at the start of the following
month or adjust the balance at the end of the following month to the new balance.
805.08 Enhancing Financial Statement Usefulness. Most accounting software packages allow
companies to take advantage of various features that will make the current year’s financial statements
more meaningful. These features include showing income statement line-item percentages, prior-year
comparative financial statement amounts, and budgeted amounts.
 Percentages. Most accounting systems allow each income statement line item to be
presented as a percent of sales. The percentages may be shown for both the current
year and the prior year. These percentages allow accounting personnel and
management to detect unusual fluctuations or potential problems.
 Prior-year comparative financial statements. Including prior-year comparative
financial statement amounts helps accounting personnel and management better
understand and analyze current-year financial statement amounts. Typically, the
income statement compares the current-period and year-to-date amounts to the
corresponding amounts of the prior year. Similarly, the balance sheet typically
compares current-period ending balances to the corresponding balances of the prior
year. if comparative amounts will be presented, the accounting system simply pulls
the prior-year information from separate computer files (often referred to as “buckets”)
when generating current period financial statements.
 Budgeted amounts. Although some accounting systems allow budgeted amounts to
be presented for both the balance sheet and income statement, small businesses that
include budgeted amounts in their financial statements typically show only income
statement budgets. Although balance sheet budgets can be helpful, presenting
budgets for only the income statement is a reasonable compromise for small
businesses. Most accounting systems also include features that expedite the budget
setup process. For example, the features allow preliminary budgets to be generated
using last year’s actual monthly amounts or the prior-year budgeted monthly
amounts. Alternatively, the systems can be instructed to arrive at monthly budget
amounts by simply dividing last year’s full year amounts by 12. Once a preliminary
budget is generated, it gives management a starting point for refining the budget to
reflect current conditions.
805.09 To avoid confusion, accounting systems usually generate different sets of financial statements for
presenting the above information. For example, a standard financial statement package might include the
three income statements shown in Exhibits 8-1 and 8-2. The income statement at Exhibit 8-1 shows
actual amounts and percentages for the current period and year to date. The income statement at Exhibit
8-2 shows actual, budget, and variance amounts for the current period amounts.
Linking the Chart of Accounts to the Financial Statements
805.10 Generally, accounting software generates financial statements by linking the numerous general
ledger accounts to specific financial statement line items. This link allows balances in specified general
ledger accounts to be combined into a single amount for the applicable financial statement caption.
Some accounting software packages come with a standard set of financial statements already linked to
the chart of accounts, but usually they allow users to modify the standard chart of accounts and financial
statements or create customized financial statements.
8-4
805.11 Standard financial statements will typically include the balance sheet and income statement.
Many software packages include a statement of cash flows, but they typically are not offered by the
systems as a “standard” financial statement. Users frequently must perform some extra steps to link
accounts to the statement of cash flows. The following paragraphs provide a general overview of the
process for linking accounts to the financial statements.
805.12 Balance Sheet and Income Statement. Accounting personnel are typically responsible for
ensuring that all general ledger accounts are properly linked to the balance sheet and income statement.
Since the linking is done only once for each account, this responsibility requires a minimal amount of
accounting personnel’s time. Accounting personnel must simply ensure that all new or deleted general
ledger accounts are properly linked to a balance sheet or income statement line item.
8-5
Preparing Financial Reports with QuickBooks
Exhibit 8-1
Sample Income Statement—Actual and Percentages
ABC DISTRIBUTION AND SERVICE CORP.
INCOME STATEMENT
FOR THE 5 PERIODS ENDED MAY 31, 2008
PERIOD TO DATE
YEAR TO DATE
ACTUAL
PERCENT ACTUAL PERCENT
REVENUES
Distribution sales
Distribution sales – East
Distribution sales – West
Service fees – East
Service fees – West
Freight charges – East
Freight charges – West
Returns & allowances – East
Returns & allowances – West
TOTAL REVENUES
1,208.22
260,166.44
136,351.78
14,165.10
5,562.30
5,261.23
3,364.00
(3,775.45)
(1,297.95)
421,005.67
0.0
61.8
32.4
3.4
1.3
1.2
0.8
(0.9)
(0.3)
100.0
1,208.22
1,175,491.73
607,743.81
44,362.23
20,853.80
24,654.81
12,487.93
(19,017.67)
(6,538.02)
1,861,246.84
0.1
63.2
32.7
2.4
1.1
1.3
0.7
(1.0)
(.4)
100.0
COST OF SALES
Purchases – East
Purchases – West
Freight – East
Freight – West
Warehouseman payroll – East
Warehouseman payroll – West
Serviceman payroll – East
Serviceman payroll – West
TOTAL COST OF SALES
GROSS PROFIT
58,225.37
86,049.75
2,558.49
1,136.63
31,104.65
7,333.75
1,876.47
1,187.82
189,472.93
231,532.74
13.8
20.4
0.6
0.3
7.4
1.7
0.4
0.3
45.0
55.0
308,297.48
294,984.18
12,519.23
5,561.76
150,636.97
5,420.91
9,208.29
5,169.47
821,798.29
1,039,448.55
16.6
15.8
0.7
0.3
8.1
1.9
0.5
0.3
44.2
55.8
1,385.48
1,261.06
0.00
124.38
670.32
1,275.30
490.73
1,306.86
706.20
0.00
0.00
0.00
0.00
1,036.29
939.44
0.3
0.3
0.0
0.0
0.2
0.3
0.1
0.3
0.2
0.0
0.0
0.0
0.0
0.2
0.2
6,605.13
6,248.95
195.36
263.58
18,857.51
4,192.68
2,453.65
1,722.88
473.03
568.90
284.36
426.62
640.12
3,406.94
1,154.33
0.4
0.3
0.0
0.0
1.0
0.2
0.1
0.1
0.0
0.0
0.0
0.0
0.0
0.2
0.1
EXPENSES:
OPERATING EXPENSES – CENTRAL
Warehouse payroll
Clerical salaries
Sick pay
Holiday pay
Payroll taxes
Building maintenance
Depreciation expense
Equipment maintenance
Insurance experience: S&M – Central
Insurance experience: Accounting – Central
Insurance experience: Service – Central
Insurance experience: S&M – Central
Insurance experience: S&R – Central
Warehouse supplies
Telephone expense
8-6
Exhibit 8-2
Sample Income Statement—Comparison to Budget and Prior Year
ABC DISTRIBUTION AND SERVICE CORP.
INCOME STATEMENT
FOR THE 5 PERIODS ENDED MAY 31, 2008
ACTUAL
PERIOD TO DATE
BUDGET
VARIANCE
REVENUES
Distribution sales
Distribution sales – East
Distribution sales – West
Service fees – East
Service fees – West
Freight charges – East
Freight charges – West
Returns & allowances – East
Returns & allowances – West
TOTAL REVENUES
1,208.22
260,166.44
136,351.78
14,165.10
5,562.30
5,261.23
3,364.00
(3,775.45)
(1,297.95)
421,005.67
0.00
220,000.00
120,000.00
10,000.00
55,000.00
3,700.00
1,700.00
(2,900.00)
(1,000.00)
357,000.00
1,208.22
40,166.44
16,351.78
4,165.10
62.30
1,561.23
1,664.00
(875.45)
(297.95)
64,005.67
COST OF SALES
Purchases – East
Purchases – West
Freight – East
Freight – West
Warehouseman payroll – East
Warehouseman payroll – West
Serviceman payroll – East
Serviceman payroll – West
TOTAL COST OF SALES
GROSS PROFIT
58,225.37
86,049.75
2,558.49
1,136.63
31,104.65
7,333.75
1,876.47
1,187.82
189,472.93
231,532.74
60,000.00
65,000.00
2,400.00
1,000.00
30,700.00
7,400.00
1,800.00
800.00
169,100.00
187,900.00
1,774.63
(21,049.75)
(158.49)
136.63)
(404.65)
66.25
(76.47)
(387.82)
(20,372.93)
43,632.74
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Preparing Financial Reports with QuickBooks
805.13 General ledger accounts are linked to either the balance sheet or income statement captions in
various ways depending on the software package. Generally, they are either dependent on or
independent of the chart of accounts structure.
 Dependent type. Financial statement line items in this type of software package
depend on how the chart of accounts is structured. The location and name of each
general ledger account is important since the financial statements are generated by
pulling captions and amounts directly from the general ledger accounts. Either
detailed or summary financial statements may typically be generated. Detailed
financial statements generally list all the general ledger account names and balances.
Summary (or traditional) financial statements total various “sub” general ledger
accounts into “master” accounts, which are then taken to specified financial statement
line items.
 Independent type. Financial statement line items in this type of software package do
not depend on the chart of accounts structure. General ledger accounts are typically
linked to financial statement captions using codes. For example, each financial
statement line item is given a unique number. Accounting personnel then link each
general ledger account to the appropriate financial statement caption by coding it with
the appropriate financial statement line item number.
805.14 Accounting personnel must understand the approach used by their accounting system to properly
handle this financial statement maintenance role. If accounting personnel use the dependent type of
general ledger software, they must take extra care when setting up and revising the chart of accounts. If
the independent type is used, accounting personnel must ensure that each new account is properly
coded to the appropriate financial statement line item.
805.15 Cash Flow Statement. Cash flow statements generated by most software packages fall short of
providing the appropriate detail of cash transactions required by GAAP. For example, receipts and
disbursements related to specific accounts, such as notes payable and fixed assets, are shown as a
single net amount. Under GAAP, the proceeds of a loan and the repayment amounts should be shown
separately. Although these and other deficiencies make the statements less meaningful, they are still
usually better than no statement at all. The following paragraphs briefly describe the process for linking
accounts to the cash flow statement.
805.16 Software packages generally preformat the cash flow statements. The packages classify the
receipts and disbursements into three broad categories as prescribed by GAAP: operating, investing,
and financing activities. Accounting personnel typically only have to assign each account to the proper
activity category:
 Operating. Operating activity accounts generally include all income statement
accounts and most balance sheet accounts (that is, all balance sheet accounts
except those specifically classified as investing and financing activities).
