How to Do Invoicing Correctly in QuickBooks Online

This video will cover how to manage the flow of this correctly, and why you want to do it this way to achieve a clean result. It'll also cover how to fix mistakes that you've already made, after you've made them.

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0:39 Creating the invoice

So I want to talk about this flowchart first, which is on the dashboard page. Talks a little bit about this. Some of this area is grayed out because I'm in a sample company file, but you can kind of see the same idea.

So when you send out invoices, the next thing you need to do is you need to receive payments against the invoice. So let me go through that part of this first.

So this is a pretty standard process. You're just going to pick a customer, you're probably going to create an invoice. This is not the part that most people have a hard time with. So if I just say something like design, and I say we sold four of this at this rate, we have a 300 balance, and I'm going to say save.

Now when I am paid for this particular invoice, it's important that I receive this payment against this very invoice that I just created. So I can either come in here to where it says sales and look for any outstanding invoices I have and find that particular one that I just created, or I can actually come in here to look for customers and I can go to find the customer that I created the invoice for. And here I have a list of all the open invoices for this particular customer. So I'm going to say receive a payment for this invoice.

1:49 Where people go wrong

And this is the part that most people create a mess of, if they're going to create a mess with this process.

So they don't consider this box right here, which indicates where this invoice is actually depositing to. Now you see that right now this is actually depositing to something called undeposited funds, which is one of the most useful functions inside QuickBooks when it comes to managing the invoicing process.

So most people will just default to depositing this to the bank account. And that's fine if this is literally like a check that came to me, or a payment that came to me, and it was for exactly this amount, and I took it to the bank by itself and deposited for exactly this amount. So if when I deposited this I got a deposit slip that basically said 300, then there's no problem at all with doing this this way. Select checking, save and close, you're done.

Then when you see this transaction come through the bank feed, you would basically match that payment through the bank feed to this invoice payment. It would come up automatically in the bank feed to match as an option, and you would say yep, that's what that was, and you would match it.

2:51

Where people get into trouble is when they don't make it possible for QuickBooks to understand how to match this against what's coming through the bank feed. What QuickBooks is primarily looking for, it's looking for a date and it's looking for an amount.

So if this is depositing for any other amount besides this. And a couple of reasons why it may happen is, I may have used a credit card, I may have let my customer pay me with a credit card, so there was some sort of payment processing fee that was taken out of the amount that was deposited. Or it may be that I'm gathering multiple checks and I'm going to go to the bank like every couple of days, and so I'm depositing multiple checks together, and so maybe this check is going to be grouped together with other payments that are all going to be deposited in a lump sum.

If any of those scenarios exist, then instead of saying deposit to the checking, I'm actually going to say deposit to undeposited funds. And what this is going to do is it's going to create sort of a way station where I can then adjust that payment amount for how it actually deposited, depending on why it deposited for a different amount.

So I can see here that my invoice amount is showing as paid off now, so this invoice is showing as closed, so I no longer have to worry about that outstanding AR.

3:42 Grouping deposits

However, what I now have is I have an amount sitting here in an account called undeposited funds. Let me show you where that's sitting.

So I have on my balance sheet this account now called undeposited funds. And undeposited funds is not an account that should have a balance in it in general. Only if there's a couple day delay from when I actually receive a payment to when I actually deposit to the bank account. But in general this account should not have a deposit on it as sort of just an ongoing thing. And you can see that one of the things that's sitting here is this payment that I just received and I'm sending through undeposited funds.

If I'm using the undeposited funds account, there's one more additional step that I need to take. I need to come up here to this new button, I need to say bank deposit, and this is where I'm now going to take everything that was sitting in undeposited funds and I'm now going to decide how it's going to be deposited into the bank account.

4:55

So let's say that this transaction here, this invoice I created for Cool Cars, maybe they sent me two checks simultaneously, so I have both of these checks.

All of this stuff sitting here, by the way, is all the things that are coming in from undeposited funds. So you saw that total that was there a minute ago, the 2362. Let me go back and show you that one more time. So 2362 is the total that's sitting here right now in undeposited funds. If I come up here in the undeposited funds I can see that that amount is made up of these three transactions that are sitting here.

So maybe these are all checks that I gathered during the day and I decided to take them all to the bank, and I'm going to deposit them all at the same time. And I would say, all of these transactions I'm depositing into this bank account on this date, and I would say save, save and close, save and new, whatever. So I would save this.

Then what that will do is it will actually record this deposit into my bank register. And then when my bank feed from the bank downloads into QuickBooks, it will be able to recognize a deposit that's exactly this amount. It will then match it against this bank deposit where I grouped this, and I will have a nice clean record of exactly what happened. So invoice created, payment received against the invoice, amount grouped with these different checks, put into the bank account. It will all be great.

