Hi Michael,
Although you need to ask the IRS for permission (I think) you are allowed to change your basis of accounting from Cash to Accrual. This will give you accurate P&L's. I've never used Cash basis in 35 years so I'm not sure how Quickbooks handles it. When Cash basis is used and you're selling inventory and you're not matching the timing of expenses your P&L's will automatically be incorrect if the Revenue and the Expense are hitting different time periods which is almost guaranteed to happen under Cash basis. At tax time you could choose to convert to Cash basis strictly for tax reporting purposes by making a few adjustments outside of Quickbooks. This will allow you to maintain Quickbooks under the Accrual method.
As to your question: This is dumb on my part but I have totally forgotten how Cash basis is handled when deposits are received. Entering the deposit into a liability account is correct from an accounting point of view; I just don't know how the IRS looks at that deposit under Cash basis. Are you generating the receipt from the "Receive Payments" icon within Quickbooks? That payment receipt turns Accounts Receivable into a negative number which is OK assuming you realize that and/or your tax preparer knows that as well and/or your producing a P&L or B/S for a financial institution and/or you never offer Open Accounts.. All the above "and/or's" can easily be accounted for if they do exist by providing the appropriate notations to whomever. In my eyes not a big deal but some folks may object.
What is absolutely critical is you have a proper matching of expense to revenue - without that taking place you cannot accuarately determine your margins.
Another oddity which Intuit has confirmed via a support call: deposit value will not show up on the invoice therefore the invoice is overstated. Not an issue within Quickbooks as long as the deposit is applied properly but an issue with the customer when they look at their invoice as it doesn't show an accurate balance due. So I cheat as follows: Directly underneath the Total, within the bottom margin, I hand write the words "Balance Due" and then I hand write whatever the balance is. Rather professional don't you think? :-)
My personal practice is to never give out an "Invoice" until it is time to do an Invoice. And, that means the sale is ready to be concluded.
Question: When you say "QBP" are you referring to Quickbooks Pro or Quickbooks Premier? Quickbooks Premier offers more sophistication with inventory than Pro. It allows for the building of "Assembly's" which is exactly what a frame, gatorboard, the image, the mat and whatever else may be involved in the wall portrait to use an example. The Assembly process will automatically relieve the inventory and create an accurate COGS number. Without that you resort to guessing, or possibly considerable manual work. The secret is taking the required time to properly setup Quickbooks. It does take some time to do right, all accounting packages do, but once setup you actually have accurate numbers.
Hi Billy, thank you for such insight.
I am currently using QBP and cash basis, and the deposits are entered into the liability account.
In response to receiving the deposit, I am giving to the customer a payment receipt (a sales receipt).
When the job is complete and a full payment is due, I issue a full invoice, reflecting the prior payment.
Do you think this addresses it sufficiently?