 Investing. Investing activity accounts generally include selected balance sheet asset
accounts, such as fixed assets, stocks and bonds, and nontrade notes receivable.
Activity includes both increases and decreases in the accounts.
 Financing. Financial activity accounts generally include selected balance sheet
liability and equity accounts, such as notes payable, long-term debt, dividends paid,
and the company’s stock. Activity generally includes increases and decreases in the
accounts.
8-8
Exhibit 8-3 includes a more detailed listing of the types of transactions that generally fall in the three
categories.
Exhibit 8-2
Types of Cash Flows
STATEMENT OF CASH FLOWS
OPERATING
Cash Receipts from:
 Sale of goods and services
 Short- and long-term notes receivable
from customers arising from sales of
goods or services
 Interest and dividends
 Other cash receipts not arising from
investing or financing activities, such as
amounts received to settle lawsuits or
refunds from suppliers
INVESTING
Cash Receipts from:
 Sale of property and
equipment
 Sale
of
investment
securities
 Collections on loans
 Insurance
proceeds
related to transactions
classified as investing
FINANCING
Cash Receipts from:
 Short-term borrowings
 Long-term borrowings
 Issuance of stock
Cash Payments for:
 Dividends
 Repayment of amounts
borrowed, e.g., shortCash Payments for:
term debt, long-term
Cash Payments for:
debt, and capital lease
 Property and equipment obligations
 Inventory
(including
capitalized  Treasury stock
interest)
 Short- and long-term notes payable to
suppliers for materials or goods
 Investment securities
 Wages
 Loans
 Other operating expenses
 General and administrative expenses
 Interest (excluding amounts capitalized)
 Taxes
 Other cash payments not related to
investing or financing activities, such as
cash contributions and cash refunds to
customers
805.17 As mentioned above, if a statement of cash flows is being prepared, accounting personnel
typically must classify any new general ledger accounts as an operating, investing, or financing activity
account. Because of the cash flow statement’s complexity, accounting personnel should consult with
their controller or outside CPA if questions arise.
810
MODIFYING FINANCIAL STATEMENT PRESENTATION
810.01 Accounting personnel may occasionally wish to revise or customize the standard financial
statement formats included with most accounting software packages. This section provides specific
guidance for presenting various balance sheet and income statement captions. This section does not
discuss the statement of retained earnings or the cash flow statement. The statement of retained
8-9
Preparing Financial Reports with QuickBooks
earnings is typically presented within the equity section of the balance sheet (see Paragraphs 810.31.33). Section 805 briefly discusses the statement of cash flows and how to link the general ledger
accounts to the statement; most small business accounting personnel do not have further involvement
with the statement.
Balance Sheet
810.02 Accounting personnel may occasionally have questions about specific balance sheet captions or
may wish to modify or customize the standard balance sheet generated by the accounting software
package. The following paragraphs specifically discuss the common balance sheet captions.
810.03 Cash. The cash balance sheet caption should ordinarily include cash on deposit with banks and
other institutions and cash on hand (for example, petty cash funds). Usually, it is presented as a single
line item, but it occasionally is combined with short-term investments considered to be cash equivalents.
(In that case, a more descriptive title, such as “Cash and Cash Equivalents,” is often used.) The following
types of deposits are generally considered cash and cash equivalents:
a. Deposits in checking accounts.
b. Held checks (i.e., checks written but not released).
c. Immaterial bank overdrafts. (Material overdrafts are normally presented as a
current liability.)
d. Time deposits.
e. Certificates of deposit.
f. Money market accounts.
The Guide recommends, however, that small businesses show cash separately from other interestbearing short-term deposits, such as time deposits, certificates of deposit, and money market accounts.
810.04 Cash restricted for special purposes should be segregated from cash available for general
operations and, normally, should be excluded from the current assets heading in the financial
statements.
810.05 Some companies have cash escrow accounts. Escrow accounts generally fall under one of the
following types:
a. Amounts on deposit that will be used to pay expenses (for example, the portion of
debt service accumulated for payment of real estate taxes and insurance).
b. Agency accounts (for example, accounts maintained by realtors for deposits on real
estate contracts).
Typically, the company has no control over the first type of escrow accounts and cannot convert them
into cash. Therefore, significant amounts should be excluded from cash and included with prepaid
expenses (or charged to expense if not material). The company has custody of, but does not have legal
right to, the second type of escrow accounts. Preferably, those funds should be excluded from the
company’s balance sheet. (If the amounts are material, however, the amount and nature of the
company’s agency obligation under the arrangement should be disclosed in a footnote to the financial
statements.)
810.06 Marketable Securities. The balance sheet caption “Marketable securities” includes the following
types of securities:
8-10
 Equity securities (such as common stock, preferred stock, warrants, calls, and puts).
 Debt securities (such as bonds, bankers’ acceptances, and U.S. Treasury notes).
 Hybrid securities (such as convertible debt and preferred stock that must be
redeemed).
Money market accounts and certificates of deposit are considered cash equivalents, not marketable
securities (see Paragraph 810.03).
810.07 The accounting for marketable securities is complex because generally accepted accounting
principles (GAAP) require that they be recorded at the lower of cost or market. Thus, if the market value
of the securities declines, the company may need to write down the securities on the general ledger and
record a corresponding loss (referred to as an unrealized loss). Instead of writing down the securities
directly, however, a contra account (similar to the allowance for doubtful accounts, see Chapter 6,
paragraphs 615.02-.07) called an “allowance for unrealized losses” is normally used. Because of its
complexity, the accounting for marketable securities is normally handled by the controller or outside
CPA.
810.08 Marketable securities are normally presented in the balance sheet as a single caption. In addition,
the required disclosures of aggregate cost and aggregate market value are often included in the balance
sheet presentation. A common example is as follows:
Marketable equity securities at aggregate cost
Less allowance for unrealized losses
300,000
50,000
250,000
810.09 Receivables. Receivables is a broad term that includes amounts due from others as a result of
sales of merchandise, services, or other assets, or as a result of a loan. Receivables may be divided into
three categories: trade, nontrade, and related party.
810.10 Trade receivables include open accounts, notes, and installment contracts representing claims for
goods and services sold in the ordinary course of business. Frequently, open accounts and current notes
are combined under the caption “Trade accounts and notes receivable.” However, it is generally good
practice to separately show the amounts in the financial statements, particularly when the notes or
installment contracts significantly extend the normal collection period. For example:
Trade receivables
Installment notes
Accounts receivable
Less allowance for doubtful accounts
500,000
300,000
800,000
50,000
750,000
810.11 Generally, nontrade receivables also should be separately shown to make financial statements
more informative and useful. Nontrade receivables include:
a. Tax refund claims.
b. Receivables from sales that are not part of the operating cycle, such as sales of plant
or equipment.
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Preparing Financial Reports with QuickBooks
c. Dividends receivable.
If nontrade receivables are not individually material, they may be classified together, for example,
“Accounts receivable—other” or “Other receivables.” If immaterial in the aggregate, they may be included
with trade accounts or notes.
810.12 Material amounts of notes and accounts receivable from related parties (for example,
stockholders, officers, management, or affiliates) should be separately shown in the financial statements
or disclosed in a footnote. They may be separately shown in the balance sheet as follows:
Cash
Accounts receivable
Trade
Related parties
10,000
65,000
35,000
or
Cash
Marketable securities
Accounts receivable
Due from related parties
Tax refund claim
10,000
105,000
65,000
35,000
20,000
The caption “Due from related parties” is useful when several types of related party receivables are
present. When only one type of receivable is present, a more descriptive caption is often used (e.g.,
“Officer notes receivable,” “Due from affiliates,” or “Due from stockholders”).
810.13 Inventories. Inventories include the following items:
a. Items held for sale in the ordinary course of business.
b. Items in the process of production for sale (say, raw materials or work-in-process
for a manufacturer).
c. Items to be consumed when producing goods or services for resale.
Operating supplies not directly entering into the production of the product should be treated as prepaid
expenses rather than inventories.
810.14 There is no requirement to disclose the components or types of inventory, but, in practice,
disclosure is almost universal when a company has one of the following:
a. Manufacturing inventories in various stages of completion.
b. Inventories of distinct product lines.
810.15 Examples of financial statement disclosure of inventory components are as follows:
Inventories
Raw materials
Work in process
Finished goods
or
8-12
75,000
25,000
50,000
Inventories
New vehicles
Used vehicles
Parts and accessories
200,000
150,000
150,000
or
Inventories
Gasoline
Groceries
Other
15,000
60,000
10,000
810.16 Prepaid Expenses. Current prepaid expenses are advance payments for products or services
that will be used in operations during the next 12 months. Readers of financial statements generally are
not interested in the details of the asset because it cannot be converted to cash and usually is not
material to the financial statements. Therefore, the recommendations in this area are intended to simplify
presentation and recordkeeping for prepaid expenses as much as possible.
810.17 The simplest approach is to present all prepaid expenses as a single line item as follows:
Prepaid expenses
18,000
However, if one component of prepaid expenses is dominant, it may be highlighted by expanding the
caption as follows:
Prepaid insurance and other expenses
18,000
Finally, the individual components may be presented (usually in the order of significance) as follows:
Prepaid expenses
Insurance
Rent
Other
15,000
2,000
1,000
810.18 Long-term Investments. The “Long-term investments” caption of the balance sheet may include
the following types of holdings:
a.
b.
c.
d.
Noncurrent marketable equity and debt securities.
Nonmarketable equity and debt securities.
Property and equipment held for investment purposes.
Cash value of life insurance.
