Double Entry Invoicing

There are basically three accounts that the invoice itself moves through.  Outside of that movement, there are transactions that trigger movement through this path by matching them to the invoice at various stages.

In the beginning, there is the service or product provided, that must be pulled into the invoice so the client or customer knows what they are paying for.  There is a price associated with this, and that goes on the profit and loss sheet.  This is where that gets captured.  For those businesses with inventory, accurately marking what is being paid for is crucial here.

Next, it gets sent to the consumer which moves it to accounts payable.  Whether electronically or print and send, this puts the amount due as pending.

Lastly, and this is the complicated part of bookkeeping in many systems, the payment comes in from the consumer.  Like the invoice, the payment has three phases as well.  First, it is rendered to the business, and second, recorded as payment on the invoice.  At this point, it is marked as undeposited funds.  The invoice is now paid, but not complete.

Once the payment is deposited to the bank or petty cash or mattress fund, or whichever “account” it goes to, that deposit gets recorded and matched to the payment on the invoice and the invoice is now considered closed.

It seems overly complex, yes, but when you need to know how much money is due to you or how much you have to spend on your bills, these steps matter.  If the cash or checks the consumer gave you nev3eer make to the bank, it doesn’t matter to the vendor that you marked the invoice as paid, the money in the bank is what matters.  Likewise, the client isn’t going to be too happy if you deposit the check they wrote, but never credited their account which marks the invoice as paid. 

Taking the time to get the right information will only help your books remain accurate beyond what is recorded on the bank statements (does the bank know what’s in account receivable vs undeposited funds?).  There’s a reason for each account, and it’s to help you, the business owner, know how much money you really have versus how much your business could have.