Accounting Basics: The Important Stuff

QuickBooks helps people who don’t have a degree in accounting handle most accounting tasks. However, you’ll be more productive and have more accurate books if you understand the following concepts and terms:

Double-entry accounting. 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, money always comes from somewhere when you use double-entry accounting. For example, as shown 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. 

TABLE i-1 Following the money through accounts

TRANSACTION	ACCOUNT	DEBIT	CREDIT
Sell products or services	Accounts Receivable	$1,000
Sell products or services	Service Income		$1,000
Receive payment	Checking Account	$1,000
Receive 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 real-world 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. (See Chapter 3 to learn about all the different types of accounts you might use.) The chart of accounts is simply a list of all the accounts you use to keep track of your company’s money.

 Cash vs. accrual accounting. Cash and accrual are the two different ways companies can document how much they make and spend. Cash accounting is the choice of many small businesses because it’s easy: You don’t show income until you’ve received a payment (regardless of when that happens), and you don’t show expenses until you’ve paid your bills.

The accrual method, on the other hand, follows something known as the matching principle , which matches revenue with the corresponding expenses. This approach keeps income and expenses linked to the period in which they happened, no matter when cash comes in or goes out. The advantage of this method is that it provides a better picture of profitability because income and its corresponding expenses appear in the same period. With accrual accounting, you recognize income as soon as you record an invoice, even if you don’t receive payment until the next fiscal year. And you recognize expenses as soon as you record a bill, even if you don’t pay the bill until the next year.