810.19 The balance sheet presentation of marketable securities is discussed in Paragraphs 81 8.06-.08.
Other long-term investments may be presented individually, as part of the investment caption, or
included in other assets as follows:
MARKETABLE EQUITY SECURITIES, at lower of
aggregate cost or market, less allowance
for unrealized losses of $50,000
250,000
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Preparing Financial Reports with QuickBooks
LAND HELD FOR INVESTMENT
CASH VALUE OF LIFE INSURANCE, net of policy
loans of $7,500
150,000
2,500
or
INVESTMENTS
Marketable equity securities at lower of
aggregate cost or market, less allowance
for unrealized losses of $50,000
Land held for investment
Cash value of life insurance, net of policy
loans of $7,500
250,000
150,000
2,500
or
OTHER ASSETS
Marketable equity securities at lower of
aggregate cost or market, less allowance
for unrealized losses of $50,000
Land held for investment
Cash value of life insurance, net of policy
loans of $7,500
250,000
150,000
2,500
810.20 Property and Equipment. Property and equipment includes all tangible assets used in a
company’s operations that have an estimated useful life longer than one year. The following is a listing of
items commonly included:










Land on which operating facilities are located.
Buildings used as operating facilities.
Machinery and other production equipment.
Office furniture and other administrative equipment.
Items leased from others under capital leases.
Items leased to others under operating leases.
Buildings being constructed for use as operating facilities.
Idle facilities.
Leasehold improvements.
Computer hardware and software.
Items originally acquired as property and equipment but later used for other purposes, for example, items
retired and held for resale, should be removed from the property and equipment caption.
810.21 Historically, the term “Fixed assets” has been used to refer to these assets. The term is still
acceptable, but many preparers now use more descriptive terms. Some preparers use the term
“Property, plant, and equipment.” Although that term is acceptable, it will not fit all situations and the
terms “Property” and “plant” are redundant. The Guide offers the following recommendations:
8-14
 Property and equipment—appropriate when the company has both real and personal
property.
 Equipment—appropriate when the company has only personal property.
 Equipment and leasehold improvements—appropriate when the company has only
personal property and leasehold improvements.
“Land” and “Buildings” are normally sufficient captions for the components of real property. There is no
need to expand the captions when improvements are made (for example, landscaping, paving, building
additions, etc.) because readers of financial statements generally have no need to distinguish
improvements.
810.22 Presentation in the balance sheet may be limited to a primary caption (with major classes of
depreciable assets disclosed in footnotes to the financial statements), or secondary captions may be
presented. For example, the following balance sheet presentations are acceptable:
Property and equipment
Accumulated depreciation
Net property and equipment
370,000
(75,000)
295,000
or
PROPERTY AND EQUIPMENT
Land
Building
Production equipment
Vehicles and other equipment
50,000
250,000
40,000
30,000
370,000
Accumulated depreciation
(75,000)
295,000
810.23 Intangibles and Other Deferred Costs. This balance sheet caption includes noncurrent assets
that are not covered by other sections of the balance sheet. Normally, it includes the costs paid by the
company to acquire any of the following:








Goodwill.
Patents.
Trademarks.
Customer lists.
Company name.
Franchise fees.
Covenants not to compete.
Organization costs.
810.24 Although there is a conceptual difference between intangibles and deferred costs, most readers
are not particularly interested in them because they are not a source of cash. Instead, they are viewed as
a cost of business that is “frozen” in the balance sheet and amortized over future periods. Accordingly,
bookkeepers often combine intangible assets and other deferred costs in a single category as follows:
INTANGIBLE ASSETS AND DEFERRED COSTS
220,000
Alternatively, the components may be presented as follows if they are significant:
8-15
Preparing Financial Reports with QuickBooks
OTHER ASSETS
Goodwill
Noncompete agreement
Trademark
100,000
70,000
50,000
810.25 Accounts Payable. The balance sheet caption “Accounts payable” or “Trade accounts payable”
includes costs and expenses that are billed to the company by a vendor or service provider. They are
usually the first caption under the current liabilities heading in the financial statements. Significant debit
balances in accounts payable generally should be shown in the financial statement separately as
accounts receivable if they will be collected in cash. If they will be offset against other invoices owed to
the vendor, the accounts payable amount in the financial statement should simply be shown net of the
debit balances.
810.26 Accrued Liabilities. Accrued liabilities are estimates of unpaid expenses that the company has
incurred for which an invoice has not yet been received. In some cases, the specific person to whom
payment will be made cannot presently be determined (for example, product warranties). Examples of
accrued liabilities include:
a.
b.
c.
d.
e.
f.
g.
Payroll.
Income taxes.
Interest.
Payroll taxes (employer and employee portions).
Retirement plan contributions.
Royalties.
Damage claims under lawsuits (if liability is probable and can be reasonably
estimated).
h. Vacation pay.
i. Warranty claims.
810.27 The following are three basic ways of presenting accrued liabilities in the balance sheet:
CURRENT LIABILITIES
Accounts payable
Accrued expenses
Compensation
Retirement plan contributions
Other
Short-term notes
TOTAL CURRENT LIABILITIES
$ 90,000
10,000
7,000
3,000
50,000
160,000
or
CURRENT LIABILITIES
Accounts payable
Short-term notes
Compensation
Retirement plan contributions
Other
TOTAL CURRENT LIABILITIES
8-16
$ 90,000
50,000
10,000
7,000
3,000
160,000
or
CURRENT LIABILITIES
Accounts payable
Short-term notes
Accrued expenses
TOTAL CURRENT LIABILITIES
$ 90,000
50,000
20,000
160,000
810.28 Notes Payable and Long-term Debt. Notes payable consist of loans due in one year or less.
Long-term debt consists of the following:
a. Notes that provide for repayment over a term longer than one year.
b. Obligations under capital leases due over a term longer than one year.
810.29 Notes payable are shown as “Short-term notes” or “Notes payable” under the current liability
heading in the balance sheet. Long-term debt is divided into current and noncurrent portions. Principal
reductions of long-term debt scheduled to be paid during the next 12 months should be classified as a
current liability. The current portion of long-term debt normally is presented immediately after short-term
notes and loans, and the noncurrent portion is presented immediately after total current liabilities as
follows:
CURRENT LIABILITIES
Accounts payable
Accrued expenses
Short-term notes
Current portion of long-term debt
TOTAL CURRENT LIABILITIES
LONG-TERM DEBT, less current portion
$ 90,000
15,000
50,000
10,000
165,000
500,000
810.30 Other Long-term Liabilities. This balance sheet caption includes items that are not covered
under other liability captions (for example, noncurrent deferred income tax liability). Generally, significant
other long-term liabilities are presented as separate line items on the balance sheet following “Long-term
debt.”
810.31 Stockholders’ Equity. The stockholders’ equity section of the balance sheet includes the
company’s common stock, paid-in-capital, and retained earnings balances. The common stock and paidin-capital captions show the amount paid by stockholders for the company’s stock. The retained earnings
caption generally shows the company’s earnings less any dividends paid since inception.
810.32 Most accounting software packages break the retained earnings amount into a beginning of the
year retained earnings caption and a current year net income caption as follows:
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Preparing Financial Reports with QuickBooks
STOCKHOLDERS’ EQUITY
Common stock
Beginning retained earnings
Net income
TOTAL STOCKHOLDERS’ EQUITY
1,000
155,000
40,500
$196,500
810.33 The preceding presentation sufficiently discloses the changes in retained earnings when net
income is the only change in retained earnings. Other changes in stockholders’ equity can also be
disclosed on the balance sheet by presenting them in a similar manner.
Income Statement
810.34 Captions within the income statement will vary based on the complexity of the company’s
operations, the way revenues and expenses are recognized, and the details presented. The following
paragraphs provide some practical guidelines.
810.35 Revenues. Generally, the revenue caption represents a business’s gross income from operations
(that is, the gross income obtained by selling goods or performing services). Thus, revenue may consist
of sales (for a company that sells products), professional fees or commissions (for a company that
provides services), or interest income (for a company whose primary source of income is from lending
activities).
810.36 If the income statement includes more than one revenue account, the revenue accounts are
usually listed under a heading such as “Operating revenues.” Amounts deducted in arriving at revenues
presented in the income statement (for example, sales returns and allowances or discounts) generally
should be disclosed on the face of the income statement, if material. The following are acceptable
presentations:
NET SALES
350,000
or
OPERATING REVENUES
Sales
Returns and allowances
365,000
(15,000)
350,000
810.37 Cost of Sales. The cost of sales caption represents the cost of merchandise or products sold.
Therefore, the costs that should be included in cost of sales are the same as those that would be
included in inventory if the merchandise had not been sold. Cost of sales is usually presented either as
(a) a separate line item, or (b) a heading below which are listed elements of costs. The following are
acceptable presentations:
COST OF SALES
455,000
COST OF SALES
New vehicles
275,000
or
8-18
Used vehicles
Service
Parts and other
125,000
35,000
20,000
455,000
810.38 Operating Expenses. Operating expenses generally include the expenses incurred to produce
operating revenue. Therefore, they include selling expenses (i.e., the costs incurred to make a sale and
deliver the merchandise to the customer, such as sales commissions, advertising, and delivery costs)
and general and administrative expenses (e.g., administrative salaries, office rent, insurance on office
equipment, etc.).
810.39 Operating expenses are generally listed under a heading such as “Operating expenses” or may
be classified by principal types (for example, selling or general and administrative) and presented as
separate line items without a heading. The following presentations are acceptable:
OPERATING EXPENSES
Compensation
Advertising
Depreciation
Rent
Utilities
Insurance
Retirement plan
225,000
16,000
30,000
15,000
8,000
7,000
13,000
314,000
or
SELLING EXPENSES
175,000
GENERAL AND ADMINISTRATIVE EXPENSES
465,000
810.40 Other Income and Expenses. Other income and expenses generally include incidental sources
of revenue and expense from nonoperating activities. Examples include dividend income, interest
income, and interest expense. If material, other income and expenses should be separately identified on
the face of the income statement. Material income and expense items should not be obscured by
classifying them under captions such as “Other income—net” or “Other expense—net.” Other income
and expenses are generally listed under a heading such as “Other income (expense)” as shown below:
OTHER INCOME (EXPENSE)
Interest income
Dividends
Interest expense
815
25,000
15,500
(8,500)
32,000
PREPARING OTHER FINANCIAL MANAGEMENT REPORTS
815.01 In addition to the monthly financial statements, small businesses often rely on a variety of other
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Preparing Financial Reports with QuickBooks
financial management reports. Although some of the reports, such as the aged accounts receivable
summary report, are routinely generated by accounting software, others are tailored to the company’s
particular needs. Ensuring that the reports focus on the company’s critical aspects is crucial.
