Learn Accounting and Bookkeeping Basics

In QuickBooks, each account is designated with an 'account types' so they appear in an order that will be understandable to you when reading reports. Accounts are sorted within the account type either

• numerically (if account numbers are used)
• alphabetically (no account numbers)
• Manually designate the order of the accounts within an account type by moving the diamonds. If you decide to manually designate the order of the accounts, you must position all new accounts that you set up once you have moved one account. This can be a real nuisance.  As an alternative if you want an account to appear at the top of the account list (within its type) prefix the account name with a letter 'a'  for example: 'aWages'.  Or a 'z' if you prefer to see the account at the bottom.  You can always return to an alphabetically ordering of your accounts within account types by resorting the list. Select resort from the account menu in the lower left of the account list window.
   

Account types:

Balance Sheet Accounts: 

 What is a balance sheet?

ASSETS are what the business has or owns.

Current Assets - Those amounts that will be converted to cash within the next 12 months. QuickBooks uses the following asset account types:

• Bank -Cash is money the business has on hand and in the bank
• Accounts Receivable is the amount of money customers owe the business for goods or services.
• Current Assets
  • Inventory is the cost of goods a business buys to resell.
  • Other Current Assets would include :
    Prepaid Expenses is a category of accounts that summarize things that the business pays for in advance, to use in the near future. They are broken down into individual accounts such as: prepaid Insurance.
• Fixed Assets -Land, Buildings, and Equipment  are purchased to operate the business. They are expected to last  more than one year. Over the life of the asset, the cost to purchase is deducted as an expense called depreciation. The portion of the fixed assets that have been expensed in prior periods is called accumulated depreciation.  The difference between the cost of the fixed assets and the accumulated depreciation is called book value.  Fair market value (what you can sell the asset for is not reported on your books)
  Talk to your accountant about what to classify as a fixed asset. A stapler or hammer, cost $12 will last 15 years but the cost is immaterial and should be expensed. We suggest to our clients using a $500 materiality guideline. The cost of the asset is its purchase price including delivery costs and installation costs.
• Other Assets include Loans Receivable from officers of the corporation, lease deposits on rented property , and any other asset that does not fit into the above categories.

LIABILITIES are what the business owes. QuickBooks uses the following liability account types

• Accounts Payable is what is unpaid to vendors for  purchased goods or services sold on open account.
• Current Liabilities represent what can be paid in full within a 12 month period. 
  Payroll Tax Liability
  Sales Tax Liability
  Credit Card Balances due
  Customer Deposits for prepayments of services or goods
  Accrued Expenses Payable is a category of accounts that summarize things the business has used but has not yet been billed for by the suppliers. Typical would be  Salaries Payable for amounts unpaid for the last few days of the year,  Interest Payable, and workers comp insurance
• Current portion of Long Term Debt - an amount that represents all the principal payments of all company notes payable that will be paid in the next 12 months. Leave this account empty and let your accountant worry about it!
• Long Term Liabilities represent the portion of the debt that will be paid off beyond the current portion (next 12 months)  Since this is too cumbersome to handle on a month to month basis within QuickBooks.  Simply set up the following accounts as Long Term Liabilities and let your accountant reclassify the amount that would be deemed current at year end.
  •  Notes Payable are liabilities for which the business has issued (signed) a promissory note to pay the lender what they borrowed, plus interest.   etc., that has accumulated on the note but has not been paid).
  • Officer loans payable for amounts loaned the business by the officer. Do not forget to pay interest on this debt at least quarterly.

EQUITY, is what the business owner had originally  invested in the company (Capital) and additional contributions of personal funds into the company (Additional Paid in Capital) and what the owner has kept in the company from the prior profits of the business (retained Earnings) and what the owner has withdrawn from the company:

Dividends (C Corporations)
Distributions (S Corporations)
Draw (Partnerships and sole proprietorships)

Click here for a sample account listing for a balance sheet

Income Statement (Profit and Loss) accounts:

REVENUE or INCOME or SALES - different names for the same thing  is what a business is paid for the work it does.

COST OF GOODS SOLD are the directly related to what is being sold.  These expenses would not exist without a goods or service being provided. Typical expenses would include Labor, Material, Small Tools, Subcontractors, Supplies

EXPENSES are the overhead costs of doing business. They  include selling expenses and administrative expenses

To see a generic chart of accounts, Click here

To see a sample chart of accounts for a contractor, click here
(pdf files)
 

Off topic, but of interest to a bookkeeper and owner of an S corporation.  Reasonable compensation  salaries vs distributions (dividends)  and at the bottom of the article a discussion for the bookkeeper to help her/him classify payments to the owners.

Need to make an entry or an adjustment and not sure how?

Is a journal entry necessary?  QuickBooks offers "behind the scenes double entry accounting features.  It makes bookkeeping a possibility  for those who have not taken any classes in accounting. Therefore, a journal entry is not usually necessary to make an adjustment to your accounts. The following transactions are better suited to most corrections than a journal entry because they contain more fields and are easier to understand than a journal entry.

Customer Credit Memo
Vendor Bill Credit
Deposit into the bank account
Inventory adjustment
Sales tax adjustment

Open QuickBooks
From the Banking Menu
Make journal Entry

If you are not sure what the account type is for a specific account, from the list menu, select chart of accounts and the account type is described in the second column.

Journal entries with Accounts Receivable or Accounts Payable must include a customer or vendor name.  If you are trying to reallocate amounts between customers or between vendors, you will be required to use 2 journal entries to make the adjustment.  Use an account called "transfer" (type= other asset) to balance each of the 2 journal entries.   Transfer account should have a balance of zero when you have finished the 2 transactions.

When you have completed the journal entry, run a report to see if you have achieved the desired result. Which report will depend upon the account balance you are correcting.  If you don't know which report, try running a general ledger for the current period. General ledgers can be found under the reports for Accountant and Taxes.

A bookkeeping course to gain insight to financial records and sharpen your grasp of business results.

The balance sheet is a fundamental accounting report and forms the basis for many other reports. A balance sheet is a financial "snapshot" of your business at a given date in time. It includes your assets and liabilities and tells you your business's net worth.

The balance sheet will tell you about the financial health of the business.  It will tell you about the companies liquidity.  Which means how quickly you can turn your assets into cash to pay bills and other liabilities. The balance sheet will tell you how much the owners have invested in the company and how much of the business is funded by creditors.  It can tell you if  the company has enough money to continue to fund its own growth or whether it is going to have to take on more debt.  The balance sheet will tell you if you have too much inventory and if you are  collecting money from customers in a reasonable amount of time. 
This information can be found by looking at the financial ratios of the business.  Comparing financial ratios to ratios of other companies in the same business will give you benchmarks to strive for when managing your business. 

The basic balance sheet formula is Assets= Liabilities+ Equity  This equation must balance. If the equation does not balance then an error has been made. Assets are what is owned by the company at the amount paid for the assets (historical cost- not at fair market value).  Assets include cash, inventory, accounts receivable, equipment, buildings, etc. Liabilities are debts of the company. These include accounts payable, bank debt, prepayment by customers, taxes and wages owed. Equity is earnings of the company retained for business growth plus investment by the owners. 

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