Overview

Accounts are categories for your financial information. A transaction is an event that impacts on the monetary value of an account and causes it to change. Bookkeeping is the process of recording your company’s financial transactions accurately on a daily or regular basis. While QuickBooks does most of the legwork, the user still must understand accounting procedures to use the software effectively.

The accounting cycle is the process for completing a company’s bookkeeping tasks. The accounting period is a period of fixed duration in which the accounting cycle is completed. In QuickBooks, the accounting period is set to one year; Opening on January 1 and closing on December 31. 

A list of all the accounts used for your business is known as the account list or chart of accounts. In QuickBooks, each account in the chart of accounts has a digital record of all the transactions affecting its balance. These digital records are called ledgers. All the account ledgers put together form a database called a general ledger. A trial balance reports the balances of all accounts in the general ledger at a given date.

The record of all transactions in the general ledger is known as a general journal. Each transaction recorded in a general journal has its own journal entry. A journal entry describes a transaction by identifying the accounts involved in the transaction and the monetary amounts moving between those accounts.

A bookkeeper reviews a source document such as an invoice or receipt and extracts the relevant transaction data. Then the bookkeeper will either enter that data manually into the software or import it from an automated feed into the software.  Either way, the software will use the bookkeeper’s data to code the transaction and create a journal entry for it, which it then posts to its general ledger. The bookkeeper repeats this process over and over through the accounting cycle until every transaction occurring during the current accounting period is entered into the software.

Along the way, the bookkeeper must compare an account’s transactions as entered into the software to external financial records to make sure they have been entered accurately. The bookkeeper then needs to explain any differences between the two sets of records, as unexplainable differences may be the result or financial misappropriation or theft. This process is known as reconciliation. 

Reconciliations do not have to be performed for every account. Generally, only accounts with ongoing balances carried forward through each accounting period need to be reconciled. These accounts are called permanent accounts. There are also accounts that are closed at the end of each accounting period and set back to zero. Such accounts are known as temporary accounts.

At the end of the accounting period, the bookkeeper traditionally prepared a trial balance and submitted it to the accountant. The accountant took it from there, prepared the financial statements, performed the necessary adjustments, and closed the books for the accounting period.

Because QuickBooks can generate the necessary financials with such ease, this has changed. Now a bookkeeper can easily retrieve the three basic financial statements with numerous variations and levels of detail.

The three basic financial statements are used to analyze a company’s financial strength and provide a quick snapshot of a company’s financial health and underlying value. They include the profit and loss (P&L) or income statement, the balance sheet, and the statement of cash flows.

Profit and loss statements report the balances of temporary accounts (see above). These are the accounts that are reset to zero at the end of an accounting period.  There are two types of temporary accounts: Revenue accounts, and expense accounts. In QuickBooks, revenue accounts (also called income accounts) track amounts generated from selling your products and services. Expense accounts in QuickBooks track the costs your business must pay to operate and generate revenue. The net profit (or loss) at the bottom of the statement shows a business’s net income by subtracting total costs and expenses from total income.

The balance sheet reports the balances of permanent accounts (see above). These accounts continue to carry an ongoing balance across accounting periods. There are three types of permanent accounts: Assets, Liabilities, and Equity.

Asset accounts track the value of what a business owns. This includes physical items such as cash, equipment, property, raw materials, and inventory. Intangible items like patents, royalties, and other intellectual property are considered assets as well. Assets also include money owed from debtors (such as customers) through a legally binding obligation. 

Liability accounts track money a business owes its creditors. Liabilities are incurred to fund the ongoing activities of a business. Bank debt and money owed to vendors with which your company does business (such as suppliers) are examples of liabilities. Advance payments from customers for a service that you have not yet performed is considered a liability until the contracted service has been rendered.

Equity is the third account type. For our purposes, equity accounts are used to track money that you as the owner invest in or withdraw from your business, and the net worth of your business (If your business is a corporation the definition for equity is a bit more complicated.)

The balance sheet reports the balances of the permanent accounts at a specific point in time.

The asset accounts are put on one side of the balance sheet while liability and equity accounts are put on the other side. If all financial transaction amounts have been recorded correctly, the sum of the balances of the asset accounts on one side will equal the sum of the balances of the liability and equity accounts on the other side. The two sides being unequal could be the result of the wrong amount being recorded for a financial transaction.

The third report is called the statement of cash flows. This report includes all the accounts. It shows how the changes of all the non-cash general ledger accounts affect cash. The statement of cash flows is divided into three sections:

Cash flow from operating activities

This is the change in cash resulting from day-to-day business activities, such as payments received from customers, payments to vendors, changes in the amount of money owed to the business and money owed to vendors, as well as changes in credit card balances.

Cash flow from investing activities

Includes changes in cash from transactions involving lending money and long-term investments such as purchasing property, furniture, or equipment.

Cash flow from financing activities

This is changes in cash resulting from funding the business. This includes changes in long-term debts resulting from advances and payments, as well as funds withdrawn from the company or invested in the company.

 There you have it. I hope this scintillating overview has whet your appetite for more!