Recognizing Income in QuickBooks

Advice on how to apply accounting methods that keep your profit and loss statements in step with your cash flow and the value added to your materials inventory. August 28, 2010

Should a transaction be entered into Quickbooks as an invoice as soon as:
1) contract is signed,
2) money is deposited, or
3) cabinets are complete?

Which is correct to keep an accurate profit loss statement in Quickbooks? We may have a contract 1-3 months prior to construction. And can it be posted as a sale without being an invoice?

Forum Responses
(Business and Management Forum)
From contributor W:
When we take a deposit, we make an invoice with two entries:
Undeposited Funds

When the job is complete, our invoice has sales and an application of the retainer to sales:

Net Sales
Deposit Credit (moves money amount out of Retainer account)

From contributor S:
3) cabinets are complete (and delivered, with minor exceptions)

An invoice is issued only when there is a transfer of ownership of goods. Neither signing a contract nor a deposit accomplishes that.

From contributor G:
3. Accountants should err on the side of conservatism. Income is not generated by the sales of the product, or the depositing of a check. Income is produced at the time of shipment, when you turn something over to a customer.

Likewise, expenses are not recognized at the time a check is written, but at the consumption of the inputs, whatever they may be; this is called the accrual form of accounting. The exception to all this is if you operate on a cash basis.

Some, although not many, also recognized a portion of their profit while the product is being produced. This is usually done as a means to reprice Work In Progress Inventory to a replacement value and taking the difference as a manufacturing profit or loss.

From contributor S:
"Income is produced at the time of shipment, when you turn something over to a customer."

Revenue is recorded when an invoice is issued, not income. Revenue is the price of goods and services.

Income = price less cost.

From contributor G:
Thank you for the correction, contributor S. You are correct.

From the original questioner:
Thanks for the responses. The question comes from profit loss statements that can show a 50k profit or 50k loss dependent on the time of entry. How do you set up your accounting so it shows the correct sales/profit/loss?

From contributor S:
You need to get an accountant or a good bookkeeper to do it for you. Your question is too vague and beyond the scope of this forum.

From contributor G:
The biggest single issue that makes an income statement jump around like that is inventory. Inventory has a value! Many choose not to track the value of the inventory while it is in their shop and having other value add processes contributing to its value.

I would likely vary my answer to you depending on your size and the requirements of your banker if you are comfortable with your controls.

What I like to help set up in hardwood processing plants is a mechanism to: 1.) figure what it costs to run the cell, and the next cell, and the next cell, etc., 2.) attribute those costs to the inventory as they occur, 3.) relieve the inventory of those costs at the time of shipment to clear the Cost of Goods Sold (COGS).

In this manner, running the plant and processing lumber into parts is relatively profit neutral (unless you have a bad load that you can not claim, a major snafu, or conversely if you have extraordinarily good yield). The vast majority of income or profit occurs at the time of shipping/invoicing.

For example:
When purchasing inputs
Inventory 5000

Cash 5000
When processing
Inventory 2000
Production Recovery 2000
When shipping/invoicing
AR 10000
Sales 10000
COGS 7000
Inventory 7000
This will leave 3000 profit.

The production recovery encapsulates your conversion at the cell level and provides a benchmark to measure how efficiently the cell is producing a product based on the power, payroll, overhead and anything else that may go into the cell.

Any which way you choose to do it, you will more than likely find inventory to be the issue. If you can quantify what the inventory is worth all through the process, you can take a snapshot of your profit all through the process.

From contributor G:
I tried to indent for Debits and Credits, but it did not work on the example. But contributor S is right - it's not a simple slam dunk process.

From contributor D:
Cash or accrual based. You decide. If you log bills as you pay them, this would be a cash based system. If you record a purchase or sale when it is invoiced - accrual. Our system is accrual based. We record purchases when bill is received and maintain a payables account. We will create a sales order when the deposit is paid, but record the payment as a liability "Deposits from customers" until the job is completed and the sales order is converted to an invoice.

You may choose to log progress invoices, and this is again your choice. The other avenue is to record "work in progress" to keep your books looking a little more real at month end.

The above posts are all acceptable. Your accountant should tell you to pick a generally accepted system and keep with it. You should choose your system with your accountant.

I think I got your second question straight and the answer is sort of no. You can create the invoice, but if you post it, the sale will be recorded. You can record a Sales Order in QB (some versions) and it is not posted as a sale until you convert it to an invoice. You can also create the invoice and under edit, mark it as "pending" so it does not post to the sales and receivables accounts.

This will show up in reports under sales - pending sales, and can be opened and under edit, marked as final.

If you have a version of QB that gives you sales orders, I would probably elect that route and use them to track your WIP to level out the statements. You just need a realistic and simple method of determining where you are in the project(s) and adjust your WIP up or down to suit.

From the original questioner:
Thanks. I had a statistics teacher tell me once, "figures don't lie, but liars can figure." I'm trying to hide anything in the numbers, just trying to see the truth. I'll try the Quickbooks forum and see what they have to say.

From the original questioner:
I went with the pending sales approach since I don't have the upgraded version. This works well and keeps finished jobs from WIP.

From contributor G:
What version of QuickBooks are you using? I use the contractor's edition. You can enter contracts (QuickBooks calls them estimates) at the time of signing. You then invoice deposits, progress payments, etc. based on the contract. Example - open customer center, select customer, select invoice. QuickBooks shows contract, select amount to invoice (several options - % of contract, specific amount of line item). Easy to keep track of where you are on all of your contracts.

From contributor J:
I usually start by creating a proposal within QB. When (and if) the customer accepts the proposal, they will send it back to me signed. I then go to that proposal and click "Create Invoice." I choose the option to "Create an invoice for a percentage of the entire invoice." That percentage is based on how much you take for a deposit. Then, based on your draw schedule, you will do the same thing at delivery and installation (or however you divide up your draw schedules). This way, in your P&L, you are only showing money that has already come in or is in the mail. I'm no accountant, but this works for me and keeps things simple.