QuickBooks 2005: The Missing Manual

Accounting Basics—The Important Stuff

Intuit claims that you don't need to understand most accounting concepts to use QuickBooks. However, the accuracy of your books and your productivity will benefit if you understand the following concepts and terms:

• Double-entry accounting is the standard method for tracking where your money comes from and where it goes. Following the old saw that money doesn't grow on trees, with double-entry accounting, money always comes from somewhere. For example, as demonstrated in Table I-1, when you sell something to a customer, the money on your invoice comes in as income and goes into your Accounts Receivable account. Then, when you deposit the payment, the money comes out of the Accounts Receivable account and goes into your checking account.

Note

Each side of a double-entry transaction has a name: debit or credit. As you can see in Table I-1, when you receive a payment, you credit your income account (you increase your income when you receive a payment), but debit the Accounts Receivable account (receiving a payment decreases how much customers owe you). You'll see examples throughout the book of how transactions equate to account debits and credits.

Table 1.  Table I-1: By balancing the money on each side of a double entry, you not only keep track of where your money is, but you can also catch data entry mistakes.

Transaction	Account	Debit	Credit
Receive payment	Accounts Receivable	$1,000
Receive payment	Service Income		$1,000
Deposit payment	Checking Account	$1,000
Deposit payment	Accounts Receivable		$1,000
Pay for expense	Office Supplies	$500
Pay for expense	Checking Account		$500

• Chart of Accounts. In bookkeeping, an account is a place to store money, just like your checking account is a place to store your ready cash. The difference is that you need an account for each kind of income, expense, asset, and liability you have. The Chart of Accounts is simply a list of all the accounts you use to keep track of money in your company. (See Chapter 4 to learn about all the different types of accounts you might use.)

• Cash vs. Accrual Accounting. Cash and accrual are the two different approaches companies can take to document how much they make and spend. Cash accounting is the choice of many small companies, because it's easy. You don't show income until you've received a payment, regardless of when that might occur. And, you don't show expenses until you've paid your bills.

  The accrual method keeps income and expenses linked to the period in which they occurred, no matter when money comes in or goes out. With accrual accounting, you recognize income as soon as you record an invoice even if you'll receive payment during the next fiscal year. If you pay employees in January for work they did in December, that expense stays with the previous fiscal year. The accrual method often provides a better picture of profitability, because income and its corresponding expenses appear in the same period.

• Financial Reports. You need a triumvirate of reports to evaluate the health of your company (described in detail in Chapter 14). The income statement, which QuickBooks calls a profit and loss report, shows how much income you've brought in and how much you've spent over a period of time. The QuickBooks report gets its name from the difference between the income and expenses in your profit (or loss) for that period.

• A balance sheet is a snapshot of how much you own and how much you owe. Assets are things you own and that have value. Liabilities are the money you owe to others (perhaps money you borrowed to buy one of your assets). The difference between assets and liabilities is the equity in the company—like the equity you have in your house when the house is worth more than you owe on the mortgage.

• The statement of cash flow tells you how much hard cash you have. You might think that the profit and loss report would tell you that, but noncash transactions, such as depreciation, prevent it from doing so. The statement of cash flow removes all noncash transactions and shows the money generated or spent operating the company, investing in the company, or financing.