LedgerLearn — QuickBooks L2 Professional

L2 Module 1

Advanced AR & Accounts Payable

Partial payments, bad debts, statement reconciliation, and multi-bill payments

Advanced Receivables Management

At L2 level, you move beyond creating invoices to managing complex AR situations: partial payments, disputes, bad debts, and customer credit management.

Partial payments

When a customer pays part of an invoice, QBO's Receive Payment applies the amount to the invoice and leaves the balance open. The open balance remains in AR ageing until paid, credited, or written off. Never edit the invoice to match a partial payment — that loses the original agreed amount.

Writing off bad debts in QBO

Create a Bad Debt expense account in the Chart of Accounts if one doesn't exist
Go to the overdue invoice and click Receive Payment
Add a Discount line equal to the full outstanding amount, coded to Bad Debt expense
Apply the discount — the invoice balance clears to zero

Tax note Writing off a bad debt reduces income for tax purposes in most jurisdictions. If VAT/GST was already declared on the invoice, a corresponding input tax adjustment (bad debt relief) may also be claimable — check your regional rules.

Customer statements

QBO can generate customer statements showing all open invoices and credits on a customer's account. Use these for: monthly statement sends, dispute resolution, and year-end confirmation requests from auditors.

Advanced AP: batch bill payments

For businesses with many vendors, Pay Bills (Expenses → Pay Bills) lets you select multiple vendors and bills, set payment dates, and process in one batch — much more efficient than paying each bill individually.

Vendor credit application

Vendor credits don't apply automatically. When paying a bill where a credit exists, QBO shows the available credit — you must manually apply it to reduce the payment. Not applying credits means overpaying vendors and understating cash.

🎯 Scenario

A customer owes $3,600 on an invoice 120 days old. They've declared insolvency. You need to write off the full amount as bad debt. Your QBO currently has no Bad Debt account.

What is the correct sequence of actions?

Create a Bad Debt expense account → open the invoice → Receive Payment → apply a $3,600 discount to Bad Debt → save to close the invoice

Delete the invoice — it will never be paid so it shouldn't be in QBO

Credit the $3,600 to Miscellaneous Income to offset the loss

Leave the invoice open — it may be recoverable from the liquidator

✅ A is correct. The Bad Debt account must exist first, then the write-off is applied via a discount on the payment screen. Deleting the invoice destroys the audit trail. Crediting to income is incorrect accounting. Leaving open inflates AR and produces misleading reports.

L2 Module 2

Inventory & COGS

Inventory tracking, adjustments, COGS automation, and shrinkage management

Inventory Tracking in QBO

QBO uses the weighted average cost method for inventory valuation. When you sell a product, QBO automatically calculates and posts the cost of that item to Cost of Goods Sold (COGS).

Setting up inventory items

Products & Services → New → Inventory part
Set: description, sales price, income account, COGS account, asset account, and opening quantity/value
QBO tracks: quantity on hand, reorder point, and average cost per unit in real time

What happens when you sell

When an inventory item is invoiced, QBO automatically:

Credits the Inventory Asset account (reduces the asset)
Debits COGS (recognises the cost as an expense)
Decrements the quantity on hand

Average cost calculation Each new purchase updates the average cost. Example: 10 units @ $20 = $200. Buy 10 more @ $25 = $250. New average = $450 ÷ 20 = $22.50. All future sales use $22.50/unit for COGS until the next purchase changes the average.

Inventory adjustments

Physical count reveals fewer units than QBO shows? Use + New → Inventory Qty Adjustment. Enter the actual count and adjustment date. QBO posts the variance value to an Inventory Shrinkage expense account (or another account you specify).

Purchase Orders

Purchase Orders (POs) in QBO are non-posting — they don't affect the accounts. They are commitments to buy. When goods arrive and you receive a bill, you link the bill to the PO. This closes the PO and records the inventory receipt properly.

