Cash Receipts and Applying Payments to Open Invoices

Cash Receipts and Applying Payments to Open Invoices

When a customer pays what they owe, two things must happen in your books: the payment must be recorded against the correct open invoice, and the cash must eventually land in the right bank account. Skipping or reversing these steps produces a misstated Accounts Receivable (AR) balance, overstated income, and a bank reconciliation that will never balance. This lesson walks through every payment type you will encounter—paper check, ACH/EFT, and credit card—and shows how QuickBooks handles each one.

How QuickBooks Routes Incoming Money

When you use the Receive Payments window (Customers menu → Receive Payments), QuickBooks does not immediately add the money to your bank account. Instead, it places the funds in a holding account called Undeposited Funds. Think of Undeposited Funds as a lockbox on your desk: the money is collected and safe, but it has not yet been deposited at the bank. The account clears to zero only after you run Make Deposits and select those funds to move them to the correct bank account. This two-step process is intentional—it lets you group multiple customer payments into a single deposit entry that matches the one lump sum your bank will show on the statement, making reconciliation straightforward.

Recording a Check Payment

1. Open Receive Payments and select the correct customer from the drop-down.

2. Enter the check amount, date, check number, and choose Check as the payment method.

3. In the open-invoice list at the bottom of the window, click the checkbox next to the invoice the payment covers. QuickBooks applies the amount automatically. If the check exactly matches the invoice, the balance due drops to zero.

4. If there is a small underpayment or overpayment, QuickBooks prompts you to write off the difference, leave it as a credit, or keep it as an underpayment. Choose the option that matches your remittance advice.

5. Save and close. The invoice now shows as Paid.

Recording an ACH or EFT Payment

ACH (Automated Clearing House) and EFT (Electronic Funds Transfer) payments arrive electronically. The recording steps in Receive Payments are identical to a check except you select E-Check or EFT as the payment method and enter the transaction or trace number in the reference field instead of a check number. Because these payments clear the bank quickly—often the same or next business day—pay attention to the date you enter; it must match the date the bank receives the funds, not the date the customer initiated the transfer.

Recording a Credit Card Payment

Select Credit Card as the payment method. If your company processes cards through QuickBooks Payments, authorization and posting happen inside QuickBooks. If you process through a separate terminal, record the authorization code in the reference field. Credit card deposits may net a merchant processing fee before they reach your bank account; your instructor will show you how your practice company handles that variance.

Matching Remittance Advice to Open Invoices

A remittance advice is the document (paper or electronic) the customer sends alongside their payment. It lists which invoice numbers and line items they are paying. Always match the remittance advice to invoices before clicking anything in QuickBooks. Common errors include:

• Applying a payment to the wrong customer (two customers with similar names).
• Applying a payment to the oldest invoice when the remittance clearly shows a newer one.
• Splitting a single payment across multiple invoices without noticing that one invoice was already partially paid.

If the remittance is missing or unclear, flag it for your supervisor before posting. Posting an incorrect application creates a phantom open balance and incorrect AR aging.

Making the Deposit

After all payments in a batch are entered, go to Banking menu → Make Deposits. QuickBooks displays the Payments to Deposit window listing every item sitting in Undeposited Funds. Select the payments that match the physical deposit slip you are taking to the bank (or the batch your merchant processor will settle). Click OK, confirm the bank account and date, and save. The deposit entry credits Undeposited Funds and debits your bank account. After all selected payments are deposited, Undeposited Funds should return to $0.

Confirming Your Work

Run Reports → Customers & Receivables → Customer Balance Detail. This report shows every customer's open invoices and remaining balances. If all eight payments were applied correctly, each invoice in your batch should show a zero balance due and a Paid status. If any invoice still shows a balance, re-open Receive Payments, locate that customer, and check whether the payment was applied to the wrong line.

Accuracy and Data-Security Reminders

Bookkeeping errors in AR can trigger cash-flow problems, incorrect financial statements, and audit findings. Treat remittance-advice packets as sensitive documents—they contain customer account information. Shred paper remittances according to your office's document-retention policy rather than placing them in open recycling bins. When working in a shared QuickBooks environment, log in under your own user name only; never share credentials. These are the office-administration equivalents of safety practices: protecting data integrity and customer confidentiality is a professional obligation in this trade.