When working in QuickBooks Online (QBO), it’s essential to understand the difference between sales vs. income. These terms have specific meanings within the QuickBooks ecosystem that does not necessarily align with their broader real-world definitions. This blog post will help clarify these distinctions, explain their implications, and guide you through proper configuration and usage in QBO.
Sales vs. Income: The QuickBooks Terminology Difference
In QuickBooks, both “sales” and “income” ultimately affect your income account. However, the way these terms are used—and the reports they appear on—differs significantly.
Sales in QuickBooks
When you use one of QuickBooks’ designated sales transaction types—such as invoices, sales receipts, or credit memos—and include a product or service item, QuickBooks recognizes this as a “sale.” For example:
- If a company sells a fountain to a customer, they might record the transaction using a sales receipt, which is a sales transaction found under the +New menu in the “Customers” column.
- The fountain is a product item mapped to an income account. Recording it on a sales transaction makes it a “sale” and ensures it appears on QuickBooks’ sales reports.
Income in QuickBooks
In contrast, income can also be recorded directly without using a designated sales transaction type or product/service item. For instance:
- If you record financial activity directly to an income account via the deposit screen or journal entry, this will not be categorized as a “sale” in QuickBooks.
- Transactions like refunds from vendors, adjusting entries to income accounts, or funds received from owners as equity contributions are examples of money coming into the organization that do not relate to the company’s products or services.
Since these transactions bypass the use of product/service items, they do not appear on sales reports—even if they increase your income account balance.
Why Proper Categorization Matters
QuickBooks encourages users to record sales using the designated sales transaction types and product/service items. This ensures that:
- Sales-related income is accurately tracked and reported.
- Non-sales-related income, such as refunds or equity contributions, is excluded from sales reports.
Improper categorization can lead to misleading reports, making it harder to evaluate the performance of your products and services.
Setting Up for Success
To use product/service items to record sales, follow these steps to properly set this up in QuickBooks Online:
Enable Product/Service Items
- Go to the Gear icon > Accounts and Settings.
- Click the Sales tab.
- In the “Products and Services” section, enable the setting to “Show Product/Service column on sales forms.”
- Review additional configuration settings such as price rules, inventory tracking, and progress invoicing. Enable or disable these based on your company’s needs.
Set Up Product/Service Items
- Navigate to the Product and Service Item screen.
- For each item you want to use on sales forms, edit the item and select the appropriate account in the Income Account field.
- Advanced practices, such as mapping sales to unearned income accounts or payment accounts for point-of-sale systems, are covered in more advanced QuickBooks courses.
By ensuring that all products and services are properly mapped to income accounts, you can maintain accurate records and generate meaningful reports.
Using QuickBooks Sales Transactions
Familiarize yourself with the sales transaction types available in QuickBooks Online. These are all found under the +New menu in the “Customers” column.
Sales Transactions:
- Estimates
- Non-posting transactions that provide customers with a proposal or quote.
- Can be converted into invoices once accepted.
- Invoices
- Used to request payment from customers after delivering products or services.
- Debits (increases) accounts receivable and credits (increases) income.
- Sales Receipts
- Used when payment is received at the time of the sale.
- Does not affect accounts receivable but debits (increases) undeposited funds (best practice, or bank account) and credits (increases) income.
- Credit Memos
- Used when a customer returns an item or negotiates a lower price after an invoice is issued.
- This is the opposite of an invoice and creates a credit in accounts receivable that can be applied to invoices.
- Refund Receipts
- Used when refunding a customer’s payment immediately.
- This is the opposite of a sales receipt and debits (decreases) income and credits (decreases) a bank account.
- Delayed Charges and Credits
- Non-posting transactions available in QuickBooks Online Essentials, Plus, and Advanced.
- Act as reminders to include charges or credits on future invoices.
Key Terms: Invoice vs. Bill
QuickBooks uses distinct terms for customer and vendor transactions:
- Invoice: Sent to customers to request payment (money IN). Increases accounts receivable.
- Bill: Received from vendors to pay them (money OUT). Increases accounts payable.
Understanding this distinction prevents confusion when navigating QuickBooks.
Reporting
Proper categorization of sales and income is critical for generating accurate and meaningful reports. QuickBooks provides several report types to analyze your data effectively.
Profit & Loss Report: On a Profit & Loss report, you can drill down into income accounts to see both transactions posted by sales transactions using product/service items and transactions posted directly to income accounts via deposits or journal entries.
Sales Reports: Sales reports, such as “Sales by Product/Service” or “Sales by Customer,” only include transactions recorded using sales transaction types and product/service items. Non-sales-related income does not appear on these reports, ensuring clarity and accuracy.
By reviewing these reports, you can:
- Identify top-performing products and services.
- Spot trends in customer behavior.
- Ensure proper allocation of income across accounts.
Summary
In QuickBooks Online, “sales” and “income” are distinct terms with different meanings and outcomes for reporting and analysis of your business. Using the proper sales transaction types and product/service items ensures accurate categorization, improved reporting, and better business insights.
By following the setup and usage guidelines outlined above you can record transactions correctly in order to generate meaningful reports to evaluate performance and streamline your financial processes. With this foundational understanding, you’re ready to harness the full power of QuickBooks’ sales and income tracking capabilities.