Step	QBO Action	Financial Impact
Order placed	Purchase Order	None — non-posting
Goods received	Receive Items (link to PO)	Inventory ↑, AP ↑
Bill received	Bill (linked to receipt)	Confirmed — no change
Bill paid	Pay Bill	AP ↓, Bank ↓

🎯 Scenario

After a physical count you discover 15 fewer units of Product X than QBO shows. Product X has an average cost of $18/unit. QBO shows 80 units; actual count is 65.

What is the QBO adjustment and what is the financial statement impact?

Inventory Qty Adjustment: set quantity to 65 units. QBO posts Dr Inventory Shrinkage $270 / Cr Inventory Asset $270 (15 units × $18). P&L expense increases, inventory asset decreases.

Edit the product record to show 65 units — no financial entry needed

Credit COGS for $270 to offset the missing inventory

Recount the items — discrepancies under 20 units should be ignored

✅ A is correct. QBO's Inventory Adjustment calculates the value automatically (15 × $18 = $270) and posts it to Inventory Shrinkage expense. This reduces the asset and recognises the cost — correct double-entry accounting.

L2 Module 3

Payroll Deep Dive

Payroll runs, tax calculations, multi-state compliance, and payroll journal entries

QBO Payroll — Professional Level

At L2, payroll knowledge goes beyond running pay. You need to understand: what QBO calculates vs what you must verify, what the journal entries look like, and how errors are corrected.

What QBO Payroll calculates automatically

Federal income tax withholding (based on W-4 elections)
FICA — Social Security (6.2% employee + 6.2% employer) and Medicare (1.45% + 1.45%)
FUTA (6% federal unemployment on first $7,000/employee)
State income tax and SUTA (requires correct state setup per employee)
Employer contributions and deductions (health, 401k, garnishments)

Multi-state payroll Each employee is taxed based on their work state (where they perform duties) and sometimes their home state (if different). QBO supports multi-state but requires separate registration and tax ID for each state — the bookkeeper must set this up correctly or withholding will be wrong.

The payroll journal entry

Account	Dr	Cr	Explanation
Gross Wages Expense	$5,000	—	Total wages earned
Payroll Tax Expense (employer)	$382.50	—	FICA + FUTA employer share
Employee Tax Liability (FICA)	—	$382.50	Employee FICA withheld
Federal Income Tax Payable	—	$750	FIT withheld for IRS
Net Pay (Bank / Direct Deposit)	—	$3,867.50	Actual pay to employee

Correcting payroll errors in QBO

If a payroll run has an error:

Same period, not yet filed: void the payroll run and reprocess with corrections
Prior period, already filed: run a corrective payroll (over/under payment) and file an amended 941 if needed
Tax filing errors: file an amended 941 and ensure QBO is updated to match — do not just post a manual journal without updating the payroll module

Commission pay types

QBO Payroll supports variable pay types. Add Commission as a pay type in the employee's payroll profile (Payroll → Employees → edit → Pay Types). Each pay run you enter the actual commission amount — QBO calculates the tax on the total (base + commission).

🎯 Scenario

After running payroll you discover that one employee's work state was set incorrectly — they work in State A but QBO was configured for State B. The error has affected 3 payroll runs. State A has a 5% income tax rate and State B has 3%. The employee's gross pay was $4,000 each run.

What is the correct approach?

Correct the work state in QBO → void and reprocess if the pay period is still open, or run a corrective adjustment for the tax difference ($80/run × 3 = $240 under-withheld) and file amended state returns for State A and State B

Post a $240 manual journal to payroll tax expense and move on

Fix the state setting for future payrolls only — prior runs cannot be amended

The employee is responsible for their own state tax — no employer action needed

✅ A is correct. The error created a compliance issue in two states — underwithholding in State A and overwithholding in State B. Amended returns must be filed for both states. The employee was under-withheld in State A by 2% × $4,000 × 3 = $240 and may owe that tax personally.

L2 Module 4

Classes, Locations & Projects

Segment reporting, profitability by division, and project-level financial tracking

Segmented Reporting in QBO

QBO Advanced offers three segmentation dimensions that allow P&L analysis beyond the flat chart of accounts.

