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.

Maintaining accurate records and reviews of financial reports is like preventative maintenance on your vehicle. It costs money to have the oil and filters changed on a regular basis. Having your tires rotating and balanced can seem like just one more thing to fit into your schedule. However, if you don’t take the time to have these things done on a regular basis, the end result can cost you much more in vehicle repairs and new tires, than if you’d simply paid for the maintenance as it was needed. Accounting works the same way.
Accurate accounting boosts your bottom line, not by increasing your revenue, but by avoiding unnecessary expense. When invoices are reconciled with vendor statements, mistakes and overcharges are caught and corrected. Early pay discounts can be earned, instead of lost, if invoices are entered into your payables and paid before discount dates. The faster your billing goes out, the sooner payments will come back to be deposited in the bank. This improves your cash flow. Improved cash flow means that you can pay your bills on time and avoid finance charges. With accurate accounting, your taxes get deposited, paid, and filed on time, which means penalties and interest are avoided. It’s all preventative maintenance.

When payables and receivables spiral out of control because a business manager is too busy ‘running’ the business and not making sure the accounting is being kept up to date, a cash flow crunch will develop. One of the biggest causes of business failure is a lack of cash flow. Accurate accounting is what keeps the gears greased and the money flowing into and out of a business.

Having up-t0-date and professionally prepared financial statements is another aspect of your business’ preventative maintenance program. The work your accountant does on these forms assists you in obtaining credit at reasonable rates.

Don’t underestimate the value of your accounting staff and CPA firm. They make a bigger effect on your bottom line than you may realize.

In addition to recording the original purchase on your books, you will want to keep a copy of the original purchase receipt for each of these purchases in a separate file, designated just for assets. It is also recommended that you, or your accountant, maintain an ongoing spreadsheet listing each of these purchases. The spreadsheet should contain, the date of purchase, the supplier, the purchase price (including tax and shipping) and a full description of the item. By full description, we mean that ‘computer’ is not adequate. A ‘Dell Inspiron 1510 laptop’ would be a better description. Then you should also list how this item is being depreciated. Is it being expensed out in the year of purchase using the Section 179 rules, or are you using a yearly depreciation, and if so, how many years?

You will find that both the fixed asset spreadsheet, and your file of asset invoices will be important resources over the years. You may need these for audit purposes or when it comes time to sell or dispose of these items. Your accountant or accounting staff, will definitely need them for review each year at tax time. Taking the time to file and record these items as they are purchased, will save you time in the long run.

Many merchant accounts (these are the people that permit you to accept credit cards) just take a monthly debit out of your bank account at the end of the month, these are easy to account for, you simply enter a withdrawal in your account register for the amount debited and categorize it as Merchant Processing Fees, which should be a COGS or an Expense (this varies by where you are located and your industry, check with your accountant if you are unsure).

However, what about those merchant accounts that take the percentage before you even get the money, similar to Paypal? This makes it more difficult to track, however, I do have an answer.

(I want to say that I recommend that the following is done even if your fees get debited as a whole so that you can process the flow of your income.)

1. Open up a new bank account inside of QuickBooks, call it Merchant Account, or PayPal, or Google Checkout (whoever your processor is). Don’t hesitate to set up multiple, as a matter of fact many of my clients have multiple, so I set up an account titled ‘Merchant Accounts’ and then I have sub accounts titled PayPal, Google Checkout, Chase Paymentech under the main ‘Merchant Accounts’ account.

2. When you receive your payment for services (via Invoices or Cash Receipts) don’t deposit directly into your checking account, deposit it into the merchant account it goes into, because let’s be honest, it is not in your checking account yet.

3. As the monies show up in your checking account, transfer the funds from your merchant account to your bank account. This also makes it easier for PayPal when you may accumulate funds in the account and only make random transfers from the PayPal account.

4. Accounting for your fees/costs – can be done in one of three ways:

• If you get lump sum fees at the end of the month debited from your checking account, don’t worry about doing anything differently, just record that transaction once it posts.
• If you are using a service like Google Checkout or PayPal you can ‘see’ how much they take out via their transaction reports, so at the same time you make that transfer from your ‘merchant’ bank account in QuickBooks to your ‘checking’ bank account in QuickBooks – you can make a withdrawal entry from your ‘merchant’ checking account for your merchant processing fees.
• If you are using a more standard merchant services provider, you rarely get daily reports, and rather get monthly reports, at the end of every month when you get your reports, take the cost of the fees they charged you off of the statement and make a lump sum withdrawal from your ‘merchant’ bank account for your merchant processing fees. This is a good way to reconcile too, making sure you received all your monies, because at the end of the month after you enter the fees, the only thing left in your account should be any undeposited recent payments.