815.02 Although controllers and top management often decide on the type and content of the reports,
accounting personnel in smaller companies are often asked to provide input and prepare the reports.
This section provides guidance on preparing the following four key financial management reports that
apply to many small businesses:
 Owner’s weekly flash “report. This report recaps key financial information for the
business owner or top management. It is typically prepared weekly.
 Weekly cash flow report. Most small businesses operate on a tight cash budget,
with minimal access to outside credit lines. This weekly report helps small
businesses forecast and monitor their future cash flows.
 Accounts receivable monthly management report. Tying up excess cash in
accounts receivable can cripple small businesses that routinely offer trade credit to
their customers. This monthly report helps management monitor credit and
collection activities.
 Inventory monthly management report. Similar to accounts receivable,
inventories can consume a large part of a small businesses’ available cash. This
monthly report helps management monitor and assess inventory levels.
Owner’s Weekly Flash Report
815.03 Most small business owners have an entrepreneurial or sales background, but not necessarily
strong business management, financial, or accounting skills. Thus, monthly financial statements and
other detailed financial reports often leave them dissatisfied and confused. The reports tend to provide a
wealth of information, but do not highlight or focus on the company’s critical financial information. Also,
the typical monthly report preparation time frame is too infrequent to address business problems, such as
sales declines or cash flow shortages, in a timely manner.
815.04 Instead, owners are often better served if presented with a concise report that summarizes only
the company’s key financial and management information on a weekly basis. Although some information
considered critical will vary from one company to the next, much will be the same. The information that
top management is interested in on a weekly basis generally falls into the following broad categories:
 Sales activities. Information includes total sales dollars and units, the dollar amount
of orders received, outstanding customer backorders, sales returns, etc.
 Cash flow activities. Information includes cash balance, accounts receivable
amounts that are over 60 days old, past due accounts payable, the outstanding
balance on the company’s line of credit, the available line of credit balance if it
changes regularly, etc.
 Production activities. Information includes units produced, rejected units, overtime
hours worked, total hours worked (if they fluctuate weekly), idle time (both machine
time and employee time), scrap amount, raw material and finished goods inventory
levels, etc.
 The specific information that management tracks weekly has two characteristics, It is
usually critical to the company and volatile. Information that is important to the
company’s success, but not subject to constant change, is normally monitored
monthly or on some other less frequent basis.
8-20
815.05 Management typically also has a few additional areas that they wish to monitor on a weekly
basis. These areas usually vary from industry to industry and company to company depending on their
volatility and importance to the company.
815.06 Exhibit 8-4 presents an example of a flash report that presents key information to owners through
the third week of a four-week period. It includes the three broad categories previously mentioned, plus a
fourth category that may be used for tracking any other key financial data. In addition, it includes blank
lines after each category to add any additional areas management wishes to track weekly. Before adding
any areas, however, management should ensure the new areas are both important and volatile (see
Paragraph 815.04). Finally, the last column of the report allows targeted (planned or budgeted) amounts
for the month to be entered to allow the company to better monitor its progress.
Weekly Cash Flow Report
815.07 Maintaining adequate cash is vital to the success of any small business. For many small
businesses, cash flows must be closely monitored to ensure that adequate cash is on hand to pay bills.
In these situations, a weekly cash flow forecast report is often necessary. In situations where cash flows
are not so tight, a monthly cash flow forecast report is generally sufficient. Monthly cash flow forecasts
are typically prepared by the controller, whereas the accounting staff often assists in preparing the
weekly cash flow forecasts.
815.08 Weekly cash forecasts are essentially a refinement of monthly forecasts. In contrast to monthly
forecasts, which often cover a 12-month period, weekly forecasts typically cover four weeks. Because
the covered period is brief, a weekly forecast often uses existing or known data, such as actual accounts
receivable and accounts payable. Thus, weekly forecasts are more precise than monthly forecasts.
However, obtaining the added precision and timeliness (typically updating every week) is more time
consuming. Thus, accounting personnel should generally prepare weekly forecasts only when the
company’s cash situation requires tighter monitoring. Since staff accounting personnel are more involved
with weekly forecasts, the following paragraphs focus on preparing a weekly cash flow forecast report.
815.09 Basic Steps in Preparing a Weekly Cash Forecast. In contrast to monthly cash flow reports,
fewer assumptions usually are required when preparing weekly cash forecasts, since both the amount
and the timing of cash receipts and disbursements are more determinable. Preparing a weekly cash
forecast involves estimating the following amounts for each week that the forecast covers:
a. Collections of existing trade receivables.
b. Collections of forecasted new credit sales and any cash sales.
c. Collections of other scheduled amounts, such as notes receivable and interest
income.
d. Payments of amounts other than existing accounts payable, such as payroll, debt
payments, equipment purchases, and taxes.
e. Payments of existing accounts payable.
f. Payments or draws made on the company’s line of credit, if any.
8-21
Preparing Financial Reports with QuickBooks
Owner’s Weekly Flash Report
Exhibit 8-4
Period Ending: February 22, 2008 (Week 3)
Description
Sales:
Total sales
Total sales units
Orders received
Open backorders
Cash Flows:
Cash balance
A/R over 60 days
Past due A/P
Credit line balance
Production:
Units produced
Rejected units
Overtime hours
Idle time (hours):
Machine
Employees
Other:
8-22
Prepared by: D. Johnson
Week 3
Week 2
Week 1
Monthto-Date
Total
X
X
X
X
$ 6,500
26
$10,200
$10,500
$ 9,700
40
$ 7,500
$ 6,200
$ 4,800
20
$ 4,200
$ 8,500
$21,000
86
$21,900
N/A
$30,000
120
$31,000
$ 4,500
X
X
X
X
$28,200
$18,100
$ 7,500
$55,000
$12,800
$22,000
$14,700
$50,000
$(1,500)
$47,000
$ 3,500
$50,000
N/A
N/A
N/A
N/A
N/A
$15,000
$10,000
$40,000
X
X
X
32
0
12
42
3
45
28
0
0
102
3
57
130
1
10
X
X
2
4
6
7
1
1
9
12
2
4
Week 5
Week 4
Target
Monthly Total
The weekly cash forecast preparation process is relatively straightforward, with fewer unknowns than the
monthly forecast. Because the weekly forecast uses actual data, accounting personnel must dig into the
detailed records and thoroughly understand collection and payment practices. The most subjective and
difficult task—estimating credit sales collections—is discussed in more depth in Paragraphs 815.11-.14.
815.10 Exhibit 8-5 presents a sample weekly cash forecast. Since the weekly cash forecast is primarily
used by companies in a tight cash situation, the forecast segregates estimated vendor payments from
other payments, such as payroll and taxes, that may require more discretion regarding timing. Thus, if
available cash is insufficient to cover vendor payables, the company’s controller can decide whether to
draw down the company’s line of credit or delay certain vendor payments. The last line of the forecast
shows the expected ending weekly balance of the company’s line of credit. The following paragraphs
provide guidance on estimating collections from customers.
815.11 Estimating Customer Collections. Typically, the most subjective issue encountered when
preparing a weekly cash forecast is estimating cash receipts from customers. The process involves
estimating weekly collections of existing accounts receivable amounts, as well as new credit and cash
sales. If customers typically pay according to terms, weekly cash collections of existing unpaid
receivables can sometimes be estimated by using the accounts receivable software module to print out
an expected collection schedule based on invoice due dates. Since most customers do not pay
according to terms, however, a more detailed analysis is usually needed, as discussed in the following
paragraphs.
815.12 Accounting personnel generally combine past collection experience and an analysis of major
unpaid accounts to estimate collections of existing accounts receivable. Forecasted new sales and
related collections during the forecasted period often can be taken from the company’s monthly forecast
prepared by the controller.
815.13 Exhibit 8-6 presents a sample weekly schedule of estimated collections. The schedule has been
divided into three major sections: major unpaid accounts, other unpaid accounts, and the next four
weeks’ forecasted sales. The first three columns indicate how much will be collected during the fourweek period, and the remaining columns allocate the collections by week. The cash receipt totals for
each week can then be carried to the weekly cash forecast. The schedule would typically be updated
each week by adding the new week and deleting the past week.
815.14 The following items discuss each major section of the exhibit.
 Section I: Major Unpaid Accounts. This section analyzes any individually significant
past due accounts to estimate how much will be collected by week. Monthly
estimated collection amounts and weekly allocations usually can be obtained by
discussing account details with the person responsible for credit. In some cases, the
customer may have to be called.
8-23
Preparing Financial Reports with QuickBooks
Exhibit 8-5
Weekly Cash Forecast
Week 1
Beginning cash
Cash receipts:
Receivable collections
New sales collections
Interest income
Other:
Note receivable collection
Total cash receipts
Cash disbursements:
Emergency purchases
Net payroll
Taxes:
Payroll deposits
Income tax deposits
Sates tax deposits
Debt payments:
Principal
Interest
Other:
Rent
Property taxes
Insurance
Cash disbursements before payables
Cash available to pay vendors
A/P payments due to vendors
Cash surplus (shortage)
Line of credit draws (payments)
8-24
$
Week 2
25,000 $
724,000
140,000
Week 3
25,000 $
306,000
100,000
Week 4
25,000 $
406,000
100,000
Total
25,000 $
25,000
288,000 1,724,000
60,000
400,000
35,000
35,000
________ _________ _________ _________ _________
864,000
406,000
506,000
383,000 2,159,000
15,000
102,000
15,000
76,000
15,000
104,000
15,000
76,000
60,000
358,000
20,400
15,200
20,800
125,000
15,200
75,700
71,600
125,000
75,700
75,000
12,500
75,000
12,500
_________ _________ _________
137,400
106,200
264,800
_________ _________ _________
751,600
324,800
266,200
60,000
146,100
89,500
_________
565,000
_________
(157,000)
60,000
146,100
89,500
_________
1,073,400
_________
1,110,600
771,300
453,300
1,224,600
_________ _________ _________ _________ _________
(19,700) 324,800
(187,100) (157,000) (114,000)
Ending cash balance
44,700 (299,800) 212,100
93,000
50,000
_________ _________ _________ _________ _________
$ 25,000 $ 25,000 $ 25,000 $ (64,000) $ (64,000)
Ending line of credit balance
$ 494,700 $ 194,900 $ 407,000 $ 500,000 $ 500,000
Exhibit 8-6
Weekly Schedule of Estimated Collections
(in thousands)
Description
Monthly Estimated Collections
A/R
Est. %
Est. $
Balance
Collection Collections
Collection Allocation by Week
Week 1
Week 2
Week 3
Week 4
Total
l. Major Unpaid Accounts
Customer Name:
1. Kinro, Inc.
$
155
$
2. Mitchell Industries
202
195
3. Graham Plastics
138
45
4. Famous, Inc.
333
250
5. Davis Enterprises
78
25
906
599
84
$
10
$
$
$
74
195
$
84
195
45
$25
45
125
250
25
25
6.
