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How Does Quickbooks Apply a Customer Payment To an Invoice With Multiple Line Items?

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QuickBooks applies a customer payment to an invoice with multiple line items by applying the proportion of the pre-tax subtotal paid to each individual line item and applying the remainder to sales tax on the invoice.

If an invoice is paid in full, this obviously results in every individual line item and the applicable sales tax marked as paid in full.

If the invoice is only partially paid, individual line items on the invoice will be partially paid in the proportion that the total payment bears to the pre-tax subtotal.

Let’s review an example using the sample data for Castle Rock Construction from QuickBooks 2009.

As of 12/4/2012, customer Teschner (an example name only) has 2 invoices outstanding: invoice # 1064 dated 10/5/2012 for $760 (the balance remaining) and invoice # 1085 dated 11/28/2012 for $8305.95.  On 12/5/2012, Teschner makes a payment of $5000 on check # 56321.  A portion of this payment, $760, is applied to the older invoice, # 1064, paying that invoice in full.  That leaves $4240 (i. e., $5000 – $760) to partially pay invoice # 1085.

Invoice # 1085 contains 8 line items with a pre-tax subtotal of $7920 and sales tax of $385.95, for a total of $8305.95.  To determine how QuickBooks applies the partial payment of $4240 to the line items on this invoice, compute the proportion of the payment to be applied ($4240) to the pre-tax subtotal ($7920), or 0.510477429 ($4240/$7920).

Next, multiply this ratio by the pre-tax subtotal of each line item on the invoice.  The first line item has a subtotal of $600.  Therefore, the amount paid on this line item is $306.28, or 0.510477429 X $600.  If we continue this process for each line item on the invoice and sum the amounts paid, that total will be $4042.98.  Since we started with a total of $4240 to apply to this invoice, the remainder of $197.02 (or $4240 – $4042.98) is applied to sales tax.

By creating a cash basis Custom Transaction Detail Report, we can see exactly how QuickBooks applied the payment to an invoice.  We’ll use the date parameters and the Filters on the Modify Report… button to highlight the exact application of the original payment of $5000.  Remember, a portion of this amount, $760, was applied to an older invoice.  This appears as the second line on the report.  The amounts in the debit column correspond to the exact application of the check.  For invoice # 1085, the invoice with multiple line items that was partially paid with this check, the amounts in the debit column represent the payment applied to each line item on the invoice.

QuickBooks Custom Transaction Detail Report Apply Customer Payment
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What Are Sources and Targets?

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Sources and targets are important concepts to understand reporting in QuickBooks and use of the Advanced Find function.

Sources and targets are terms assigned by Intuit to describe transactions.

In most instances, the source of a transaction is the summary or total of the transaction.  For example, the source of a check includes the amount of the check, the payee, and the bank account from which the check was written.  The target of a transaction is the distribution of the source into 1 or more other accounts.  For example, a check might be used to pay expenses in 2 different General Ledger accounts, which appear on the Expenses tab below the check payee information.  The targets of this check include the information on these 2 lines.

A transaction can have 1 source and 1 or more targets.  In most instances, the source is equal to the sum of the targets.  Forms or windows in QuickBooks determine what information will be the source and what will be the target.  Your only control over what is the source or target is what you enter (subject to validation) in the appropriate area of the form.  In the check example below, the top part of the check form is always the source, and the bottom part always contains the target information.  However, don’t extend too far the thought that the “sources are on top of the form and targets on the bottom.”  That only applies to A/R & A/P transactions.

General Journal Entries are one important exception to the discussion of sources and targets.  The first line of a general Journal Entry is the source, and all other lines are targets.  Depending on how one enters a general journal entry, the source may not be equal to the sum of the targets.  Since you have direct control over the order of lines in a general journal entry, you do control what the source and targets are for general journal entries.

Payments, statement charges, and transfers don’t follow the model that the source is on the top of the form and targets on the bottom.

Here are the source and targets for QuickBooks transaction types:

  • Invoice: A/R is the source; income accounts associated with the line items are the targets
  • Bill: A/P is the source; expense accounts on the line items are the targets
  • Deposit: The Deposit To account is the source; the accounts on the line items are the targets
  • Payment: The Deposit To account is the source; A/R is the target

To learn the source and targets for any transaction, click the Journal button or use the keyboard shortcut Ctrl + Y.  The source is the first line listed.  The targets are the lines listed after the source.

QuickBooks Enterprise Solutions 10 Check
QuickBooks Enterprise Solutions 10 Check Transaction Journal

In this example, the source is the first line of the report that shows the payee and check amount.  There is 1 target, the second line that contains the distribution information.  We’ve added Source Name as an additional column to the standard Transaction Journal report to better illustrate sources and targets. Note that the Name field for the target is the Customer:Job name, but the Source Name is the check payee.  Reports that show target information won’t show the check payee in the Name field.

That leads to confusion among QuickBooks users that aren’t familiar with sources, targets, and the type of information that appears on a report.  A report that shows check information in an expense account is reporting target information.  The report is not indicating that a check was written to the information shown in the Name field.

According to Intuit:

  • sources and targets are database concepts and have nothing to do with debits or credits
  • a source can be a debit or credit, just as a target can be a debit or credit
  • most reports display a mixture of source and target data
  • the Inventory Valuation Summary and Inventory Valuation Detail reports are examples of exceptions in that they display only target data

This Intuit knowledge base article offers additional information on sources and targets.  When reading it, don’t forget the general journal entry exception to statements about sources and targets.  Some of the statements in Intuit’s own materials don’t repeat that exception, and they’re only true with that exception noted.

Issues involving confusion about sources and targets are fairly common.  To address these issues, Intuit also offers explanations of the source and target data sets, the report set, where reports get their data, and how conflicting report filters produce unexpected results.

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