December 01, 2010
Kimberly A. Brooks CPA, CITP, CISA Supervisor, Business Risk & Advisory Services
Certified QuickBooks ProAdvisor
While QuickBooks is touted as an easy, off-the-shelf, user friendly financial application for small to medium size businesses, it has a number of traps that, without proper user training, can frustrate the most patient of bookkeepers and wreak havoc on recording certain financial transactions. What follows are several helpful tips for using QuickBooks more efficiently and for troubleshooting a few tricky transactions.
Using the Undeposited Funds Preference for Recording Customer Payments
TRAP: Difficulty reconciling QuickBooks bank register deposits to monthly bank statement deposits.
TIP: Use the “Group with other Undeposited Funds” feature.
- Deposit directly to one of the cash accounts
- Group with other Undeposited Funds
The "Use Undeposited Funds as a default deposit to account" preference under Sales and Customers account preferences is the QuickBooks default setting. The Undeposited Funds account is a special account that is automatically created by QuickBooks (often coded as the 1499 account) and is used to track customer payments. Instead of recording each individual customer receipt as a single deposit entry directly into the cash account, customer payments are collected and held in the Undeposited Funds account until the actual bank deposit is made. QuickBooks effectively reduces the balance in Accounts Receivable and increases the balance in Undeposited Funds.
Once the actual bank deposit is prepared and taken to the bank, the customer payments sitting in the Undeposited Fund account can be grouped together and recorded as deposits in QuickBooks to mirror the actual bank deposit. QuickBooks effectively reduces the Undeposited Funds account and increases the applicable Cash account.
Using the “Group with other Undeposited Funds” option makes reconciliation of bank accounts easier by facilitating the matching of register deposits to the monthly bank statement. Without it, each customer payment would be entered in the register separately making bank reconciliation extremely time-consuming, if not impossible.
Troubleshooting the QuickBooks Undeposited Funds Account
TRAP: The Undeposited Funds account has a large balance in the account which, unfortunately, almost always means that revenue has been entered twice.
The most common reason for a large Undeposited Funds balance is the lack of understanding by the user of how the default setting for Group with other Undeposited Funds works. This lack of understanding typically contributes to the problem in two ways:
- Customer payments, recorded via the Customer -> Receive Payments function, accumulate in the Undeposited Funds account because the user ignores the popup window of “Payments to Deposit” when properly making a deposit via the Banking -> Make Deposits function. Without checking off the list of customer receipts awaiting deposit in this popup window, the funds never move from the Undeposited Funds account to the Cash account. The user may try to “correct” the missing deposit, and inadvertently create a duplicate deposit, by entering the bank deposit amount directly into the “Make Deposits” window.
- A problem can also arise when the user, while trying to reconcile the checking account, finds that deposits are missing and records the deposit directly in the check register. In doing so, the user may have effectively duplicated the deposit and may also have overstated revenue by posting it to a revenue account.
TIP: To correct the Undeposited Funds account and any duplication of revenue, there are basically two choices. The hard way involves deleting all the incorrect deposits and re-entering them again correctly. If there are many deposits, this method could be very time-consuming. Fortunately, there's an easier way:
- Find all of the incorrectly posted duplicate deposits in the bank register and copy down the chart of account used.
- Go to Banking -> Make Deposits and in the “Payments to Deposit” window, check off all the Undeposited Funds (i.e. customer payments) listed that have already been deposited to the bank and click “OK”. These will carry to the next windows entitled “Make Deposits.”
- In the “Make Deposits” window, under the list of customer payments carried over from the “Payments to Deposit” window, enter each of the duplicate deposits identified in step 1, the corresponding chart of account used in the duplicate deposit, and enter each duplicate deposit amount as a negative number.
- If done correctly, the resulting total deposit in the “Make Deposits” window should equal $0 and have no affect on the cash account balance. It will, however, properly reduce the Undeposited Funds account balance and any overstated revenue account(s). If some of the duplicate deposits were from a prior fiscal year, consult with your CPA or tax advisor for assistance since an amended tax return may need to be considered.
Voiding a Check in a Closed Period
TRAP: The QuickBooks “Void Check” function, found under the Edit menu, automatically zeros out the check as of its origination date. If the check to be voided is dated in a prior closed fiscal year, the prior period’s ending cash balance and associated account balances would be altered resulting in inaccurate prior period QuickBooks financial reports.