7.
8.
9.
10.
Major A/C Totals
$330
25
125
119
599
ll. Other Unpaid Accounts
Estimated Weekly Collection %
Aging Categories:
35%
25%
25%
15%
100%
0—30 days
1170
78%
913
320
228
228
137
913
31—60 days
287
33%
95
33
24
24
14
95
61—90 days
118
100%
118
41
30
30
17
118
91—120 days
Over 120 days
Total Other A/R
1575
1126
394
282
282
168
1126
Total A/R
2481
1725
724
307
407
287
1725
400
20
80
100
200
400
lll. Next Four Weeks’ Forecasted Sales
Next four weeks’ sales
1600
Total A/R and Sales
$
4081
25%
$
2125
$
744
$
387
$
507
$
487
$2125
8-25
Preparing Financial Reports with QuickBooks
 Section II: Other Unpaid Accounts. This section lists remaining trade receivables
by aging category. The estimated collection percentage for each aging category
typically reflects historical collection patterns. Typically, the controller provides
accounting personnel with the appropriate percentages determined by analyzing past
collection experience. The percentages estimate how much will be collected in the
four-week period. To compute the percentages, the controller simply tracks the aging
categories from one month to the next to determine the percentage of each category
that is historically collected in the following month (i.e., four-week period). The
percentages can then be applied to each aging category to determine total expected
collections for that month.
After determining the estimated collection amounts for each aging category,
accounting personnel should allocate them to each week using historical weekly
collection patterns. For example, the company may find that a greater percentage of
cash is collected in the first week than in the last week of the month because
customers frequently mail payments around month end. Collection patterns are
typically determined by scheduling out weekly collections of accounts receivable for at
least three months and computing the percentage of each month’s collections by
week.
 Section Ill: Next Four Weeks’ Forecasted Sales. Accounting personnel typically
obtain the next four weeks’ forecasted sales and expected collections from the
company’s monthly cash forecast. The allocation of monthly collections to each week
is usually based on historical collection patterns (expected collections will often
concentrate in the latter weeks of the month).
Accounts Receivable Monthly Management Report
815.15 Most small businesses regularly monitor the accounts receivable function to help ensure that
policies and procedures are being followed and are achieving the desired results, and that the system is
operating as expected. This section discusses the following key information that accounting personnel
often assemble when assisting the controller in preparing an accounts receivable monthly management
report. Key aspects of the report include:
 Accounts receivable aging analysis.
 Accounts receivable turnover analysis.
 Bad debt analysis.
815.16 Exhibit 8-7 presents a sample report that presents key data for the current month, the
corresponding month of the preceding year, and the moving average for the preceding 12 months. The
report also includes a column for illustrating targeted or budgeted amounts, or percentages for
comparison to actual results. Finally, a section for any comments or explanations appears at the end of
the report.
815.17 Accounts Receivable Aging Analysis. Accounts receivable aging schedules are often the key
measure of accounts receivable performance. Aging schedules typically show the amounts and
percentages of outstanding accounts receivable in each aging category. The monthly report includes
both the amounts and percentages in each aging category for the current month, the corresponding
month of the preceding year, and the moving monthly average for the preceding year.
8-26
815.18 Accounts Receivable Turnover Analysis. Accounts receivable turnover analysis is a method
bookkeepers use to measure how effectively accounts receivable are being managed. The two most
commonly used turnover methods are the turnover ratio and days sales outstanding ratio.
 Turnover ratio. The turnover ratio indicates how many times accounts receivable
turns over during a period compared to sales. This ratio is typically computed by
dividing sales (monthly, quarterly, etc.) by ending or average accounts receivable. For
example, monthly credit sales of $50,000 and a receivable balance of $75,000
produce a turnover ratio of .667. On an annualized basis, the ratio would equal 8
(.667 x 360/30).
 Days sales outstanding ratio. The days’ sales outstanding (DSO) ratio converts the
turnover ratio into days. For example, an annual turnover ratio of 8 would convert to
approximately 45 days sales outstanding (360/8). Alternatively, the same DSO figure
can be obtained by dividing accounts receivable by average daily sales
($75,000/$1,667).
Bookkeeper personnel may use either turnover method to measure monthly performance, although the
DSO method is probably used most commonly. Whichever method bookkeepers choose, setting a
targeted or budgeted turnover or DSO ratio for comparison to the current period’s actual ratio is often
helpful. (If monthly sales fluctuate significantly, accounting personnel should consult with their controller
or outside CPA to decide whether an alternative method should be used.)
815.19 Bad Debt Analysis. Besides monitoring past-due accounts and turnover statistics, companies
also need to monitor bad debt statistics. Bad debts are generally compared to sales using the bad debt
ratio. The bad debt ratio merely computes bad debt expense for a given period as a percentage of credit
sales for the same period. Bad debts are also typically evaluated by comparing the allowance for
doubtful accounts (bad debt reserve) as a percentage of accounts receivable for a given period. The
monthly management report should include both percentages. If available, it should also include targeted
percentages for comparison to actual percentages for the current period.
8-27
Preparing Financial Reports with QuickBooks
Exhibit 8-7
Accounts Receivable Monthly Management Report
Company Name: ABC Company
Period Ended: 7/31/08
Prepared by: Judy Smith, Accounting
Date Prepared: 8/5/08
Same P/Y
Month
12 Month Average
Current Month
Target
Actual
%
Actual
%
Actual
%
Credit Sales
Accounts Receivable
Aging Analysis:
135000
1175000
1275000
Current—0—30 days
1264000
75% 1130000
73% 1220000
77%
31—60 days
219000
13%
180000
12%
185000
12%
61—90 days
101000
6%
120000
8%
80000
5%
91—120 days
68000
4%
75000
5%
50000
3%
Over 120 days
34000
2%
30000
2%
40000
3%
100%
Total unpaid
1686000
100% 1535000
100% 1575000
35
40
37
22000
21000
20000
1.5%
1.8%
1.6%
140000
119000
120000
60%
53%
71%
Turnover Analysis:
Days sales outstanding
38
Bad debt expense
Percent of sales
1.6%
Reserve for bad debts
% of A/R over 60 days
60%
Comments:
Days sales outstanding in the current period is below target by 3 days (38 – 35).
The reduction has freed up cash of approximately $135,000 (average daily sales of approximately
$45,000 x 3) during the current month. Assuming an 8% interest rate, the savings produces an
annual imputed interest expense reduction of $10,800.
Bad debt expense and the reserve are in line with target.
8-28
 Bad debt expense. A company’s bad debt expense and related ratio (as a
percentage of sales) will generally vary depending on its industry and the nature of its
credit policies. The company’s management should establish an acceptable bad debt
percentage that is consistent with its credit policy. Once management determines an
appropriate bad debt percentage, that percentage should be compared monthly to the
actual percentage. However, unless the company analyzes and expenses bad debts
throughout the year, monthly calculations of bad debt ratios can be misleading. In
those situations, bad debt ratios based on annual data may be more meaningful. In
any event, significant judgment and estimates are inherent when estimating bad debt
expense in any given period.
 Bad debt reserve. When the reserve for bad debts as a percentage of total accounts
receivable is compared to historical percentages, it can roughly indicate the reserve’s
overall adequacy. Management can obtain a more useful evaluation of the reserve’s
reasonableness, however, by computing the reserve as a percentage of delinquent
accounts receivable, such as those that are 60 days or more past due. A significant
change in the current period as compared to the corresponding month of the
preceding year, or the moving average for the preceding 12 months, requires
explanation. In some cases, however, comparing the current period percentage to
one based on adjusted prior-year actual balances may be more meaningful.
Inventory Monthly Management Report
815.20 Accounting personnel may also assist the controller with preparing a monthly report that monitors
key inventory and related purchasing department activities. Various methods are available for monitoring
inventories, and each company must select appropriate methods and reports for acquiring the needed
information. Today’s powerful personal computer and commercial inventory management software often
reduce the need for printed reports. Instead, the report or information is available immediately on the
computer screen. Infinite possibilities of reports might be useful in an inventory system; however, most
companies would cover at least the following in their inventory management reports:
 Summary of inventory by category, generally with comparative amounts for the prior
period or year, and the amount or percentage of increase or decrease.
 Comparison of actual inventory to forecasted inventory by category, and the amount
or percentage that actual is over or under forecast.
 Turnover analysis (or days, weeks, or months on hand) by category and in total.
 Summary of inventory activity, including requirements, usage, balances by part,
category, and classification.
 Summary of inventory movement, such as aging, slow-moving, obsolete, and excess.
 Reports on physical inventory overages and shortages.
 Summary of receipts and shipments.
 Inventory on hand and on order as compared to production or shipping requirements.
 Summary of physical counts and adjustments.
 Summary of purchasing activity, including amounts and number of orders written.
 Special reports, as required by senior management.