6:26 Adjusting for fees

Now another scenario, like I said, may be that this didn't deposit for exactly the same amount. Maybe I offered the client a discount, maybe I processed it in some way that left me with less money than that.

So what I'm going to do is I'm going to adjust this now for what that was. So let's say that it's this transaction here. I'm going to come down here and I'm going to say bank charges. This is, you can call it whatever you want, payment processing, whatever. Bank charges. And let's say that maybe I got charged 20 to process that. So now I'm going to put in a negative amount of 20, and I can see now that this amount that's hitting the bank is going to be exactly 1,655 and 52 cents.

And if this is exactly the amount that deposited into my bank account, again I will now be able to see exactly what deposited. It will match against the fee that came in through my bank account, and I will be able to handle this the way that I need to handle it.

7:26 Why this double counts income

Now, one of the ways that you can tell that this is happening in your books. First of all, let me say that if you're not using this flow correctly, you end up double counting income.

And the reason why that's true is because when this invoice is created to begin with, let me show you what's happening on the back end from an accounting perspective. So not when I receive the payment, but when I go in and I create the invoice to begin with.

So let's go look at that invoice one more time, so the invoice called Cool Cars. When I create this invoice to begin with, what happens is, this is what happens to my books from an accounting perspective. This shows you the journal entry behind. So I show accounts receivable created for 300, and I showed design income for 300.

So at the time that this invoice is created, that is when the income for this invoice is actually recognized. At the time that the payment for this is actually received, income is not even touched at all. All that happens in this case when I receive my payment is, let me show you, I reduce my accounts receivable, and the other side of this transaction is this undeposited funds account. So income is not touched here at all. So the time that the income is recognized in my books is when the invoice is actually created.

8:48

So then what happens is, if when I'm in this bank feed, let's say this transaction came through, let's say it was maybe like this one right here, maybe there was some reason why there was like a hundred dollar difference.

Now if I were to just categorize this as income, because it didn't match against the activity that I already had, I would now have had the 300 of income that was actually created when the invoice was created, and now I have an additional amount that was created when I coded this incorrectly instead of matching it. So now I'm showing double income.

Like if this had been three hundred dollars, if I coded this for three hundred dollars and I had that other invoice that had been created for three hundred dollars, now a three hundred dollar transaction with a customer is hitting my books as a six hundred dollar impact to income, because I'm double counting the income, because I didn't match this when it came through. Instead I re-recorded it as income.

So that's part of the reason why this is so problematic. You're basically increasing your taxable income, not to mention completely misstating your books, throwing everything off. Really, really problematic when you don't do this process correctly.

9:55 Spotting and fixing it in reconciliation

Now one of the ways that you can tell that this is happening is when you find situations like this, when you come in to reconcile your bank accounts and you have transactions that are sitting here that are clearly coming through accounts receivable but are not matching to anything, and never matched anything that came through the bank account. And there's no transactions anywhere around it that match that same amount. This is a clear sign that this transaction, this payment, when it was received and came through the books, that it did not deposit into the bank account for the amount that they would have expected it to deposit for, for whatever reason. Therefore QuickBooks never matched it.

So therefore this income, somewhere in all of these transactions that were basically matched or selected and coded from the bank feed, this is buried in one of these transactions somewhere, but it doesn't match against anything. And so instead we have a situation where, because everything that's sitting in your reconciliation window is affecting your financial statements, so now we have income that doesn't exist that is floating here in the reconciliation window, because of the flow of information.

11:19

Here's another example right here. So another transaction that came through accounts receivable, again we have nothing around it that matches, nothing around it that is the same amount. And it needed to have passed through undeposited funds somehow to get the amount that actually deposited to the bank account correct.

Now sometimes you'll have a situation where this will happen and it just didn't match. The way you can tell that that happened is because you'll have the exact same amount. Like say that this transaction was 243. The date will be the same, the amount will be exactly the same, but one will show as being no match, and one will show as coming in from the bank account.

12:04

To fix this issue you just need to go back into your bank feed window, and you need to go in and you need to find the transaction that didn't match and undo it, which will drop it back into this for review tab, which will then allow you to match it, which will then resolve that issue.

But what you really want at the end of the day, when you are in your reconciliation window, is that all of these transactions have a little green icon by them. Meaning that everything came through, everything matched against, everything was either coded from the bank feed or matched correctly against something that was already existing from the transactions that you created, but then matched correctly against the bank feed. So that all the way down you have nice green symbols by everything, and you don't have any of these floating transactions that indicate duplications or erroneous issues or just data that is messing things up.

If you would like more information about how to use QuickBooks Online to properly track your ecommerce accounting, we have lots more videos. You can find the link to the playlist below.

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