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Using double-entry accounting
In QuickBooks Pro 2008 Essential Training (www.lynda.com), instructor Suzanne Robertson explores the many powerful features of QuickBooks Pro, the popular accounting software that can be used for everything from handling personal expenditures to creating professional business account records. Suzanne covers organizing inventory and non-inventory items and using the automated EasyStep interview. She also demonstrates how to create and edit accounts, collect and pay sales tax, and handle invoices, vendor payments, and client refunds. Exercise files accompany the tutorial.
Note: QuickBooks Pro 2008 is not currently available for the Mac. If you are a Mac user you will be unable to open the exercise files for this tutorial, however you will still be able to watch the movies.
* Working with the Chart of Accounts feature
* Setting up items
* Tracking inventory items
* Using the Customer Center
* Invoicing customers
* Making client sales receipts
* Applying discounts and credits
* Entering and paying vendor bills
First I want you to know that QuickBooks does double entry accounting for you.
You could skip this movie and still use QuickBooks without a problem. The reason I have included this movie is because if you're going to do your own bookkeeping, there are two accounting methods that I feel everyone should have at least a general understanding of: double entry accounting and accrual-based accounting.
We are going to cover accrual-based accounting in our next movie.
Most of you are probably familiar with single entry accounting. In single entry accounting you deposit money and the bank increases or debits your account. When you take the money out the bank decreases or credits your account.
In double entry accounting there are two entries made to the transaction instead of one. Unlike single entry counting, double entry accounting shows us not only where the money is going but also where it came from. Double entry accounting provides a system of checks and balances by summing all of the debits and summing all of the credits and comparing the totals. If the two totals do not equal, you are out of balance which means you've made a mistake.
This ties back to the balance sheet and what keeps it in balance.
Click Play or press spacebar to start the video
As you can see in the example, we've increased our cash account by debiting it. And we've also increased our revenue account by crediting it. I'm sure you're wondering how do you know when to debit and credit something and how you know whether that increases or decreases it.
Debits and credits increase or decrease account balances based on the type of account.
Asset and expense accounts, you debit to increase them and you credit to decrease them.
Liability, equity, and income accounts,you credit to increase and debit to decrease.
Now I know this may not make a lot of sense yet, but I'm going to show you a chart that I put together that may help. This is called T accounts. Someone showed this to me when I was just starting out in accounting and I found them to be incredibly helpful. The T forms two columns, debits on the left and credits on the right. Each account formed it's own T and as you can see it gives you a quick reference on how to increase or decrease an account.
In a previous movie we discussed asset, liability, and equity are associated with your balance sheet. And revenue and expense are associated with your income statement.
As you can see that's broken out here in this slide. So this gives you a quick, easy reference and I'm going to provide this slide in an exercise file so at any time you can print it out and put it up on your wall and use it as a reference point for when you're doing your own accounting work in QuickBooks.
Now at this point, I'm sure it's all as clear as mud to you.
Remember, QuickBooks performs the double entry accounting so you will not need to memorize this information. However you want to try and understand the concept behind double entry accounting. The whole idea is to provide a way to ensure you that entered your financial information correctly. If your debits don't equal your credits, then your balance sheet will not balance.
Let's look at an example of a transaction you would post in QuickBooks that may help you see how this would work.
We're going to sell an item for $100 and invoice the client. The client is going to pay us later for the sale. This is called accrual-based accounting and we're going to discuss it in the next movie in detail. But just so you understand, the idea behind accrual-based accounting is you sell the item today and the client pays you later. You're going to book the revenue and earn it today because the client has received their product, but they're going to pay you at a later date. When we sell an item we're going to post that money to our revenue account.
Now remember in the previous slide, revenue accounts are income accounts and we need to increase our revenue account by the $100 of the sale.
What do we want to do when we want to increase an income account? We credit it.
OK now, in double entry accounting you have to affect two accounts for the one transaction.
So we've sold something, we've posted the sale in our revenue account, and now we have to create the second entry. Because the client is going to pay us later, we're going to post that money in what is called accounts receivable. Accounts receivable is money that the client owes you. They're going to pay you at a later date and so you're going to keep track of that debt or that money that's owed to you through accounts receivable.
Now, accounts receivable is an asset account. And we want to increase the asset account by $100.
How do we increase an asset account? Well, if we look at the chart we put together of our T accounts we can see that asset accounts are increased by debiting them.
So we're going to debit our accounts receivable by $100. So now let's look at our transaction for a minute. We've sold something and we've invoiced it. What's happening behind the scenes is QuickBooks is our revenue was increased by $100 so we credited it, and accounts receivable was also increased by $100 and we debited it.
OK now, that's how it's going to sit until the client pays us. So, the client now has paid us and we've received the payment and we have to record that money in QuickBooks.
So if we're going to record it in QuickBooks what's the first account we have to affect? Well, that would be our cash account. We want to record the money. Cash is an asset. We want to increase cash by $100. That's the payment. How do we increase our asset account? We look at accounts receivable, which is also an asset. We debit it. So we're going to debit cash $100 the money that we were paid. Remember accounts receivable is used for the money people owe you.
These people have now paid us. That means we have to reduce accounts receivable by the $100. We have to lower the amount owed since it is no longer due.
So, how do we lower an asset account? Well, if we debit it to increase it then the opposite would hold true to decrease it. We're going to credit it. So you can see the corresponding entry here. We originally had the time of the sale increased revenue, and we increased the money owed to us through accounts receivable.
When it was paid to us we increased our cash and then we lowered accounts receivable, because the money was no longer owed to us. This may be a confusing concept to you, but I want you to remember this movie as we begin working with QuickBooks.
When we get to chapter 9 and look at invoicing customers and Chapter 10, client payments, I want you reference back to this movie as it will make a lot more sense to you once you see it in action.
Remember, QuickBooks will take care of the double entry accounting that goes on behind the scenes for you. The two most important concepts to remember from this movie are: two entries for every transaction and those entries must equal one another to keep your accounts in balance.
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As both an experienced artist and an accomplished professional in finance, Suzanne Robertson possesses a unique combination of creative and analytic talents. She utilizes her 20 years of business experience and 10 years of teaching experience, along with a distinct affinity for software, to teach complex subjects in a way that is both easy to understand and applicable to the real world.
Suzanne is happily married and lives in California, where she enjoys being a mother to two beautiful children. She works as a consultant, assisting small business owners in creating and maintaining successful financial practices.