815.21 Exhibit 8-8 presents a report that summarizes inventories for the month and provides information
about purchasing activities. The report presents inventory balances (current month end, prior month end,
and preceding year end) and turnover information. This summary report would usually be supported by
other reports providing increasingly lower levels of details. For example, each individual line item may be
supported by a detailed report showing individual part numbers comprising the total. The supporting
8-29
Preparing Financial Reports with QuickBooks
detail usually would show the source of the information needed to calculate the year-to-date turnover.
815.22 Importance of Exception Reporting for Inventories. Another technique for making the report
more useful is to highlight exception conditions requiring management’s attention. For example, in
Exhibit 8-8, certain dollar amounts and turnover ratios are highlighted to indicate their greater
significance for management’s review. In many cases, preparers would explain the highlighted amounts
in notes to the presentation. In the Exhibit, inventory categories whose balances exceed prior year by
more than $100 or where the year-to-date turnovers differ from prior year by 0.5 or more are highlighted.
815.23 Most companies that have inventories as a normal part of operations must pull together
voluminous detailed information about those inventories. Emphasizing exceptions or extraordinary
occurrences when reporting on inventories is important for facilitating management’s review. An
executive can rarely oversee, check, or follow up on every detail. Reports should therefore distinguish
between satisfactory inventory items and those that need the attention of the executive who is receiving
the report.
815.24 Importance of Using Comparative Figures. Data for a single month or period is usually of little
significance. Actual data is most useful when compared to budget, plan, standards, past performance, or
some other measure. Generally, particular inventory data is less significant than the trend the data
portrays. For example, a current turnover ratio of two times may be significant only if it represents a
change from a prior period turnover ratio of four times. In many cases, using comparative figures will help
a controller apply exception reporting. Exhibit 8-8 compares actual balances and turnover rates with prior
periods. This technique can be effective when identifying the direction of any changes.
8-30
Exhibit 8-8
Illustration of Summary Inventory Reports
ABC Manufacturing Co., Inc.
Inventory Balances
Current
Month
Inventory Category
Compressors
Inc. (Dec.)
This
Month
Prior
Month
Year-to-date turnover
Prior
Year
Inc. (Dec)
YTD
This
Year
Last
Year
369
2.4
3.4
3.0
Target
$7,911
$7,952
($41)
$7,542
Speed controls
662
732
(70)
639
23
3.8
4.1
4.0
Sound units
345
317
28
418
(73)
1.9
1.8
1.8
3,113
3,062
51
3,254
(141)
1.3
1.4
1.3
966
908
58
794
172
0.4
1.0
1.0
Total raw materials
12,997
12,971
26
12,647
350
3.2
3.8
3.5
Air conditioners
12,991
13,041
(50)
13,100
(109)
4.5
4.7
4.7
Custom sound units
4,866
4,793
73
4,815
51
2.2
2.5
2.5
Retail sound units
1,015
1,359
(344)
1,233
(218)
2.4
2.5
2.3
Speed control units
1,590
1,767
(177)
1,625
(350
6.0
5.9
7.0
828
823
5
815
13
2.4
2.1
2.8
2,653
2,403
250
2,515
138
2.6
2.8
2.8
Parts
Accessories
Accessories
Travel accessories
Other
1,281
1,278
3
1,306
(25)
6.0
5.8
7.0
Total finished goods
25,224
25,464
(240)
25,409
(185)
4.3
4.8
4.5
Total all inventories
$38,221
$38,435
($214)
$38,056
$165
4.0
4.1
4.0
Purchasing Activity
---Current Month--This
Year
Purchasing Item
Overall Comments
---Year to Date---
Last
Year
This
Year
Last
Year
Purchase orders issued
$
505,122
483,046
2,659,925
2,565,405
Purchase orders issued
#
292
287
1,769
1,776
Average per order
$
1,730
1,683
1,504
1,444
Merchandise received
$
482,753
483,042
2,516,171
2,358,281
Merchandise rejected
$
5,634
3,054
12,517
4,956
1.17%
0.63%
0.50%
0.21%
7,118
6,762
42,494
39,761
1,068
1,014
6,374
5,964
309
281
1,857
1,675
48
47
301
279
4
2
12
11
Rejected as % of received
Purchasing department expenses
Salaries and wages
$
Other payroll costs
Travel and entertainment
Occupancy costs
Other
Total
$
$ Dept Exp/$ Purchases
$ Dept Exp/# Purchases
$
8,547
8,106
51,038
47,690
1.69%
1.68%
1.92%
1.86%
29
28
29
27
8-31
Preparing Financial Reports with QuickBooks
820
QUICKBOOKS REPORTS AND GRAPHS
Reports and Graphs Help You Understand Your Business
820.01 So far, you’ve been learning ways to track your data in QuickBooks. In this section, you’ll work
with two of the most valuable tools in QuickBooks: reports and graphs. Reports and graphs give you
insight into your finances; they’re two of the most important benefits of tracking your data in QuickBooks.
820.02 Often, people’s perceptions of their business profitability don’t match the facts. If you enter your
data in QuickBooks, but don’t take the time to analyze the data, your business decisions are based on
incomplete knowledge. Reports let you summarize your financial data so you make decisions based on
analysis of the numbers.
820.03 Reports give you the bottom line—you can see exactly how profitable your business is.
If it’s not doing as well as you’d hoped, you can create reports that show you which areas need
improvement. QuickBooks has dozens of preset reports, but if you have specific reporting needs, you
can customize any QuickBooks report to show exactly the data you want. And if you’re interested in
getting quick information, you can use a QuickReport that lets you summarize information from your lists,
forms, or registers with one click of a button.
820.04 Some people find it easier to see a visual picture of their financial data. If you’re interested in
learning more about trends or patterns in your business data (for example, what proportion of your
income comes from consulting services as compared to product sales), QuickBooks offers six types of
QuickInsight graphs.
Creating QuickReports
820.05 One of the fastest ways to see a report on your QuickBooks data is to create a QuickReport.
QuickReports are predesigned reports that give you information about the items you’re currently viewing
on screen. Whenever you have a list, a register, or a form displayed, you can click a button to have
QuickBooks create a QuickReport.
When to Use a QuickReport
820.06 Suppose you’re viewing the Vendor list, and you want to see a history of all transactions for a
certain vendor. Select the vendor’s name, click the Report menu button, and then select QuickReport.
You’ll see a report listing information about each bill for that vendor.
Suppose that Rock Castle Construction wants to see what it owes to Patton Hardware.
To see what you owe a vendor:
1. Click Vendor Center on the navigation bar.
QuickBooks displays the Vendor Center.
8-32
2. Select Patton Hardware Supplies.
3. In the Reports for this Vendor section, click the QuickReport link.
A vendor QuickReport shows all transactions for this month to date for the selected
vendor, Patton Hardware Supplies. The transactions shown can include purchase
orders, item receipts, bills, bill payments, and credits received from the vendor.
Note: If you want to see only unpaid bills and unapplied credits for the selected
vendor, click the Open Balance link in the Reports for this Vendor section.
Zooming In On a QuickReport
820.07 All QuickReports contain a summary of individual transactions. To help you better understand the
information presented in reports, QuickBooks lets you trace report data to the individual transaction level
using QuickZoom.
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Preparing Financial Reports with QuickBooks
820.08 When you position the mouse pointer over a number in a report and you see the QuickZoom
symbol (a magnifying glass with a Z in it), you can double-click the number to display the original
transaction in QuickBooks.
820.09 Suppose you want more detail about the item receipt shown in the report. (You use an item
receipt in QuickBooks when you want to record that you’ve received inventory items, but you haven’t yet
received a bill.)
To see more detail about an item:
1. Position the mouse pointer over the item receipt dated 12/05/07.
The arrow pointer turns into a magnifying glass with the letter Z (z for zoom).
2. Double-click the item receipt.
QuickBooks displays the Create Item Receipts window for the selected transaction.
3. Click Save & Close to close the window.
QuickBooks returns you to the QuickReport.
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Customizing QuickReports
820.10 Each QuickReport window has a buttonbar at the top of the report for customizing report content
and layout.
Customize the QuickReport you just created to display transaction numbers in the report.
To add a column to a report:
1. In the QuickReport window, click Modify Report.
QuickBooks displays the Modify Report window.
Customizing QuickReports
820.11 Each QuickReport window has a buttonbar at the top of the report for customizing report content
and layout.
Customize the QuickReport you just created to display transaction numbers in the report.
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Preparing Financial Reports with QuickBooks
To add a column to a report:
1. In the QuickReport window, click Modify Report. QuickBooks displays the Modify
Report window. Use the Display tab of the Modify Report window to select the
columns to include in the report and the date range of the report.
2. In the Columns list, select Trans #.
QuickBooks displays a checkmark next to Trans # to indicate that it’s selected.
3. Click OK to accept the change.
QuickBooks displays the customized vendor QuickReport.
Notice that the item receipt from Patton Hardware Supplies is now listed as
Transaction #266.
Next, you’ll move the Trans # column to a new position in the report.
To move a report column:
1. Position your mouse pointer over the Trans # column that you added to the
QuickReport. The mouse pointer changes shape to look like a hand.
2. Hold down the left mouse button and drag the Trans # column to the right until you
see an arrow between the Date Column and the Num column.
3. Release the mouse button.
QuickBooks places the Trans # column between the Date column and the Num
column.
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Next, you’ll use the QuickReport buttonbar to customize the report header.
To Change Information in the Report Heading:
1. In the QuickReport window, click Modify Report, and then click the Header/Footer tab.
On the Header/Footer tab, you can change the company name, report title, subtitle,
and date and time prepared. You can also specify whether to print the header on all
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Preparing Financial Reports with QuickBooks
pages or on just the first page. The Header/Footer tab is the same for all QuickBooks
reports.
Use this window to change the report title from Vendor QuickReport to Vendor History
Report.:
2. In the Report Title field, highlight the text for “Vendor QuickReport,” and type Vendor
History Report to replace the title.
3. Click OK to close the Modify Report window.
4. QuickBooks changes the title of the report and displays the new report.
5. Close the QuickReport window.
6. Close the Vendor Center.
Creating and Customizing Preset Reports
820.12 In addition to QuickReports, QuickBooks has dozens of preset report formats. You can create
profit and loss reports, balance sheet reports, accounts receivable reports, sales reports, accounts
payable reports, inventory reports, and many other types of reports.
