In any given business here’s what happens at the core:
- Hopefully you sell something to a customer.
- Either you get paid right away, or you get paid later.
- 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.