Bookkeeping – Tracking Invoices (Lesson 36)
Now that I’m done with the employee payroll series, Lessons 30-35, it is time to explain sales. There are five lessons for this section of daily operations. They are as follows:
Tracking Invoices – Lesson 36 (this lesson)
Accounts Receivable Management – Lesson 37
Sales via Debit and Credit Cards – Lesson 38
Tracking Returns and Allowances – Lesson 39
Sales Tax Compliance – Lesson 40
Every small business should track their sales in order to evaluate performance, opportunity and trends. In a good system sales will identify date and time of purchase; customer’s name and demographic information; items purchased with quantity and dollar values and finally, methods of payment. These four essential pieces of information are explained in more detail in the information gathering section below. But the most important piece of information to track is the unique sales transaction identifier. The most common are assigned numbers to sales receipts. But many businesses generate sales in a non-traditional retail environment using invoices.
Traditional Exit Pay
The most common form of recording sales is at the point of customer exit. The customer sets their purchase on the counter and the clerk checks them out. Every modern retail, accounting software assigns a unique identifier to this transaction. Tracking of the transaction is perfunctory. Any mistakes are adjusted automatically through a simple void process.
You find exit pay everywhere:
* Fast Food
* Auto Maintenance Shops
* Online Purchases
* Citizen Services (DMV, Courthouse, etc.)
But not all businesses utilize exit pay. Some businesses are involved in contractual arrangements, thus another method is used – invoicing.
Invoices are used when a customer is granted credit by the business. Often a contractual agreement is entered into between the two parties. The arrangement allows for so many days for the customer to pay their bill (remember, the seller generates an invoice; when received by the customer, the customer calls it a bill). The basic entry is recorded to the sales journal as follows:
Date Description Ledger Identifier DR CR
11/15/15 100 Units Sales 60421 $3,481.23
John Doe A/R 60421 $3,481.23
It is important to note the following from this entry:
1) The customer John Doe is the control account identifier in accounts receivable. Remember, accounts receivable is customarily a control account.
2) All invoices have a unique identifier, in the example above it is 60421.
3) Sometimes the sales ledger will have several line items of entry if the customer purchases various items.
4) Many sales journals use an additional column for the item identifier for product or service tracking.
As the bookkeeper your job is to track the invoices. There should never be a skipped invoice number in the register. A skipped ID is a sign of a potential problem, more on this later.
The most common tool used for invoicing is the accounting software. QuickBooks allows the business to start the invoice numbering system at a preset identifier. Simply click on Edit/Edit Preferences/Select Invoices and indicate the starting point (number) for invoicing.
When an invoice is created, the salesman selects the customer from the customer list. If the customer isn’t available on the list most accounting software packages allow the clerk or sales rep to enter the customer information on the fly. Management needs to determine the minimum required information for the customer fields.
Once the customer is selected, the item code is chosen along with quantity purchased. Some businesses don’t need to use an item code or quantity value because the item is custom made. In lieu of the item code and quantity a detailed description field is used. This is very common in the following industries:
- Professional Services
- Art or Antique Sales
- Custom Shops (Furniture, Autos, Decorations etc.)
- Metal Fabrication
- Equipment Services
When using item codes the price per unit field automatically populates and total dollar value populates based on quantity. Some software forces the sales representative to select if the item is taxable for sales tax purposes. Once completed, the invoice is saved and printed for mailing or handing to the customer.
Once saved the unique identifier can no longer be reused. If there is a mistake, the invoice can be voided and a new replacement invoice is created with a new number. DO NOT DELETE INVOICES! I encourage management to select the ‘Do not allow deletion’ feature in the invoicing module of the software. This is an internal control requirement and benefit (more on internal control in the advanced bookkeeping section). Without the ability to delete invoices, sales representatives find it more difficult to manipulate the system.
A SEQUENTIAL NUMBERING SYSTEM WITH INVOICING ALLOWS THE BOOKKEEPER AND MANAGEMENT THE ABILITY TO TRACK SALES, RECONCILE INVOICES AND DISCOVER DISCREPANCIES.
Some businesses have to use hand written invoices due to the nature of the business. Hand tickets are just like the old fashion order book a waitress used at the diner. If you ever look, they’re sequentially numbered too. Some common operations that use this are:
* A/C Repair
* Carpet Cleaners
* Towing Companies
* Lawn Maintenance
There is nothing wrong with using hand tickets it just needs to be tracked. The best tool for tracking is using a batch assignment. If the normal volume is five tickets a day, a batch of twenty-five is assigned to the employee (service technician) on Monday. Each day this employee should turn in his completed tickets for the bookkeeper to record. Voided tickets are turned in also. Make sure voided tickets are recorded to the sales journal.