820.13 The Reports Center categorizes the preset reports into 12 major categories:
 Company & Financial reports include the following:
 Profit and loss reports give you a global view of your company’s income,
expenses, and net profit or loss over a specific period of time.
 Balance sheet reports show the financial position of your business by listing
assets, liabilities, and equity.
 Statement of cash flows reports show the net change in your cash during a
period of time.
 Customers & Receivables (accounts receivable) reports give you information about
the receivables side of your business: which invoices are due (or overdue), how much
each customer owes your company, and so on.
 Sales reports give you information about what you have sold and to whom.
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 Jobs, Time & Mileage reports give information about how well your company is doing
at estimating jobs, how much time is spent on each job, and the mileage expenses for
each vehicle or job.
 Vendors & Payables (accounts payable) reports give you information about the
payables side of your business, including which bills are due, your sales tax liability,
and\ your current balance with each vendor.
 Purchases reports give you information about your purchases.
 Inventory reports give you information about status (such as the quantities you have
on hand or on order) and the value of your inventory.
 Employees & Payroll reports summarize the information you need to pay your current
payroll liabilities and fill out your tax forms. QuickBooks has these payroll reports:
summary, employee earnings, liabilities, item detail, transaction detail, and
transactions by payee.
 Banking reports include check detail, deposit detail, missing check reports, and
reconciliation reports.
 Bookkeeper & Taxes reports include income tax summary, income tax detail, general
ledger, trial balance, journal, transaction journal, and audit trail reports.
 Budget reports show how your income and expenses compare to the budgets you’ve
set up.
 List reports let you report on any information stored in a QuickBooks list.
Using the Report Center
820.14 A good way to learn about the reports available in QuickBooks—and how to work with them—is
the Report Center, which is available by clicking Report Center on the navigation bar.
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Preparing Financial Reports with QuickBooks
The Report Center contains a description and example of each QuickBooks report. The “Learning” link in
the center takes you to a window in which you can launch a video tutorial that provides an overview of
QuickBooks reports as well as links to several help topics about working with reports.
Creating a Balance Sheet Comparison Report
820.15 The balance sheet comparison report compares the current year against the previous year in
both dollar amount and percentage.
To Create a Balance Sheet Comparison Report for Rock Castle Construction:
1. In the Report Center, choose Company & Financial. Then choose Balance Sheet
2. Prev Year Comparison.
The report on your screen should resemble the following figure.
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Scroll the report window to see more of the report. Notice that the buttonbar at the
top of the report is the same buttonbar you saw in the QuickReport window. with the
addition of a Collapse button.
3. Click the Collapse button to see the difference.
The Collapse button hides subaccounts, jobs, and subclasses. Amounts are
summarized under the main heading. This button affects both the onscreen and
printed report.
4. Click Expand to return to the original report display.
Filtering Reports
820.16 You can customize preset reports the same way you customize QuickReports. Customize the
balance sheet comparison report and filter it to include only the transactions you specify.
820.17 Report filters let you set custom criteria for the transactions you want included in a report. When
you filter a report, QuickBooks includes only those transactions that match the rules you create.
To filter a preset report:
1. With the balance sheet comparison report displayed, click Modify Report on the report
buttonbar, and then click the Filters tab.
QuickBooks displays the Filters tab of the Modify Report window.
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Preparing Financial Reports with QuickBooks
Suppose you want to see only the asset accounts on the comparison balance sheet. You can
filter the report by account.
2. In the Filter scroll box, make sure Account is selected. Notice that QuickBooks provides a
description of the selected filter below the list of filters. If you need more information about how
applying a particular filter will affect the report, click Tell me more.
3. In the Account field, choose All assets from the drop-down list.
Selecting a Filter
820.18 Some filters represent more than one thing. This may be confusing if you’ve never used report
filters in QuickBooks before. Here are some tips on what to filter for:
 Use “Item” to filter for any kind of line item that appears on a purchase order or
sales form. These include goods and services, discounts, and sales tax.
 Use “Name” to filter for customers, jobs, vendors, employees, or any name on the
Other Names list.
 Use “Transaction type” to filter for any type of transaction, including invoices, cash
sales, statement charges, payments from customers, bank deposits, purchase
orders, item receipts, bills, bill payments, credit card charges, checks, paychecks,
and general journal entries.
4. Click OK.
QuickBooks displays the customized balance sheet comparison report.
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If you scroll to the bottom of the report, you’ll see that QuickBooks removed the
liability and other accounts from the report.
To keep a record of the information in the report as it exists today, you can save the report in Portable
Document Format (PDF).
To save a report as a PDF file:
1.
2.
3.
4.
5.
With the report open, choose “Save as PDF” from the File menu.
Navigate to the folder in which you want to store the file, and enter a filename.
Click Save.a t a
Close the report window.
Click No when QuickBooks asks if you want to add this report to the Memorized
Report list.
Creating and Customizing a Sales Report
820.18 Create a QuickBooks sales report and then customize it by changing the date range it covers.
To create a sales report:
1. From the Reports menu, choose Sales, and then choose Sales By Customer
Summary from the submenu.
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Preparing Financial Reports with QuickBooks
QuickBooks displays the sales by customer summary report.
The Dates field in the report buttonbar shows that the report covers “This Month-todate.” Customize the report so you can see sales figures from January 2007.
To customize a report:
1. In the Dates field, select Custom from the drop-down list.
2. In the From field, enter 01/01/2007.
3. In the To field, enter 01/31/2007 and press Tab.
QuickBooks updates the report and displays the new data.
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4. From the Dates field, choose All from the drop-down list.
Using QuickZoom in a Preset Report
820.19 As with all QuickBooks reports, you can QuickZoom any item in the report to see more detail.
To QuickZoom on a report item:
1. Position the mouse pointer over the $11,105.00—the amount for Anton Teschner’s
sun room.
The arrow pointer turns into a magnifying glass with a Z in it.
2. Double-click $11,105.00.
QuickBooks displays a QuickZoom report showing sales by customer detail.
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Preparing Financial Reports with QuickBooks
To QuickZoom Further to Display the Original Invoice For a Transaction:
1. Position the mouse pointer over the first item on the report (invoice #40 dated 10/05/2007 for
Removal labor).
2. Double-click anywhere in the first line.
QuickBooks displays Invoice #40 for Anton Teschner’s sun room.
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Notice that QuickBooks puts a paid stamp on invoices for which payment has been
received in full.
3. From the Window menu, choose Close All.
4. Click No when QuickBooks asks if you want to memorize the report.
5. Click Home in the navigation bar to display the Home page.
What you see when you QuickZoom in a report depends on the type of report displayed:
 If the report shows summary figures (like the sales by customer summary report
we just displayed) and you QuickZoom an amount, QuickBooks displays a
transaction report that includes the transactions which contribute to that amount.
 If the report shows transactions and you QuickZoom a transaction, QuickBooks
displays the invoice, bill, or other form for the requested transaction.
Saving Report Settings
820.20 After you have customized a report to provide the information you need, you can have
QuickBooks memorize the settings so you can quickly produce the same report in the future.
(QuickBooks memorizes a report’s settings, not the actual data.)
Note: If you use one of the QuickBooks: Premier products, you can export the settings for memorized
reports as report templates. A report template lets you specify all of a report’s settings in advance—for
example, report date, format, and filters. Report templates can be imported into other QuickBooks data
files and then accessed from the Memorized Report list.
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Preparing Financial Reports with QuickBooks
Creating Memorized Report Groups
820.21 In addition to saving report settings, you can create memorized report groups that you can use to
organize your memorized reports in a way that makes sense for your business and to allow you to
quickly process a group of reports at once.
820.22 QuickBooks comes preset with a number of memorized report groups each containing common
reports for each area. You can add your own reports to these groups, modify the groups to meet your
needs, and even create your own groups.
Create a memorized group called “Year End” to which you will add some memorized reports. Later, you
learn how you can batch process memorized reports.
To create a memorize report group:
1. Choose Memorized Reports from the Reports menu, and then choose Memorized
Report List.
QuickBooks opens the Memorized Report list.
2. In the Memorized Report list, click the Memorized Report menu button, and choose
New Group.
3. In the Name field of the New Memorized Report Group window, type Year End.
Your window should look like this.
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4. Click OK.
QuickBooks adds the new group to the Memorized Report list.
Memorizing Preset Reports
820.23 Now, you’ll memorize a report and add it to the memorized report group you just created.
To memorize a report:
1. From the Reports menu, choose Bookkeeper & Taxes, and then choose Income Tax
Summary.
2. On the report buttonbar, click Memorize.
QuickBooks displays the Memorize Report window.
3. Leave the name of the report as is.
4. Click the “Save in Memorized Report Group” checkbox to select it, and then choose Year End
from the drop-down list.
Your window should look like this.
5. Click OK to memorize the report and add it to the Year End memorized report group.
6. Close the income tax summary report.
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Preparing Financial Reports with QuickBooks
Adding Reports to Memorized Report Groups
820.24 Now, you’ll add two previously memorized reports to the Year End group.
To add memorized reports to a memorized report group:
1. In the Memorized Report List window, select the report called “1099 Summary--Year
End.”
2. Click the Memorized Report menu button, and then choose Edit Memorized Report.
QuickBooks opens the Edit Memorized Report window.
3. Leave the report name as is.
4. Click the “Save in Memorized Report Group” checkbox to select it, and then choose
Year End from the drop-down list.
5. Click OK.
QuickBooks moves the 1099 Summary report to the Year End memorized report
group.
In the Memorized Report List window, select the report called “Balance Sheet--Year End.”
Click the Memorized Report menu button, and then choose Edit Memorized Report.
Leave the report name as is.
Click the “Save in Memorized Report Group” checkbox to select it, and then choose Year End
from the drop-down list.
10.
Click OK.
6.
7.
8.
9.
Once a report is memorized, you can easily display it from the QuickBooks Memorized Report list.
