Customers are the lifeblood of every business. Making sure that the Customer Center in QuickBooks appears as it should is essential in managing a business. A regular run through of your Customer list will make it easier to identify things that need to be corrected and it will definitely help you avoid confusion in the future.
By opening the list of Customers, one can easily identify a customer with a zero balance, an unpaid invoice, or an available credit. It is the best starting point to validate whether customer balances are correct. Some other accounts receivable reports can also be helpful. Depending on the amount, if it is a collectible or an amount to be refunded, below are some tips to make sure that zero customer balances will appear as zero.
Credits and Refunds
There are instances when customers return items that are either paid or unpaid, or sometimes, as a result of unforeseen events such as failure to deliver the merchandise or that the product is not what the customer expected. This is when you need to decide if a Credit Memo or a Refund will be used. A Credit Memo can be used to offset an outstanding balance. It is most applicable if a customer returns or cancels an item even before paying for it, or for when they don’t want to get their money back now but want use it as a payment for future purchases.
On the other hand, the Refund option can be used to reimburse customers for overpayment or other paid services or items. In this regard, if there is an available credit or a negative amount showing in the Open Balance column for a customer, it can be dealt with by processing a refund.
First thing to bear in mind is that in QuickBooks Online, a refund can either affect the accounts receivable or just the bank balance. Second, there are two ways of processing a refund according to purpose: to offset an available credit or just to reimburse the customer for returned products. The Refund Receipt can be used without affecting the customer’s balance (that is, when it is already zero). To do this:
- Open the Refund Receipt screen (Plus sign → Refund Receipt).
- Fill out necessary fields and save the transaction.
However, when accounts receivable is affected, as is the case with an overpayment; an advance payment with no invoice or sales receipt; or simply just to offset an available credit, a Check or an Expense must be created.
- Open the Check screen.
- Fill out the fields, make sure to select Accounts Receivable for the Account.
- Save the transaction.
- Link the check to the open credit or unapplied payment.
- Open the Receive Payment screen
- Fill out the Customer and Date fields or the Memo field if necessary, but leave the other fields (Amount, Payment Method, and Reference Number) blank, including the Deposit too.
- Put a check mark on both the Check and the Unapplied Payment.
- Save the transaction.
Entering a Credit Memo affects the customer’s balance, but it still needs to be applied manually against an invoice. Once you have created a Credit Memo, link it to the invoice by recording a payment as above.
Fixing Incorrectly Applied Payments
Mistakes can happen! The more open invoices there are, the bigger the chance of applying a payment to the wrong invoice either for the same customer or to a different one. In some instances, the payment amount was accidentally modified, which can cause a discrepancy on the open balance. Other times, a payment is not linked to any invoice. To correct these, either edit or delete and re-create the transaction.
Unapplied Payment – You can get this status if a payment is not linked to an invoice or that the amount is an available credit. Make sure that there is an invoice to apply it to. Open the payment and link it to the invoice.
Incorrect amount – Simply edit the payment if it does not match the actual amount paid. However, if the payment has been deposited and reconciled, you need to first remove the deposit from the account register and take note if it has the ‘R’ mark. Edit the payment and redeposit it, making sure that the reconciled status has been put back.
Write Off Small Discrepancies
When the overpayment or underpayment is a matter of few cents and it would cost more resources to collect or pay the said amount, simply writing it off is justifiable. That is, of course, provided that you and your customer agree on this option.
Edit the invoice. This is the simplest way to get rid of those small amounts in QuickBooks Online. Add another line item to the original invoice using the same product/service that was already used or just create a new item for this purpose. Put a memo that can best describe the adjustment. If it is an underpayment, enter the amount as a negative number. For an overpayment, record it as a positive number.
Journal Entry. This option is commonly used in QuickBooks Desktop, but also works with QBO. Pull up the Journal Entry screen and check the date and the journal number. In the Account field, select Accounts Receivable. Enter the amount as Debit for overpayment, or Credit for underpayment and attach it to the customer. Select an offsetting account in the next row, which you may call Minor A/R Charge Off. This can be set up as an Income or an Other Income account. QuickBooks will automatically enter the amount either in the Credit or Debit column to counteract the entry in the first row. Save the transaction and apply it by receiving a payment.
The Customer Balance and the A/R Aging reports also provide lists of the transactions that need some attention. However, we recommend that whenever applicable, you record a transaction in Quickbooks the way that it actually happened. When in doubt, it is still best to seek advice from your accountant, especially for unusual scenarios where there is a need to create a new account.