The first step in the process of determining your bad debt write-offs for the year is to print an accounts receivable aging report. You will want to determine which of the invoices that you have listed as past due have little or no chance of ever being collected. These will generally be invoices with clients that are a year old or more, that have failed to respond to all your attempts at collection.

The invoices that you are going to write-off as uncollectible should be clearly detailed in the supporting documentation for the adjusting entry that you will make to the Bad Debt Write-off expense account on the income statement. You will want to maintain your complete files on these bad debts showing all your billing and attempts at collection, should they ever be required by the IRS.

For most small companies, the adjusting entry that is made should credit your accounts receivable account on your balance sheet and debit your bad debts expense account on your income statement, decreasing your net income for the year.

Companies with larger receivables may follow a different procedure. Some of these companies will often create a ‘Bad Debt Allowance’ account on their balance sheet. This account is used to record the ‘estimated’ amount of bad debts expected rather than the specific individual bad debt write-offs. These estimated amounts should then be reviewed, at least quarterly, to adjust them to true expectations, which may move up or down. Actually write-offs of specific invoices will still occur, the accounting steps related to this type of accounting are just a little more complicated than the direct write-off method.

However, you probably purchased those 10 candles several months before they were sold. Where do you record that $40 purchase initially? Your purchases of goods for sale should initially be debited to your inventory account, which is an asset account on your balance sheet. You have simply exchanged one asset (cash ) for another asset (inventory).

Once the item sells, you will be recording the sale, which is a debit to cash (or accounts receivable) and a credit to your sales revenue. However, since you did not make 100% profit on the sale, you must reduce your sales by the cost of the goods sold. You do this my crediting your inventory and debiting your cost of goods sold. Now your income statement will show a $100 sale, less $40 cost of goods sold, for a gross profit of $60. Your inventory account will have also decreased by $40.

‘But I keep my books on a cash basis. Can’t all my material purchases go to cost of goods sold?’ you ask. In that case, you are correct. A business that is recording its transactions on a cash rather than an accrual basis will generally record all their materials purchased for resale under cost of good sold and then simply do a physical inventory count at year end to determine their inventory carry over at the end of the year.

Some businesses, such as a service business, will have both labor and materials as costs of goods sold, or direct costs. Only labor directly related to your revenue billings should be recorded in the cost of goods sold. For instance, since you are billing a customer for your receptionist’s time, her labor costs would not be recorded as a cost of goods sold. The labor for your field technician who did the billable work, would be recorded as a cost of goods sold. The labor for the receptionist should be recorded under your general operating expenses.

Again, if you’re uncertain on where or how to record a business transaction, a call to your accounting professional can sometimes be the simplest solution. They understand your business and can you give the best advice.

Just as a refresher, when your accounting is done on an accrual basis, revenue is recognized when the billing goes out to the client. On a cash basis, revenue is recognized when the client actually pays the bill, and you have deposited the funds. The same is true on the payables end. In an accrual system, expenses are recognized when your vendors bill you. In a cash system, the expenses are recognized on the books until you actually pay those bills.

So, how does that affect your sales tax filings? When you file your sales tax return, you must report the amount of sales during the filing period. You then must breakout the portion of those sales, which were taxable sales, and the amount of tax collected on those sales. If you’re doing your accounting on an accrual basis, your sales tax payable will be based on the billings you’ve sent out, regardless of whether you’ve collected payment from those clients or not. On a cash base system, you will only be required to pay into the state the actual sales tax collected from clients, not what you may have billed.

For example: Company A operates on the accrual system. They have billed out $100,000.00 worth of taxable sales in the filing period. They have collected only $65,000.00 worth of those billings at the end of the filing period. If their sales tax rate is 5%, they will need to pay in 5% of the total billings of $100,000.00 for the tax period, $5,000.00.

Company B operates on a cash system. They have billed out the same $100,000.00 worth of taxable sales and collected the same $65,000.00 at the end of the filing period. Since they are on a cash system, they only need to pay in 5% of the $65,000.00 received, or  $3,250.00.

Company A, on the accrual system, is having to provide the government with $1,750.00 of funds that they have not received into their bank account yet.

As you can see, it can make quite a difference on your cash flow, depending on how you report your sales tax. So which accounting method should you use when filing your sales tax? You are required to file your sales tax using the same accounting method you use for filing your income tax. If you file your income tax on a cash basis, then you should also file your sales tax on a cash basis. You cannot not mix and match, filing sales tax under one method and income tax under the other method.  Just maintain consistency with your accounting and filing methods, that’s the key.

