QB - Unanswered question in my mind is whether he is doing cash or accrual basis on books. Sounds like accrual-basis on books since he has in liability account, but maybe in error. CPA seems to be doing cash-basis for taxes, from what he said he was told to do, but it seems to be a mix of accrual and cash basis accounting, so I think that is the first question to be answered.
You may notice I never give specific instructions on QB functions, I always let you add that. I only answer accounting questions in general if I know answers, on what s/b done, not how. As you may recall, my clients can't use QB in our industry since it does not meet regs. I may have one of 10 current clients on QB but only for a short time until they must pass audits. Used to use QB for my own accounting but I switched as of 2019 since I got a better deal.
QB terminology of sales and income, are meaningless to me since I refer to revenue and profit.
All my clients must do accrual-basis accounting so most do accrual-basis for taxes by 2nd year.
So there is a period where they do accrual-basis accounting but do cash-basis for taxes. I'm not looking to learn how to do things on QB but know many people are so I try to help by answering first part of question to help, knowing you will respond with the how-to on QB.
Procedure you describe below with prepayment and credit memo functioning as discounted sale sounds convoluted to me but if that is what is required to use QB, that is up to each client. In my industry, most clients must focus on the key criteria of their Govt contract customer so they don't have time to mess around with trying to get QB to do what is needed for basic accounting. Most functions needed cannot be done on QB, but I keep watch on QB to see if /when they do.
@qbteachmt wrote:
Here's why this is wrong: "He seems to understand it is in a liability account, which most people would never guess to do and he also knows he needs to move it to (revenue) income later, which is way ahead of most."
It is Income for the cash basis entity; their CPA told them so. If we were to do one example, you can see that this concept for Moving is wrong: "so I need to move it to income on Dec 31st. What is the best way to move it to income and then back into customer deposits"
Let's do one Deposit that is $100,000 on July 15, 2017 and we treat it incorrectly as Liablity. On Dec 31, 2015 we want to Move it from liability to Income. This is supposed to have been reported as Sales, already. It isn't generically income, but Sales. We "move" it to income, for purposes of tax reporting. On Jan 1, 2018, we "move" it back to Liability. Then, in April 2018, we finally make a Sale, and we "remove" it from Liability to income again, but the Real Sale is the income, now.
Here's what is supposed to happen: A cash Basis entity got Funds in July 2017. That is part of their sales, and they also need to address if that is Taxable at that time or not. Then, we want to show in April 2018 that a different Sale has happened (our actual sale) and we want to show the customer does not need to pay again. That's why the Prepayment is handled properly the first time we get the money and later, that same Prepayment concept is used to Apply to the actual Sale as a Credit Memo, which results in functioning as a Discounted Sale, for a cash basis entity, because they already reported the Fund amount as sales and income in the previous year.
An Accrual Basis entity handles the prepayment item linked to Liability. It is Liability when they first get it and it Relieves the Liability when they list that prepayment amount on the credit memo in April to apply that to that Actual sale.
And that's what the Intuit Article teaches you, as well.
