In order to use QuickBooks 2012, you must understand how to record payments. Accounting principles state that sales revenue needs to be recognized when a sale is made. And that the sale is made when a business provides goods or services to a customer.
This requirement to record sales revenue at the time that goods or services are provided means that accounting for sales revenue is slightly more complicated than you may have first guessed. The first transaction, for example, the transaction that records a sale, is shown here.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 1,000 | |
| Sales revenue | 1,000 |
Journal Entry 1 shows how a $1,000 sale may be recorded. The journal entry shows a $1,000 debit to accounts receivable and a $1,000 credit to sales revenue. To record a $1,000 sale — a credit sale — the journal entry needs to show both the $1,000 increase in accounts receivable and the $1,000 increase in sales revenue.
When the business receives payment from the customer for the $1,000 receivable, the business records a journal entry like that shown.
| Account | Debit | Credit |
|---|---|---|
| Cash | 1,000 | |
| Accounts receivable | 1,000 |
Journal Entry 2 shows a $1,000 debit to cash, which is the $1,000 increase in the cash account that occurs because the customer has just paid you $1,000. Journal Entry 2 also shows a $1,000 credit to accounts receivable. This credit to the accounts receivable asset account reduces the accounts receivable balance.
At the point when you record both Journal Entry 1 and Journal Entry 2, the net effect is a $1,000 debit to cash (showing that the cash has increased by $1,000) and a $1,000 credit to sales revenue (showing that sales revenue has increased by $1,000). The $1,000 debit to accounts receivable and the $1,000 credit to accounts receivable net to zero.
If you think about this accounts receivable business a bit, you should realize that it makes sense. Although the accounts receivable account includes a $1,000 receivable balance, this just means that the customer owes you $1,000. But when the customer finally pays off the $1,000 bill, you need to zero out that receivable.
QuickBooks, by the way, automatically records Journal Entry 1 and Journal Entry 2 for you. Journal Entry 1 gets recorded whenever you issue or create a customer invoice.
Therefore, you don’t need to worry about the debits and credits shown in Journal Entry 1 except for one special occasion: When you set up QuickBooks and QuickBooks items (items are things that get included on the invoices), you do specify which account should be credited to track sales revenue.
So, although you may not need to worry much about the mechanics of Journal Entry 1, you should understand how this journal entry works so that you can set up QuickBooks correctly.
Journal Entry 2 also gets recorded automatically by QuickBooks. QuickBooks records Journal Entry 2 for you whenever you record a cash payment from a customer. You don’t need to worry, then, about the debits and credits necessary for recording customer payments. It’s helpful to understand how this journal entry works and how QuickBooks records this customer payment transaction.