QuickBooks Online – Lesson 1 -The Revenue Cycle

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In any given business here’s what happens at the core:

  1. Hopefully you sell something to a customer.
  2. Either you get paid right away, or you get paid later.
  3. Once you do get paid, the money flows into your bank account.

That’s the revenue cycle in a nutshell. The only consideration beyond the above, is how you get paid, and based on that how, exactly the money will flow from the customer’s account to yours.

When you post a sale, you’re posting to an income account. The offset is either going to be cash, or accounts receivable, depending on whether you’re getting paid now or later. When you are using accounting software, you will become a much more powerful user, if you can get in the habit of thinking through what is happening beyond the form, when you post a transaction.

In QuickBooks Online, we use items to describe the products and services we sell. Those items are linked to an income account. In reality, they can be linked to any type of account, such as a liability. The bottom line is understanding that when you use an item in an invoice, or a sales receipt, whichever account that item is linked to, is being credited. The debit goes to Accounts Receivable or Cash. When you understand it at this level, many other transactions will make a lot more sense, a lot faster. For example, if you invoice someone for a deposit, then you understand why you want to map an item to the liability account, Customer Deposits. That account will be credited, to increase the liability. Get it?

The video for this lesson is 30 minutes long. Make sure you follow along with the T-Account worksheet I’ve provided in Google Sheets. You can access that in your Patreon account.

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5 Replies to “QuickBooks Online – Lesson 1 -The Revenue Cycle”

  1. I have a customer that is service based and he is creating an invoice in order to collect a deposit (the services will be performed within a 90 day period after deposit is paid). When he completes the service, he adjusts the the same invoice and adds the trip expenses, which the client agrees to pay. After i have reviewed some of these invoices, i noticed they are completely incorrect due to credit card fees. Should this client be creating estimates first and having the client pay the deposit based on tha estimate?

    1. There should be two separate invoices.
      The first one to collect the deposit, using an item linked to a liability account (see lesson further down on customer deposits).
      Then when the services are rendered, and reimbursed expenses are known, (s)he should invoice the services, and use the deposit to apply payment to the second invoice.

  2. Hi Seth,

    I have a question regarding referral fees in a real estate business. If an angent is providing 20% of their commission to a referring agent, would you classify that as an Expense or Cost of Good?

    Thanks!

    Tom

    1. Hi Tom.

      Since we’re not talking about selling products, COGS is really just a reporting mechanism, which really means, it’s up to you, where you want to report something like this. In my own case, I would see it as a “direct cost,” therefore, I would book it as COGS. I would want to see it coming directly off my revenue, so I can see the difference right in my Gross Profit on my P&L.

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