Of course, your income is not really doubled. But your books say it is.
Most people use QuickBooks to create invoices, which is one of the great features of the program. When you create an invoice, QuickBooks records two entries. This is an example of double entry accounting. You do not need to fully understand the concept, but you do need to know that there are two entries, and you need to accept in blind faith that this is a very good thing.
The two entries are:
- Debit to Accounts Receivable (an asset – somebody owes you money)
- Credit to Revenue (whatever you call it in your business – sales, income, revenue)
When you get paid, the correct way to enter it is by applying the payment to the invoice to tell QuickBooks that the invoice is paid, and the money is in hand.
The menu path is Customers>Receive payments. When you apply the payment, QuickBooks records two entries. (Yet another example of the beautiful double entry accounting method!)
The two entries are:
- Debit to Cash (either your Undeposited Funds account, or your bank account, depending on how you have it set up.)
- Credit to (drum roll, please…) Accounts Receivable
When both these entries are done, the Accounts Receivable is zeroed out, as it should be.
So far so good. Here comes the mistake:
If you do not apply the payment to the invoice, but instead simply record the payment as a bank deposit (Banking>Make Deposits), the two entries are:
- Debit to Cash
- Credit to (cue theme from Psycho…) REVENUE! (Instead of Accounts Receivable)
The end result is that that you have double counted your revenue, and your Accounts Receivable is still sitting there as though the customer owes you money. It is not intuitively obvious that you have made a mistake, because the cash you entered is correct. It’s the only thing that is correct. The rest of the accounts are wrong, wrong, wrong.
If you discover that you or your bookkeeper has made this massive blunder, the good news is that it can be fixed with some straightforward data entry whereby you match up the payments to the customer’s Accounts Receivable.