Feature	Best Used For	Report Output
Classes	Departments, product lines, revenue streams	P&L by Class
Locations	Geographic branches, physical sites	P&L by Location
Projects	Individual jobs or contracts	Project Profitability

Classes — the most powerful segmentation tool

Classes tag transactions with a business segment. To get meaningful results:

Apply a class to every income AND expense transaction — missing class tags distort the segment P&L
Set QBO to warn or require a class on all transactions (Settings → Account & Settings → Advanced → Classes)
Run P&L by Class to see each segment's revenue, COGS, and gross margin

Common error Applying classes to income but not expenses. This makes income look high per class but expenses appear in "unassigned" — producing a useless segment P&L. Consistency is everything.

QBO Projects

Projects (available in Plus and Advanced plans) track profitability at the job level. You assign invoices, expenses, and time entries to a project. QBO's Project Profitability report then shows:

Total invoiced (income)
Total costs assigned (expenses and billable time)
Gross profit and margin per project
Uninvoiced billable items still outstanding

Time tracking integration

QBO Time (formerly TSheets) integrates with payroll and projects. Employees log hours against customers and projects. Approved billable hours appear in the customer's invoice queue, ready to bill. Non-billable hours post directly to labour expense on the project.

🎯 Scenario

A QBO client runs three departments: Consulting, Training, and Software. They've been applying classes to all income for 6 months but no expense transactions have class tags. The P&L by Class shows Consulting: $85,000 income; Training: $42,000; Software: $38,000. Total expenses show $90,000 under "Not specified".

What is the correct diagnosis and the fix?

Expenses were never tagged with classes — the segment P&L is incomplete. Go back through 6 months of expense transactions and add classes. Then turn on "Require class" in settings to prevent this going forward.

The report is correct — expenses don't need classes as they are shared across all departments

Create a fourth class called "Overhead" and post all shared expenses there

Export to Excel and manually allocate expenses equally across the three departments

✅ A is correct. A P&L by Class with expenses untagged is useless for profitability decisions — you can see revenue per segment but not profit. The fix is retrospective re-tagging plus mandatory class enforcement going forward. An "Overhead" class (Option C) is valid for genuinely shared costs but doesn't fix the core missing-tags problem.

L2 Module 5

Fixed Assets & Depreciation

Capitalising assets, depreciation methods, disposals, and the fixed asset register

Capital vs Revenue Expenditure

The most important decision in fixed asset accounting: is this a capital purchase (asset on the balance sheet) or a revenue expense (P&L)?

Capital (Asset)	Revenue (Expense)
Long-lived (useful life > 1 year)	Used up within the period
Significant value (above capitalisation threshold)	Low value — expensed directly
e.g. Vehicles, equipment, fit-out	e.g. Stationery, repairs, small tools

Section 179 / Bonus Depreciation (US) The IRS allows immediate expensing of qualifying business assets (Section 179 up to $1.16M in 2023; bonus depreciation at 60% in 2024). If a client elects these, QBO's depreciation schedule differs from GAAP financial statements. Track both.

Recording a fixed asset in QBO

Create a Fixed Asset account in the Chart of Accounts (type: Fixed Asset)
Record the purchase: Dr Fixed Asset Account, Cr Bank/AP
Set up a depreciation schedule — either in QBO or an external fixed asset register
Post monthly/annual depreciation: Dr Depreciation Expense, Cr Accumulated Depreciation

Depreciation methods

Method	Formula	Use for
Straight-line	(Cost − Residual) ÷ Useful life	Most assets — even charge each year
Declining balance	Book value × Rate %	Vehicles, technology — faster early write-down
Units of production	Cost ÷ Total units × Units used	Machinery tied to output

Asset disposals

When an asset is sold or scrapped:

Remove the asset cost: Cr Fixed Asset Account
Remove accumulated depreciation: Dr Accumulated Depreciation
Record proceeds: Dr Bank (or Dr Loss/Cr Gain)
The difference between proceeds and book value = gain or loss on disposal

🎯 Scenario

A client bought a delivery van 3 years ago for $36,000. It is depreciated straight-line over 6 years with $0 residual. They just sold it for $20,000.