QuickBooks is an accounting application and FreshBooks is an invoicing application. They are two different things, but in the end to have your data matching in both, there could be a ton of double entry resulting in valuable time consumed and strenuous effort.

You can have your data accurate in both, while not matching in both. Matching and accuracy are two different things. For all of the numbers to match up, it is a matter of accuracy. To have all of the details such as sales items etc. it would be a matter of matching.

In this blog post, I will begin to show you ways to get accurate data from FreshBooks into QuickBooks.

This blog post is Part 2, if you have not read Part 1, I suggest you do so, as it covers Methods 1 & 2.

In methods 1 and 2 we spoke of various ways to get your data into QuickBooks assuring that you have your Accounts Receivable accounted for. Now, we understand those two methods may not be ideal, and not everyone wants (or needs) to track their Accounts Receivable in QuickBooks – after all they track it in FreshBooks. We also understand that Cash Basis companies only have to worry about income after it is received.

So, let’s talk about Method 3, shall we. Method 3 is all about getting your paid income into QuickBooks from FreshBooks.

Method 3: Getting Money Received (Cash Revenue) as a whole into QuickBooks

This method is ideal if:

• You do not need to track accounts receivable in QuickBooks.
• You only want income data in QuickBooks after it is received (when it becomes cash revenue).
• You file taxes on a cash reporting basis (not accrual)

Step by Step Instructions:

1. Log Into your FreshBooks Account

2. Click on the Reports Tab

3. In the second column, click on the Revenue by Client report.

4. Select the year that you want to report on, highlight all clients, select total collected, and then click View Report.

5. Open QuickBooks

6. Set up a generic or general client in your Customer Center. My general client is called ‘FreshBooks Receivables’ (If you don’t know how to do this, visit my blog post on setting up a customer in QuickBooks)

7. Click on Company in the main menu bar and then Make Journal Entries

8. Select the end date of the month you are going to be recording sales, for this example we will be doing January 2010. So I would enter the date of January 31, 2010.

9. From the account drop down pick your Income account (mine is Accounting Services Income).

10. Tab over (or move with your mouse) to the credit column and enter your payments collected total for the month you are entering. You will get this information from the Revenue Report that you previously generated from FreshBooks, it is your total at the bottom for the month in question.

11. Go to the second row and from the account drop down box select your bank account that the funds went into and in the debit column enter the same amount (in most cases QuickBooks will automatically fill in that amount for you).

12. Tab over to the Name column and enter your general client name that you set up in Step 6.

13. Check to make sure that your entry looks similar to this:

14. Press Save and Close

What has happened now is you have your entire month income inside of QuickBooks. The income is sitting in your bank account.

Now, there are some rules about this:

• You must wait until the end of the month.
• If you want to track revenue by ‘client’ rather than just the general revenue, you would do the same thing as above but change Steps 6, 10 and 12.
  1. Step 6 would no longer be necessary.
  2. Step 10 would become: Tab over (or move with your mouse) to the credit column and enter your payments collected by client for the month you are entering. You will get this information from the Revenue Report that you previously generated from FreshBooks, it is next to your clients name, in the month column you are entering.
  3. Step 12 would become: Tab over to the Name column and enter your client name that you set up in Step 6.

Problems you may be thinking:

1. Not all of my income goes into the same bank account.

Answer: That is fine in Step 13 you can have multiple rows, not just two. So let’s assume that my $8,337.40 deposit was split between three bank accounts. I would still have the Row 1 be the credit column, but then Rows 2, 3 and 4 would each have the bank account that the monies went into and the specific amount. See here for an example:

2. Not 100% of my invoice payments go into my bank account, because I accept credit cards or Paypal and they take a percentage of the revenue.

Answer: If you accept credit cards or Paypal you have to understand that your money goes into a ‘different’ bank account before it hits your real bank account. Think of your merchant account as being a bank account or your Paypal account as being a bank account. In the next blog post I will explain how to deal with this in detail.

3. What about sales tax? All of your methods are recording sales tax as general revenue or income and I know it is not.

Answer: You are correct. We must make an entry to appropriately allocate your sales tax. I will cover this in detail in a follow up blog post as well.

Stay tuned, in the next week I will be writing two more blog posts:

• How to handle accounting for credit card processing or Paypal fees in QuickBooks (with a special segment on relating it to the suggested FreshBooks entries)
• How to handle allocating your sales tax in QuickBooks from FreshBooks.