Use a Credit Memo Instead of a Discount to Save Money

Use a Credit Memo Instead of a Discount to Save Money

I heard a consultant once say the discount is evil and must be destroyed! That’s a little strong, I’ll admit, but I’ll bet he trains his clients not to use it. However, he was driving home a valid point; this is VERY important for your clients who collect/pay sales tax.

Here’s the situation. Your clients invoices a customer and there are taxable Items on the invoice. For whatever reason, when your client receives the payment that is less than the full amount of the invoice, he discounts the invoice in the QuickBooks® Receive Payment window and codes the discount to his Chart of Accounts. In this window, there is no way to apply that discount for a specific line item on that invoice.

This causes a couple problems.

  • When you go to run a report based on Items such as Sales by Item Summary or the Job Profitability Summary or Detail Report, those discounted Items will NOT be reflected in those reports.
  • The bigger issue may be that those discounts, or reductions in income, do not show in your Sales Tax Revenue Summary or the Sales Tax Liability Reports either. So, you could be paying more in sales tax than you need to. In today’s economy that’s definitely something you don’t want to be doing!

The solution is to use a Credit Memo instead. It’s easier in the newer versions of QuickBooks and you can then apply the Credit Memo to the Invoice. When you create a Credit Memo, you get to choose the Item that’s been discounted. It will then show in your Item-based reports, including your sales tax reports. This way, you won’t overstate your taxable income or overpay your sales tax.

If you think you have clients who have overpaid in the past, talk with them about it. For the future, using the Credit Memo will be your clients’ better method.