For my FreshBooks followers:

I promised you a follow up to my recent ‘making FreshBooks and QuickBooks play nicely posts’ – if you have not read them yet, check them out:

Making FreshBooks work with QuickBooks and vice versa Part 1

Making FreshBooks work with QuickBooks and vice versa Part 2

My suggestion for you all in regards to credit card processing fees is to do the same thing that I suggest above – create additional accounts for your merchant processing accounts and rather than depositing the payments received directly to your bank account, place them in their appropriate merchant account as the ‘middle man’ before it hits your bank account, and follow one of the three options above for recording the appropriate fees.

Do you have any questions or specific circumstances that I did not help you with? Feel free to comment on the post with your question(s) and I will respond personally!

Stay tuned, in the upcoming week I am going to talk about allocating Sales Tax in QuickBooks for FreshBooks users, incorporating it into my previously suggested methods for recording receivables and revenue.

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.

Method 1: Getting Receivables as a whole into QuickBooks

This method is ideal if:

• You do not need to track the accounts receivable balance by client inside of QuickBooks, but want to track your accounts receivable as a whole.
• Have no issues with documenting your invoicing on a monthly basis inside of QuickBooks.
• Are okay with entering your payments received on invoices, once the payments are actually received from your customers.

Note: I offer this as an option, because maintaining who owes you what in QuickBooks is not that big of a deal, because you track that same data inside of FreshBooks. However, tracking your accounts receivable total is necessary for some companies, such as accrual based entities.

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 billed, 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 sales 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 accounts receivable account 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. You should be able to see that the balance exists for your general client, and see the revenue reported in your Profit & Loss Statement.

You are not done yet! When you receive payments from your customers on these open invoices, you have to record this in QuickBooks. This is easy though:

15. Get a notification from FreshBooks that you have received a payment.

16. Open up QuickBooks

17. Click on Customers & then Receive Payments from the main menu.

18. Pick your general customer name in the Received From field, enter the amount received, the payment method, the date it was received, and then in the Memo line, I like to personally leave the real clients name and invoice number.

19. Click Save and Close.

20. Don’t forget to deposit your money in the Banking -> Make Deposits menu, all customer payments are automatically stored in Undeposited funds in recent versions of QuickBooks (in some older versions, you could pick the account you want it deposited to at the received payments screen).

Method 2: Getting Receivables on a per client basis into QuickBooks

This method is ideal if:

• You want track the accounts receivable balance by client inside of QuickBooks.
• Have no issues with documenting your invoicing on a monthly basis inside of QuickBooks.
• Are okay with entering your payments received on invoices, once the payments are actually received from your customers.

It is the same process as outlined above in method 1, with the following changes:

1. In Step 6 you will either want to skip this step or set up your actual clients name if they are not already in QuickBooks.

2. In Steps 10 and 11 you will only enter the amount for the specific client in that month, rather than the total revenue.

3. In Step 12, rather than entering the ‘general clients’ name, you would enter the specific name of the client.

4. In Step 18, rather than picking the ‘general clients’ name, you would select the specific name of client from whom you received payment.

It should be noted that with this method you will have to do an individual entry for each client, as QuickBooks does not permit combined General Journal Entries involving accounts receivable and multiple customer/client names.

In my opinion: It is not necessary to record things as in method 2, because you are already maintaining client specific accounts receivable information in FreshBooks. Entering your data as outlined in method 1 will assure your data is accurate, just not identical as it relates to client specific invoices and balances.

Before you pick one method over the other, I want to state that there are more ways than just these and I will be outlining them in upcoming blog posts.

Some of you may not want to have to enter your accounts receivable (the invoicing) and the payments received (the money received), this is especially applicable to cash based reporting companies, whose income is only income once the payment is actually received. So, rather than having to enter all the invoicing totals and then payment receipts, you can enter just payment totals. There are several ways that this can be done. Stay tuned and I will outline them in an upcoming blog post.