Can you believe it, recently an accounting/bookkeeping on-line forum had someone write in
with the question, “When you say debit, are you just misspelling debt?”? Do your clients really understand the differences between a ‘payable’ and a ‘prepaid’? Can you explain to a client why a ‘credit transaction’ on a client’s open account isn’t issued as a negative amount? When is an LLC preferred over an S-Corporation?
These are the kinds of questions that not only appear in the forums you and I may respond to, but they are also the types of questions that day-to-day users of accounting software find themselves wondering about. Many of them try to research their query by posting forum questions, and sometimes they get the right answer, sometimes they get the wrong answer, and sometimes the answers are so confusing that it takes a PhD in six academic endeavors to interpret. Then there are those users who look for an answer and find themselves more confused, and even wondering, ‘why did I bother?’ Unfortunately, there will be some who simply refuse to try to get the answer and they just go on posting junk into their books.
But guess what, some of the people posting these questions are not end-users, they are actually individuals holding themselves out as ‘trusted advisors’ to small business owners. Perhaps they think to themselves, the software says “you don’t need to know accounting’ so I can sell my time recording the transactions of a small business. On the other hand, they made a ‘D’ at the local Vo-tech in the course on business record-keeping, so why shouldn’t they be qualified to keep books for some small business.
Then of course there are those people who you wonder, how did they earn a degree in accounting, or even get a ‘Public Accountant’ designation and they have no idea of what constitutes prepaid expenses any more than they understanding incurred but not reported liabilities. Even when they pull out the reporting standards, they are confused how to post the appropriate transactions in the particular software they are using.
Rob Shaff, a great accountant, and close friend of mine, who has contributed numerous ‘tax related’ articles to Insightful Accountant in the past, will join me in authorship of this series. In so doing our intent is to cover the kinds of issues I have just been mentioning in this new series. ‘Accounting Tips Tuesday sponsored by ZOHO Books’ will focus on basic bookkeeping, fundamental accounting, tax implications of more complex transactions, and the brick-n-mortar of preparing accurate financials over the next year.
Each Tuesday we will present articles that fit into one of two categories. First, the theory behind basic, and even not so basic, accounting concepts with practical applications including the old ‘debits and credits’ appropriate to the situation. Second, we will go beyond the practical theory and actually cover fundamental software use in the proper recording of these types of transactions using Zoho Books.
I know what you are thinking, “I don’t use Zoho Books, so this series won’t apply to me…”; well the software is just a tool and the principles we illustrate will apply to any accounting software you are using, so long as it is ‘true’ accounting software and not just a computerized checkbook. End users should find themselves saying, “now I understand why the tax guy deducts costs I already paid and posts them to prepaid expenses on the balance sheet.” Or a seasoned accountant may even find themselves going, “it really is easy to garner the numbers so we can allocate payroll and overhead to individual job costs.”
Zoho Books is easy-to-use on-line accounting software designed for small businesses, allowing them to manage their finances and stay on top of their cash flow. If you are not familiar with Zoho Books, just take a look with me at a few of their basics.
The Zoho Dashboard is the first thing you see when you log into your account, and it actually looks very similar to QX on-line (you know those other ‘guys’) accounting software. Maybe the colors are a little different and the access points slightly changed, but for the most part Zoho encompasses the complete accounting functionality you would expect.
Zoho Books Dashboard
The Zoho Dashboard gives an overview of your company’s total receivables & payables; top projects; and a lot more. The Sidebar allows you to switch between different modules of the product; you can easily access estimates, invoices and more from the Sales module, or record expenses, bills (etc.) from the Purchases module. Recent History allows you to view your recently visited transactions.
The Total Receivables section displays how much money your customers owe you. The section is divided into two parts, Current which is the amount you’re yet to receive for invoices that hasn’t crossed the payment due date, and Overdue representing the amount you’re yet to receive for invoices that have crossed the due date.
The Total Payables section displays how much money you owe your vendors. This section is also divided into two similar parts. Current represents the amount you’re yet to pay for purchase transactions that hasn’t crossed the payment due date, and Overdue is the amount you’re yet to pay for purchase transactions that have crossed the due date.
I could go on illustrating every aspect of the Zoho Books Dashboard, but this article is not about the software, it’s about how this software, or any accounting software can help you accomplish the tasks you need to perform. A little earlier I mentioned something about an inquiry concerning ‘customer credits’, so let’s spend a minute looking at that topic.
Customer Credits represent the money that you owe your customer. A credit note is issued in the customer’s name in order to keep track of this debt until it’s paid off. The debt remains until it’s refunded or subtracted from the next invoice you send your customer.
Why might you own your customer money? Perhaps you sent them an invoice for $23.00 on their last purchase and they simply misread the invoice and sent you a check as payment for $32.00. if you accept the check the difference between the amount of their check and the amount of the original invoice, which is $9.00, represents a credit to the customer. They don’t owe you, you owe them. Now a company might choose to immediately refund the customer the value of the credit, but if this customer is buying stuff from you all the time, then you may want to simply hold the credit and apply it to their very next invoice. In these cases you will issue the ‘credit’ to your customer so they are aware that have a credit available for their use the next time they are ready to buy.
No matter what ‘accounting software’ you are using, you should be able to issue properly configured customer credits if you create invoices and track Accounts Receivable, and so your actual steps maybe slightly different, but the principles remain the same.
The simplest way to create a credit note in Zoho Books is:
Zoho New Credit Note
When you are finished you have a completed Credit Note ready to go to your customer.
Zoho Credit Note
You can view and edit Credit Notes anytime by scrolling down the Sales Tab to view Credit Notes. Clicking on the pencil icon highlighted illustrated above lets you edit the credit previously recorded.
Credits you issue a customer can be applied to an invoice issued to the same customer. Doing so will reduce the invoice amount accordingly. To do this,
- Open the customer’s credit note and select the option Apply to invoice.
- Zoho books will display a list of the customer’s open invoices.
- Select the appropriate invoice and specify the amount to be applied.
Apply Customer Credits in Zoho Books
As a result, both the invoice amount and the credit available are reduced accordingly. If all the credits are used up, the status of the credit note will be changed to Closed.
You also have the option to Refund a credit from the More drop-down menu (shown above) at the top of the Credit Note.
Well this article is not intended to be an in-depth guide on Customer Credits, or how to use Zoho Books, rather it is designed to inform you of our new weekly series ‘Accounting Tips Tuesdays’. Rob and myself are hoping that you will join us each Tuesday as we strive to attempt to cover both the basics and the complex for users and professional alike. Until then "may all your accounting tips be true, and your debits and credits balance."