What is the book value at disposal and the gain or loss?

Annual depreciation = $36,000 ÷ 6 = $6,000/year. After 3 years: accumulated depreciation = $18,000. Book value = $36,000 − $18,000 = $18,000. Sale at $20,000 = $2,000 gain on disposal.

Book value = $36,000 − $20,000 = $16,000. Loss on disposal = $16,000.

Book value = $0 (fully depreciated). Gain = $20,000 full sale proceeds.

No gain or loss — the asset was recorded at cost and cost = original price.

✅ A is correct. Annual depreciation = $36,000 ÷ 6 = $6,000. 3 years × $6,000 = $18,000 accumulated. Book value = $36,000 − $18,000 = $18,000. Proceeds $20,000 exceed book value by $2,000 — a $2,000 gain on disposal posted to Other Income.

L2 Module 6

Advanced Reporting & Year-End

Cash flow analysis, budget vs actual, year-end close, and audit preparation

Professional-Level QBO Reporting

Cash flow statement analysis

The indirect method cash flow starts with net income and adjusts for non-cash items and working capital changes. Key adjustments:

Add back: depreciation, amortisation (non-cash expenses)
Deduct: increase in debtors (earned but not collected)
Add: increase in creditors (incurred but not paid)
Deduct: increase in inventory (cash used to build stock)

Budget vs Actual reporting in QBO

Go to Accounting → Budgeting → Add Budget
Enter monthly budget amounts per account
Run Budget vs Actuals report to see variances
Investigate material variances before month-end review

Management accounts pack For a professional monthly pack: P&L vs Budget (variance %), Balance Sheet with month-on-month comparison, Cash Flow summary, AR Ageing (outstanding over 60 days highlighted), AP Ageing (anything overdue), and 3 key KPIs relevant to the business.

Year-end close process in QBO

QBO doesn't have a formal "close" like some ERP systems — but the year-end process includes:

Final bank reconciliation to year-end date
Depreciation journals posted
Prepayment amortisation reviewed and completed
Accruals raised for expenses incurred but not billed
Inventory counted and adjusted to actual
All payroll tax returns filed and matched to QBO
Lock date set to prevent backdating
P&L and Balance Sheet shared with accountant/tax preparer

Audit preparation from QBO

Auditors will request: trial balance, general ledger extract, bank reconciliations, AR and AP ageing, payroll summaries, and fixed asset register. QBO produces all of these — ensure every report is reconciled and can be traced transaction-by-transaction before providing to auditors.

🎯 Scenario

A QBO client's P&L shows net profit of $68,000 for the year. The operating cash flow on the Cash Flow Statement shows only $31,000. The balance sheet shows: debtors increased by $22,000, creditors decreased by $8,000, and depreciation was $7,000 for the year.

Reconcile the net profit to operating cash flow and confirm whether the $31,000 is correct.

Net profit $68,000 + depreciation $7,000 − increase in debtors $22,000 − decrease in creditors $8,000 = $45,000. The $31,000 shown may be incorrect — there are likely other working capital movements not accounted for here.

Net profit $68,000 − depreciation $7,000 + debtors $22,000 + creditors $8,000 = $91,000. The cash flow is wrong.

Cash flow and net profit are the same thing — the $37,000 difference means QBO has an error

The $31,000 is correct because cash was used to pay tax and dividends not in the P&L

✅ A is correct. Starting with $68,000: add depreciation $7,000 = $75,000. Deduct debtor increase (cash not collected) $22,000 = $53,000. Deduct creditor decrease (more cash paid to suppliers) $8,000 = $45,000. The gap to $31,000 ($14,000) suggests additional working capital movements (inventory, tax, or other items) not provided in this scenario.

🎓

L2 modules complete

Take the QuickBooks L2 assessment to earn your Professional certificate. Pass rate required: 75%.