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How To Post Down Payments From Customers in QuickBooks

  
  
  

When invoicing a customer in QuickBooks for a large job most folks will request a down payment for work to be done before the job begins, typically we see this at 50% of the cost
of the total invoice that was remitted. However, some jobs (such as building a house) are so large in scope that the person may not want to invoice a customer until all work is complete because they would rather it be a time & materials job (a job costing feature). In this case our client will bill out a set amount at the beginning of the job to begin work and apply this amount to the final invoice when they're finished. 

The Scenario - Construction ABC has recently sold a job to build a home on an empty lot. The total amount of the job is estimated to be around $400,000 at completion but Construction ABC bills time & materials + 20% at completion and therefore won't be issuing a final invoice until the end of the job. Construction ABC bills $50,000 at the start of the job as a down payment to break ground and begin the foundation work. The customer gives $50,000 as a down payment to begin work. How should Construction ABC apply this in QuickBooks to show this amount correctly on the business's balance sheet?

How to Setup a Down Payment - To setup the down payment we'll add the customer first in customer center then create an invoice for which we can apply the down payment to. All this invoice will be doing is acting as a placeholder for which the down payment is received. When the invoice is open proceed to do the following to a create an item called 'Customer Down Payment':

  1. Put 'Customer Down Payment' in the item field
  2. Click 'Yes' to add it now
  3. Type is a 'Service' from the drop down
  4. Go to account bottom left and put in 'Customer Down Payments'
  5. Set Up as an 'Other Current Liability'
  6. Save and close
  7. Click 'Ok' to create the new item type

Now that we have the Customer Down Payment item
created we'll put $50,000 into the amount field and close the invoice. Next, right click the customer and click receive payment against the down payment invoice for the $50,000 that the customer has given to begin the job.

Explanation of the Liability Account - When we setup the Customer Down Payments account as an Other Current Liability we've told QuickBooks that this is money owed for work that has yet to be completed. It's a liability for the company because they haven't completed the work and the customer has full expectations to receive a final product that won't be delivered until the job is complete. When the final invoice is generated we'll back the payment out of the liability account as a payment against the final invoice because the final product has been delivered to the customer.

Applying the Down Payment - When the job has been finished ABC Construction will finally generate an invoice based on time & materials for the job detailing what was purchased for the job and showing how many hours were spent until completion. At the end of the invoice input the Customer Down Payment line item and enter the total of all down payments from this customer as a negative number. This will now $0 the Customers Down Payments in the liability account and properly show the income as billed from the invoice.


So, why go through all of this trouble? Why not just receive the payments for the customer and leave them as an open balance to be applied at a later date? If you take a $100,000 down payment on a job you've now thrown your accounts receivable $100,000 in the other direction, it'll be a negative balance, the horror!

Instead, if you setup a liability account it will properly reflect and give you a much cleaner understanding with what your liabilities are as a business (down payments that you owe for services yet to be fulfilled) and your accounts receivable will reflect as a positive number to show the total amount owed to the business for services that have been completed.

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Comments

This is really helpful, but I still am having a hard time with this. My problem is that I created an estimate for a customer using specific items that I sell. These items are tied to income accounts. Then, I invoiced the customer for 50% of that specific estimate (quickbooks now lets you partially invoice existing estimates very easily). When I receive a payment against that invoice, the payment is applied to the income accounts that the originally quoted items are tied to. How can I still invoice a detailed estimate for a down payment without created two sets of detailed items...one set tied to income accounts (for when I bill the end-of-job invoice) and one set tied to liability accounts (for the down payment invoice)?
Posted @ Wednesday, December 04, 2013 8:37 PM by Kevin
Which version of QuickBooks is this (Mac or PC) and year (2012, 2013, 2014)
Posted @ Thursday, December 05, 2013 9:53 AM by Alex Viau
Sorry...I'm working with Mac 2013
Posted @ Thursday, December 05, 2013 12:05 PM by Kevin
Kevin, I'll have to get my hands on Mac 2013 to look this over, I don't usually use QuickBooks for Mac as QuickBooks for Windows is quite different, it's basically a different program. Might have to give me a bit to give you an exact answer on this one unfortunately.
Posted @ Tuesday, December 10, 2013 2:42 PM by Alex Viau
Thanks for responding. I appreciate it. For now, I'm just going to use some manual journal entries to make things right.
Posted @ Tuesday, December 10, 2013 3:30 PM by Kevin
For some reason my payments are being posted to my "construction materials costs". I can't figure out how to move them to an income account?
Posted @ Tuesday, February 18, 2014 4:23 PM by Debora Thomas
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