TIP: QuickBooks allows the Administrative user to set a closing date and password to prevent unauthorized or accidental changes to closed periods. With a closing date and password in place, only the Administrative user can override the automatic popup alert that warns the user that the transaction you are about to record will affect prior period balances. In the case of voiding a check from a closed period, proceeding with an override entry (i.e. enter closing date password) leads to a further prompt from QuickBooks. The user must decide whether to allow QuickBooks to automatically enter the void transaction through a series of journal entries (recommended choice).
If the Administrative user selects the "No, just void the check" response (not recommended), the void transaction will change prior period financial reports for the closed period, potentially creating a discrepancy between QuickBooks and filed tax returns.
If the Administrative user proceeds with a “Yes” response (recommended) the following journal entries are automatically created by QuickBooks:
- Check to be voided is associated only with an expense account:
If the check you are voiding is only associated with an expense account, QuickBooks will create two journal entries to preserve closed period financial balances. The first journal entry is dated on the same day as the original check and effectively duplicates the original check entry. The second journal entry is a reversing entry dated in the current period, which reverses the original accounting entry on the check.
- The original check is voided, changed to zero and marked as cleared in the check register.
- A journal entry, dated as of the original check date, is created with a credit to the bank account for $100 and a debit to office expense for $100.
- A reversing journal entry, dated on the day you process the void transaction in the current period, is created with a debit to the bank account for $100 and a credit to office expense for $100.
- Check to be voided is associated with a non-expense account or item:
If the check you are voiding is associated with a non-expense account, QuickBooks generates an alert that voiding the check could affect previous financial reports. Examples include checks with associated items, bill payments, paychecks, payroll liability payments, and sales tax payments. If the Administrative user chooses to override the warning and proceed, the voided check could give rise to the following situations, which require additional attention:
- Voiding a check that was used to purchase inventory items may falsely reduce inventory on hand, making inventory balances inaccurate. An adjustment to inventory may be required after voiding a related check.
- Voiding a check used to pay a vendor bill will put the affected vendor bill back into accounts payable and change accounts payable aging and open vendor bill reports. If applicable, a new vendor bill payment will need to be processed to bring the vendor invoice back to a paid status. If the vendor invoice in no longer to be paid and requires adjustment, a vendor credit will need to be processed against the vendor bill to zero it out of account payable.
- Voiding a paycheck will not automatically create adjusting general journal entries. Adjustments must be made directly to these accounts for the new amounts.
- Voiding a check written for payroll liability payments will not automatically create adjusting general journal entries. Adjustments to the liability balance for payroll items must be made after voiding a related check.
- Voiding a check for sales tax payments will not automatically create adjusting general journal entries. Adjustments to sales tax accounts must be made for the new amounts.
Writing Off a Bad Debt or Adjusting Accounts Receivable
TRAP: All too often, accountants will propose a journal entry to write off or adjust accounts receivable at year end. Journal entries to accounts receivable are not recommended because although they adjust the general ledger accounts receivable balance, they do not correct the underlying sales invoice transactions that are the basis for accounts receivable aging and open invoice reports, sales detail reports and, potentially, inventory detail reports.
It is not uncommon for a new customer account labeled “Year End Adjustment” to be created for the sole purpose of getting QuickBooks to accept the journal entry to accounts receivable. This entry remains on the accounts receivable detail reports indefinitely because there is no easy way to eliminated it.
TIP: If a sales invoice becomes uncollectible or requires adjustment, the related Account Receivable can be written off or adjusted by creating a credit memo transaction, via the Customers -> Create Credit Memo/Refund function, and then applying the credit memo to the open invoice via the Customers ->Receive Payments function.
For bad debt write-offs, a new Bad Debt item should be created as an Other Charge in the Item list under the List menu. The Bad Debt item should also be linked to a Bad Debts expense account in the chart of accounts. This bad debt item can then be used in the creation of the credit memo that will serve to write-off the uncollectible sales invoice. Once the credit memo transaction has been saved and closed, QuickBooks will automatically prompt the user to choose one of three options as to what to do with the credit. In this case, the user would select “Apply to an invoice” to zero out the uncollectible sales invoice, thereby reducing both the accounts receivable balance and the related sales income account.