USE QUICKBOOKS?
25 Accounting Terms You
Should Know!
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Copyright ©A Bookkeeper 4 U, LLC
Telephone (570) 839 – 3922 ●www.abk4u.com
QuickBooks is a great accounting software that is the most widely used amongst small
businesses and is designed to be quite user friendly, intuitive and flexible. However it is just that,
a software; it is not an accounting manual or tutorial and it is not a magic bullet that will provide
you with accounting knowledge you don't possess. In order to use QuickBooks effectively it is
important to understand the basics of accounting and accounting terminology. If your business
is not complicated you might be able to get by without knowing a lot about the principles of
bookkeeping, however I truly doubt that all you want to do is get by. Using QuickBooks without
understanding the fundamentals of accounting can be a dangerous combination. For this reason
I have compiled a basic list of Accounting terms that you should become familiar with.
With that said; the most important aspect of using QuickBooks beyond understanding the basics
of accounting is ensuring that QuickBooks is setup correctly. How QuickBooks is setup dictates
how reliable your financial information will be. Knowing the accounting terms below will help
increase the accuracy of your QuickBooks experience.
ACCOUNTS (Chart of Accounts)
Accounts are used to accumulate amounts produced from like transactions. In other words
accounts are used to categorize your financial transactions in a logical way. When setting up
QuickBooks, based on your industry, QuickBooks will create a starting chart of accounts.
However it is important to know that these account are organized based on type; Asset,
Liability, Equity, Income and Expenses.
ASSETS
Assets are one of the 3 major parts of the Balance Sheet and can be defined as economic
resources owned by a business that are expected to benefit future operations. In other words,
What physical items do you have that has value? This would be the simplest way to define your
assets. Still there are also non-physical assets such as the rights granted by patent, trademark
or copyright.
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Assets are tracked in QuickBooks in 3 categories :
Current Assets
Current Assets are generally used within 12 months or can be converted to Cash within
12 months. Examples of Current Assets are; Bank Accounts, Cash on Hand, Prepaid
Expenses such
as Insurance, Inventory, Employee Cash Advances, Security
Deposits, Money Owed to Your Business By Customers (Accounts Receivable)
Fixed Assets ( Also called Long Term Assets)
Fixed Assets are assets that (1)have a useful life of more than one year, (2)are acquired
for use in the operation of the business and (3)are not intended for resale to customers.
What fits these descriptions? Property, Plant and Equipment. More specifically, examples
of Fixed Assets are: Building, Land, Machinery and Equipment, Vehicles. Beyond the
examples of Fixed Asset there is also a minimum dollar value that companies adopt
within IRS guidelines in determining if an item qualifies as a fixed asset. (Talk to your
accountant or bookkeeper for guidance with this determination).
Other Assets
Used to track the value of assets that are neither Fixed Assets or Current Assets - Non
Physical assets. Examples are Goodwill, Intellectual Property, Copyrights, Designs,
Formulas, Patents, Trademarks.
LIABILITIES
The second of the 3 major parts of the Balance Sheet. Liabilities are obligations or monies
owed for value received in the operation of your business. In other words, who do you owe?
Liability is debt.
Liabilities are tracked in 2 different categories:
Current Liabilities
Keeps track of monies your business owes and expects to pay in one year. Examples of
current liabilities are: Sales Tax, Payroll Tax, Retainers from Customers, Security Deposit
Received, Short-Term Loans, Vendor Bills
Long Term Liabilities
Tracks monies your business owes and is expected to pay back over more than a year.
Examples are: Mortgages, Bonds, Leases,.
EQUITY
The third part of the 3 major parts of the Balance Sheet, Equity also called Owners Equity by its
simplest definition is the owners interest in the company. In other words, Equity is what you put
in or take out of the business. Examples of equity would be opening investments, contributions,
owner’s capital or retained earnings, Owner Draws. When you re-arrange the accounting
equation, Equity = Assets – Liabilities.
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REVENUE
Revenue , simply put is the monies earned by your business from goods sold or services
rendered over a specific period of time. When a business delivers a product or provides a
service to a customer, it usually receives cash (ie, check, cash, credit card etc.) or a promise to
pay cash in the near future.
EXPENSE
Expenses are the cost of the goods and services used up in the process of earning revenues.
Often called cost of doing business , expenses include cost of goods sold, the cost of activities
necessary to carry on a business, and the cost of attracting and servicing customers. Examples
are salaries, rent, advertising, telephone service and depreciation (allocation of cost) of Fixed
Assets
ACCOUNTS PAYABLE
Accounts Payable is the opposite of Accounts Receivable. It represent amounts owed to
creditors on the basis of an oral, implied or written promise to pay. In other words Accounts
Payable tracks money you owe to your vendors and usually arise as a result of the purchase of
merchandise, services, supplies or equipment on credit. Accounts Payable is categorized as
current liability as these debts are usually expected to be paid in the short term.
