Accounts Receivables, Income and Deposits—Aren’t they all the same?

Many small business owners who do not have much accounting background will often times get accounts receivables, income and deposits confused, thinking they are all the same, and as long as I get the amounts into QuickBooks somehow, I will be covered. This, of course, is not true. In this article, we are going to discuss the differences in these three items and how to properly enter them, so you do not end up with duplicate entries, throwing off both your Profit & Loss and your Balance Sheet.

The first main difference between accounts receivables and income is where these numbers are recorded, and on which report. Accounts receivables are reported and seen on your Balance Sheet and income is reported and seen on the Profit and Loss. Accounts receivables are viewed as an asset of your company, in that accounts receivables represent money owed to you, but you have not received it yet. The reason that we want to record these is so that you have the entire value of your company. The Balance Sheet, where accounts receivables are recorded is what shows you the assets, liabilities and equity of your company, basically the value of your company. Income is something that we now have in hand, represents what is happening daily, weekly and monthly and is not considered an asset. Just like expenses are not considered a liability. You might look at it like past vs. future. The assets and liabilities represent what is owed you and what you owe, the income and expense represent what you have been paid and what you have paid out. We have covered the Profit & Loss statement and how to use this.

We now want to have a clear understanding of how to record your accounts receivables and your income, so that you do not do duplicate entries inadvertently, throwing your books off and giving you a skewed picture of your company. 

If your company operates on a cash basis, in other words, you do not do billings to your clients, you just have sales receipts and whatever you get in for the day that is all you have to record, then all you will be doing is reporting income and making deposits and you will not have any accounts receivables. When you enter your income, you will do this by making sales receipts in QuickBooks, not invoices.  You will still have to enter deposits the same way as a company that does accounts receivables, but you will not have to do invoices. We will go over making deposits later on in this article.

If you do bill your clients, no matter what the payment terms, then you will need to create invoices and then apply payments when the checks come in to pay a particular invoice. A common mistake made in QuickBooks is to create an invoice, and then also make a deposit, and never apply the payment to the invoice. The problem with this is that you have now entered the income twice in your books, once when you entered the invoice, and once when you made your deposit.  When you enter an invoice in QuickBooks, QuickBooks is making an entry in accounts receivables account and also in your income account.  When you make a deposit without going thru and applying the payment to the invoice, you also make another entry to the income account. So in order to prevent this duplicate entry, click on invoices in QuickBooks to create your invoice. Then when a check comes in, click on "Receive Payments" and then QuickBooks will give you the option to apply the payment to the proper invoice.  Once you have applied all the payments to the invoices, then you will go back to the home page and click on Make Deposits. You will get a screen that pops up with all the checks you have entered. You click on all the checks you are entering on your actual deposit slip and then follow the prompts to enter the deposit into QuickBooks as a total. So in other words, if you have 5 items/checks that you are depositing, and they total $5043, then when you are in the make deposit screen, and you have clicked on all 5 items in QuickBooks that match your actual deposit slip, then the deposit total should match what you are about to take to the bank. This will make bank account reconciliations simple. Your total deposit listed in QuickBooks should always match what the bank will be recording when you take the actual deposit in.

If you are doing cash basis accounting and entering sales receipts, all you have to do is click sales receipts, make your sales receipts, and then once all of them are entered, you also click on Make Deposits and do the same thing as explained above.

So whether you do cash basis accounting with sales receipts or Accrual based accounting with invoices, you will Make Deposits the same.

Hopefully you have found this helpful in the recording of your income and your accounts receivables and what the differences are.  In a future article, we will discuss how to read and use your Balance Sheet.