QuickBooks Setup Issue – Balance Forward Customer Credits to be Refunded

One of the most fun aspects of working with students in the classroom and clients in the field is that they come up with questions or issues that I never considered. It’s kind of like “stump the band”. I was conducting a QuickBooks foundation class and a student asked me how, when using balance forwards to move existing accounting records into a new company file, she should record a customer with a credit that was to be subsequently paid. I was temporarily stumped but worked it out eventually. After figuring it out I was a little embarrassed I hadn’t just whipped the solution out. Well now I’m a smarter guy.

Use a credit memo because you can subsequently retrieve the credit memo and issue a refund check. Before you can do this you need to create an item because, like invoices, credit memos work with items and not the chart of accounts.

Here’s how you can do it if you are an accrual basis tax payer.

A nice flexible item to create is an “Other charge” item with both an expense and an income side, both pointed to the “Open Balance Equity” account. This makes it flexible to use in multiple situations. For example, if you are an accrual basis tax payer, you can use it to recreate an unpaid invoice detail and an unpaid bills detail with the offset to the “balance forward” clearing account.

Below is an example of this “Balance Forward” item.


Now we are ready to enter the customer credit as shown below.


Whenever we are ready to cut a check to refund the credit, we can select it from Customer Center or from the “Open invoice” report using the QuickBooks QuickZoom feature, select the “Use Credit to” dropdown menu, and select “Give refund”.

Here’s how to do it if you are a cash basis taxpayer

You would still use a credit memo to allow for a refund. However, you will need to enter unpaid invoices, bills, and credits as they were originally recorded because the non-investing and financing transactions are recognized for tax purposes in the year the receipt or disbursement occurred. Use of the method described for accrual basis taxpayers would cause the current tax year financials to be incorrect.

If your overpaid receivable was treated as an increase in income in the previous tax year the payment would need to be treated as a reduction in current year income. It’s always a good to come to an agreement with your tax accountant as to how to record this credit balance transaction in advance.

Robert Guild is Advanced Certified QuickBooks ProAdvisor in Austin, TX who conducts CPE courses for CPAs and individual training and group classes to QuickBooks users. His company at www.QBCoach.biz, maintains a sixteen-station QuickBooks lab, providing hands-on training. You can contact him directly at rguild@QBCoach.biz or follow him on twitter at QBPro