ACCOUNTS RECEIVABLE
You guessed it; Accounts Receivable is the opposite of Accounts Payable. This account tracks
income that you have not yet received. Money owed to you by your customers.
DEPRECIATION
Depreciation is the allocation of cost of your fixed assets over time (its useful life). There are
multiple ways to calculate depreciation. (Talk to your bookkeeper about the best option for you)
INVENTORY
Inventory items are merchandise you purchase and store for future sale.
NON INVENTORY PART
It's merchandise that isn't stored by you for future sales. When you purchase an item but don't
sell it or you buy something and resell it immediately to a customer, this is what it's called.
AVERAGE COST
Average Cost is a method of calculating the value of your stock. There other methods of
calculating this, however the average cost method is the one QuickBooks uses.
DOUBLE ENTRY SYSTEM
The double entry system of accounting or bookkeeping means that every business transaction
will involve two accounts (or more). This is the system that QuickBooks uses--that all legitimate
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small business accounting software uses. Every transaction must show where the funds came
from and where they went. Each has a Credit (decreases asset and expense accounts) and
Debit (decreases liability and income accounts) which must balance out (other types of accounts
can be affected)
For example, when a company borrows money from its bank, the company's Cash account will
increase and its liability account Loans Payable will increase. If a company pays $200 for an
advertisement, its Cash account will decrease and its account Advertising Expense will
increase. All mounts entered into the general ledger as debits MUST be equal to the amounts
entered as credits
GENERAL JOURNAL (JOURNAL ENTRY)
The general journal is where double entry bookkeeping entries are recorded by debiting one or
more accounts and crediting another one or more accounts with the same total amount. The
total amount debited and the total amount credited should always be equal, thereby ensuring
the accounting equation is maintained. (Assets = Liabilities + Equity)General Journal entry is the
backbone of every accounting system. You very rarely see it because the software does the
journal entries in the background. The fact is every transaction you enter into QuickBooks is
recorded in the system via journal entry.
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BALANCE SHEET
A balance sheet is a snapshot of your business' financial position on a given day, usually
calculated at the end of the month, quarter or year. It is a summary of your company's assets,
liabilities/obligations, and owner's financial involvement.
A balance sheet is how a business can verify that all their financial records are in check. There
are essentially 3 accounting categories used to keep track of your finances: 1. Asset 2.
Liabilities 3. Owners’s (aka Shareholder’s) Equity
The way your finances “balance” is as follows: Assets = Liabilities + Owner’s Equity
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TRIAL BALANCE
A listing of the accounts in the general ledger along with each account's balance in the
appropriate debit or credit column. The total of the amounts in the debit column should equal the
total of the amounts in the credit column.
GENERAL LEDGER
In the simplest terms a general ledger is a complete record of all the financial transactions of
your company throughout its life. The general ledger holds all of the information needed to
prepare financial statements and includes assets, liabilities, equity, revenue and expenses.
CASH FLOW
This refers to the relationship between incoming and outgoing funds during a specific time
period.
INCOME STATEMENT OR PROFIT & LOSS STATEMENT
The Income Statement is a financial statement that summarizes the amount of revenue earned
and expenses incurred by a business over a period of time
NET INCOME
This is your revenue minus expenses.
ACCRUAL BASIS
Accrual-basis records cash when it is earned and expenses when they are incurred, regardless
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of when the revenue is received or expenses paid. For example you send an invoice to your
customer for services performed in the month of September, your customer pays you in
November. On the accrual basis of accounting your revenue is recorded in September because
this is when it was earned regardless of the fact that you received the payment in November.
CASH BASIS
When utilizing the cash method of accounting (also called cash basis accounting), business
owners report income when it is actually received and expenses when they are actually paid.
Cash basis accounting is the most common and easiest method of accounting for money.
DEBIT
In bookkeeping, debit is an entry on the left side of a double-entry bookkeeping system that
represents the addition of an asset or expense or the reduction to a liability or revenue. The
opposite of a debit is a credit.
CREDIT
An entry recording a sum received, listed on the right-hand side or column of an account.
RECONCILE
It's the process of making sure your records and those of your financial institutions agree.
These are just a few of the terms you should recognize and understand. We hope you'll contact
us when you need help understanding how the accounting process fits into your workflow.
AUTHOR:
Michelle Chappelle
A Bookkeeper 4 U, LLC
www.abk4u.com
(570) 839-3922
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Copyright ©A Bookkeeper 4 U, LLC
Telephone (570) 839 – 3922 ●www.abk4u.com