You need to realize that tracking invoices is a function of sales and not accounts receivable. If properly executed the sales register will create a line by line list of every invoice (ticket) used in the system over a set period of time.
I suggest using the entire month of sales to compare the invoices and hand tickets against what was issued, outstanding and the register. In the sales journal the transaction identifier is the invoice number. Some accounting software will allow you to sort the information on this number and select the ordering preference (lowest to highest or high to low). If the sorting feature is nonexistent, export the report to Excel and sort the data there.
Look at the prior month, what was the ending number and then what is the beginning number for the month under review? Any unused hand tickets should be physically in your hands. Mark them ‘VOID’ and enter them into the system at the end of the month as void tickets with zero value. You may have to repeat this tracking process several times to account for every invoice and hand ticket.
Why account for every ticket?
Simple, as the bookkeeper you want to make sure every sale is entered into the system. I can’t tell how many times I’ve had credits for customers and no invoices to recognize the sale and apply the credit against. The most common culprit is the owner! Owners hate paperwork and often neglect to enter the invoice.
A secondary reason and rare is an employee stealing from the company. If a customer pays in cash, the employee would simply pocket the money and not turn in the ticket. The best tool prevent this is work orders (advanced issues section of bookkeeping). The backup is tracking tickets (not as effective as work orders). But overall, this isn’t the primary reason for tracking invoices, it is to make sure all sales are accounted for during the accounting period.
If sales tracking is properly set up, the company can gather a lot of valuable information.
One of the ways a business improves is by using valuable information to their advantage. When a customer buys a product or service he is telling you a lot about himself. Take advantage of this important information. There are five minimum bits of information every business needs.
1) Date and Time of Purchase – this information is essential to properly staff the operation during peak times and for certain days of the week. As an example, common sense tells anyone that recreational based businesses should be fully staffed on weekends. Emergency rooms need more assistance on Friday and Saturday nights. But to illustrate this to a high level of performance let’s talk Wal-Mart. Wal-Mart has several years of data. Using this information the schedule for staffing levels in preparation for holiday sales is increased for the days and hours of high activity. This same concept is needed in small business. For example, think of a bakery, not many people buy doughnuts at 5 PM. However, on a weekday morning at 7 AM I’m willing to bet there is a line. Most businesses are not this extreme, still they should track time, dates and days of the week to confirm appropriate hours of operation and staffing levels.
2) Items Purchased and Volume– this information is used to ensure adequate quantity of a particular item in inventory. In addition there may be peak times of the year for consumption. For example, my son works at a national chain store called Tractor Supply. They don’t sell too many snow blowers in May, actually ZERO. But come December they can’t keep them on the shelf. Their system adjusts the number of units for each store based on prior year, volume and weather patterns. In small business you need to do the same. Take for example an auto lube shop. Do the customers purchase expanded services? If so, how much and how often? Is it tied to a promotion? All of this information is incorporated into that sales invoice.
3) Customer Information – this critical piece of information helps the business stay in contact with the customer for continued sales or service. Think of your dentist. Every six months you get that funny card in the mail reminding you that your teeth need cleaning. Without customer information to send out reminders, sales will decrease. The more data mined, the better for marketing and advertising purposes.
4) Method of Payment– this part is for the bookkeeper. As a function of daily sales, reconcile the methods and associated amounts of payment should tie to the respective physical deposits. Methods of payment include:
* Debit Card
* Credit Card
Summary – Tracking Invoices
Tracking invoices is a function of sales. It is designed to ensure all sales are recorded to the proper revenue accounts. In addition, it is a tool to verify work completed and customer patterns. If used properly the data gathered is invaluable to the small business. Act on Knowledge.
Do you want to learn how to get returns like this?
Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.
There are four key principles used with value investing. Each is required. They are:
- Risk Reduction – Buy only high quality stocks;
- Intrinsic Value – The underlying assets and operations are of good quality and performance;
- Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
- Patience – Allow time to work for the investor.
If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above.
Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:
- Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
- Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
- Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.
Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:
- Lessons about value investing and the principles involved;
- Free webinars from the author following up the lessons;
- Charts, graphs, tutorials, templates and resources to use when you create your own pool;
- Access to existing pools and their respective data models along with buy/sell triggers;
- Follow along with the investment fund and its weekly updates;
- White papers addressing financial principles and proper interpretation methods; AND
- Some simple good advice.