To display a memorized report:
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1. In the Memorized Report list, select “Balance Sheet--Year End.”
2. Click Display.
QuickBooks displays the report.
3. Leave the report open.
Printing Reports
820.25 Any time you have a report displayed in the report window, you can print it by clicking the Print
button in the report button bar.
To print a report:
1. With the balance sheet summary report displayed, click Print.
QuickBooks displays the Print Reports window.
In the Print Reports window you can select the print orientation and tell QuickBooks
where you would like the pages to break in multi-page reports.
2. Click Preview to see how the report will look when you print it.
QuickBooks displays a preview of your report onscreen.
3. Click Close to close the Print Preview window.
4. Close the Print Reports window, and then close the report.
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Preparing Financial Reports with QuickBooks
Processing Reports in Groups
820.26 Organizing your memorized reports in groups makes it fast and easy to process several reports at
once. Now, you’ll process the reports you added to the Year End report group you created.
To Batch Process Reports:
1. In the Memorized Report list, select Year End.
2. Click Display.
QuickBooks opens the Process Multiple Reports window. You can use this window to
display or print the selected reports. You can also change the date range for reports
in this window before you display or print them by clicking in the From or To columns.
3. Leave all three reports selected and click Display.
QuickBooks opens the three reports in the Year End group.
4. From the Window menu, choose Close All.
Exporting Reports To Microsoft Excel
820.28 Occasionally, you may want to change a report’s appearance or contents in ways that aren’t
available in QuickBooks, filter report data in ways that you can’t in QuickBooks, or run “what-if” scenarios
on your QuickBooks data.
820.29 You can send reports from QuickBooks to Microsoft Excel. Since the changes you make in Excel
don’t affect your QuickBooks data, you’re free to customize reports as needed, and even change data to
run what-if scenarios.
Note: To proceed you need Microsoft Excel 2000, 2002, or 2003. If you don’t have Excel, proceed to
“Creating QuickInsight graphs”.
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Sending a Report to Microsoft Excel
820.30 When exporting a report to Microsoft Excel, you indicate whether or not you want to preserve the
formatting from your QuickBooks report. You also have the option of turning on or off several Excel
features from within QuickBooks.
820.31 By default, QuickBooks preserves the look of your report when exporting to Microsoft Excel, and
turns on the following Excel features:
 AutoFit sets column widths in Excel wide enough to display your data without cutting
off words or numbers.
 Freeze panes allows you to scroll through data while keeping the row and column
headers In view.
 Show Gridlines turns on gridlines in Excel.
 You’ll learn how to select which QuickBooks report formatting options you want to
preserve in Excel, and how to turn on and off certain Excel features from within
QuickBooks.
To send a report to Microsoft Excel:
1. From the Reports menu, choose Company & Financial, and then choose Balance
Sheet Standard.
2. On the Report buttonbar, click Modify Report.
QuickBooks displays the Modify report window.
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Preparing Financial Reports with QuickBooks
3. In the “Add subcolumns for” area, click the Previous Period checkbox, and then click the $
Change and % Change checkboxes.
Your screen should resemble the following.
4. Click OK.
Your balance sheet should now look like this.
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5. On the Report buttonbar, click Export.
QuickBooks displays the Export Report window.
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Preparing Financial Reports with QuickBooks
6. On the Basic tab, make sure that “a new Excel workbook” is selected.
If desired, you can also send the report to a new sheet in an existing Excel workbook,
or to a comma separated value (.csv) file.
7. Click the Advanced tab.
8. Under Formatting options, click the Colors checkbox to clear it.
The title font will remain blue in QuickBooks, but display in black in Excel.
9. Under Excel features, select the Auto Filtering checkbox.
Your screen should now resemble the following.
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10. Click Export.
QuickBooks starts Excel (if it’s not running already) and sends the report to a new
spreadsheet.
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Preparing Financial Reports with QuickBooks
If you wanted to save the report, you would choose Save from the Excel File menu.
Filtering a report in Microsoft Excel
820.32 Within Microsoft Excel, you can filter on any column of data using a drop-down list at the top of
the column. Using the drop-down list, you can apply a number of preset filters or create your own custom
filter.
820.33 To find out if any of Rock Castle Construction’s account balances have decreased since the
previous period, you’ll filter the balance sheet report you just created.
To filter a report in Microsoft Excel:
1. In the Excel window, click the down arrow in the $ Change column of the balance sheet report,
and choose (Custom...) from the drop-down list.
Excel displays the following window.
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2. In the $ Change field, choose “is less than” from the drop-down list.
3. In the field to the right, type 0.
Your screen should resemble the following.
4. Click OK.
Excel filters the $ Change column for negative amounts and displays the results.
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Preparing Financial Reports with QuickBooks
5. Close Excel without saving the report.
6. Close the balance sheet report in QuickBooks.
7. Choose No when QuickBooks displays a message asking if you want to memorize the report.
Creating QuickInsight Graphs
820.34 A report gives you numbers that are essential if you want to stay on top of your business
finances. But when you want a visual picture to plan current or future business decisions, a graph is
another invaluable tool.
820.35 A QuickInsight graph shows your data pictured as either a bar graph or a pie chart. The bar
graphs and pie charts are simply different views of the same company financial information.
QuickBooks has six types of graphs, providing up to 15 different views of your data:
 Income and Expenses graphs show your income and expenses for the period you
specify.
 Sales graphs show your company’s sales income for the period you specify.
 Accounts Receivable graphs show how much your customers owe.
 Accounts Payable graphs show how much you currently owe your vendors.
 Net Worth graphs show changes in your company’s net worth.
 Budget vs. Actual graphs let you see the variance between your budgeted amounts
and the actual amount you earned or spent.
To create a QuickInsight graph, select the type of graph you want from a report submenu.
Creating an Income and Expense Graph
820.36 If you want your business to be profitable, you need to keep an eye on your expenses. The
income and expense graph shows you exactly what you’re spending and where.
820.37 You should be especially concerned with the proportion you’re spending relative to the income
you receive. As a simplistic example, if you’re earning only $20,000 in income, you don’t want to spend
$30,000 in expenses.
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To create an income and expense graph:
1. From the Reports menu, choose Company & Financial, and then choose Income &
Expense Graph.
QuickBooks displays a graph depicting your income and expenses.
In the top portion of the graph window, QuickBooks displays a bar graph and legend
showing total income and expenses. In the lower portion of the window,
QuickBooks displays a pie chart and legend showing expense percentages by
account.
2. QuickBooks can display only 10 accounts at a time. To display more accounts, click
the Next Group button at the top of the graph window.
Features of QuickInsight Graphs
820.38 These features are common to all QuickInsight graphs:
 Every graph window, except for the Net Worth and the Budget vs Actual graphs,
shows a bar graph in the top part of the window and a pie chart in the bottom half.
The bar graph usually shows totals. For example, the Income and Expense graph
shows the total for income and the total for expenses in each month of the period.The
pie chart shows a breakdown of the information shown in the bar graph; each pie
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Preparing Financial Reports with QuickBooks
slice in the Income and Expense graph represents a type of income or expense.The
legend to the right of the pie chart shows you which income or expense account
corresponds to the color shown in the pie chart; it also shows you what percentage of
the pie each slice represents.
 Every graph window has a buttonbar with buttons you can click to customize the
graph. For example, you can change the time period shown in the graph by clicking
the Dates button. If you want the pie chart to show a breakdown by customer or class
rather than a breakdown by account, just click By Customer or By Class.
 Just as you can use QuickZoom in a report to get more detail on the numbers, you
can use QuickZoom in a graph to see the numbers behind the picture. When you
double-click a bar or pie slice, QuickBooks shows you the numbers represented by
that graphic image. For example, the pie chart legend tells which income/expense
accounts are represented by each pie slice, and tells you what percentage of the
whole is represented by each slice. When you zoom in on a pie slice, you can find out
exactly how much you received or spent (in dollars) for each account.
Customizing Graph Data
820.39 To display income accounts instead of expense accounts:
1. Click Income at the bottom of the graph window.
2. Click By Customer.
QuickBooks changes the pie chart to display income by customers.
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Using QuickZoom With Graphs
820.40 To help you better understand the information shown in the graphs, QuickBooks lets you trace
graphical data using QuickZoom graphs.
To display the sales for Anton Teschner:
1. Position the mouse pointer over the Teschner, Anton slice of the pie chart
(Use the Key on the right side of the window.)
The pointer changes to a magnifying glass with the letter Z inside.
2. Double-click the Teschner, Anton slice.
Note: If a slice is too small to click, click on its legend representation instead.
QuickBooks displays a QuickZoom graph depicting sales for Anton Teschner by
month.
To display a report describing the transactions for a given month:
1. Position the mouse pointer over the bar representing November 2007.
The pointer turns into the QuickZoom symbol.
2. Double-click the bar.
QuickBooks displays the custom transaction detail report for the month of November
2007.
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Preparing Financial Reports with QuickBooks
You may need to scroll to the right to see the entire report.
To display the first transaction in the report:
1. Double-click any of the lines in the report for Invoice #60.
QuickBooks displays the invoice.
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2. From the Window menu, choose Close All.
Customizing How Graphs Display
820.41 You can customize graphs to control what data they include and how the data is displayed.
Change the display from three-dimensional (3D) to two-dimensional (2D) graphs.
To change from 3D to 2D:
1. From the Edit menu, choose Preferences.
QuickBooks displays the Preferences window.
2. In the left panel, click Reports & Graphs.
QuickBooks displays the Preferences window for Reports and Graphs.
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Preparing Financial Reports with QuickBooks
3. Click “Draw graphs in 2D (faster).”
A checkmark appears in the checkbox to indicate that Draw graphs in 2D (faster) is
selected.
4. Click OK.
5. From the Reports menu, choose Sales. Then choose Sales Graph.
QuickBooks displays the sales graph in 2D.
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Displaying graphs in 2D often allows your computer to draw them on your screen
faster than displaying them in 3D.
6. Close the graph.
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Preparing Financial Reports with QuickBooks
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