QuickBooks Tip: Use credit memos, bill credits – not discounts

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By Joe Woodard, AccountingWEB QuickBooks columnist

Customer Discounts (applied on the Receive Payments window) and Vendor Discounts (applied on the Pay Bills window) are effective and efficient ways to discount what your customers owe you and what you owe to your vendors.

With vendors, the discounts are even more effective when you use date-driven terms because QuickBooks either will automatically apply the discount or automatically calculate the discount, depending on the settings in your Company-level preferences.

However, there are some drawbacks to using these discounts – and some advantages to using Credit Memos and Bill Credits instead.

Customer and Vendor discounts do not allow you to select an Item. Since you cannot use an Item, QuickBooks will not reflect the discount on item based reports like the Sales by Item Summary report and the Job Profitability Summary/Detail reports. QuickBooks also will not include customer discounts (which are reductions in income) on sales tax reports like the Sales Tax Revenue Summary report and the Sales Tax Liability report. If you use a Credit Memo or Bill Credit, you can either create a separate item to track the discount or you can use regular sales items so the discount will be reflected in the overall profitability for that item.

Warning: Do not use Inventory Items in this way. Doing so will result in an understatement in inventory quantities on hand.

Vendor Discounts do not allow you to designate a Customer/Job record. If you use job costing reports like the Profit & Loss by Job, discounts taken (usually a Cost of Goods Sold type account) will not show on the report because the discount to Cost of Goods Sold is not assigned to a customer or job record. If you use a Bill Credit, you can designate one or more jobs for the discount.

Vendor Discounts will automatically apply to bills, but only if the date of the bill payment is within the discount period designated by the date-driven terms on the bill. For example, the term 2% 10, Net 30 will allow you to take the discount if the bill date is within 10 days of the payment date. Though the automatic application by terms seems to be ideal, data entry errors on the date of the bill and/or the date of the bill payment can cost the company hundreds or thousands of dollars in unused discounts. Bill Credits are not date-sensitive and will always apply to the bill if you setup the auto-application in Company preferences. Then, the QuickBooks user can selectively remove any credits that the company is not eligible to take.

Tip: Alternatively you can setup your terms with very forgiving discount periods. For example, you can setup terms of 2% 10, Net 30 to offer the discount through day 30 instead of day 10.

Customer and Vendor discounts do not allow you to include a memo describing the reason for the discount. This is especially crucial when the discount is related to a quality-of-service dispute, damaged products shipped to the customer or receive from the vendor (but not shipped back) or any other special discount issue for which you need to make a notation.

Customer and Vendor discounts are not separate transaction types. Unlike Credit Memos and Bill Credits, discounts are linked to the Receive Payments transaction for customer discounts and the Bill Payment transaction for vendor discounts. On detail reports the discount amount shows as a separate line, but you do not have the ability to filter QuickBooks reports (or use Find filters) by Transaction type for Customer Discounts and/or Vendor Discounts.

Customer and Vendor Discounts have an adverse impact on Sales Tax calculations. If you pay sales tax on the accrual basis, a customer discount will not reduce taxability on the invoice you discount. If you pay sales tax on the cash basis, the discount will increase cash basis sales tax if the invoice you discount contains taxable line items. Either way, you overpay.

About the author:
Joe Woodard is an Advanced Certified QuickBooks ProAdvisor and Intuit Solution Provider who has taught more than 20,000 QuickBooks consultants across the country. Joe works with Intuit, state CPA societies, and Atlanta-area CPA firms to present advanced QuickBooks instruction to accounting professionals and software consultants. Joe has earned a unique relationship with Intuit as a trainer, consultant, and author. Joe has built two successful accounting software consulting practices: the first in New Orleans, and the second in Atlanta – Creative Financial Software (CFS). In addition to consulting with small businesses, CFS provides advisory services to CPA firms and other QuickBooks ProAdvisors/Intuit Solution Providers across the country – helping them to better service their clients who use Intuit products. Joe recently hosted the first annual Scaling New Heights QuickBooks conference in Atlanta.

See all articles by Joe Woodard.

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