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  • Writer's pictureP. Seely

Understanding QuickBooks

Income and Expense Diagram for QuickBooks Click

When I first started using this amazing accounting system I was just as lost as so many first-time users. Unfortunately, I made mistakes that cost my business money. Some might say, 'That's just the cost of doing business." According to The Hartford, 29% of businesses fail every year due to cash flow problems and over 8 out of 10 experience cash flow problems throughout the year. If you are like the millions of QuickBooks users who do not have an accounting background then you are probably thinking that's why you send your records to your accountant.

Since I started travelling the country teaching small businesses how to use QuickBooks, I often draw diagrams in class to help attendees visually understand complex concepts. These rudimentary drawings form the basis for computer generated ideas that I sometimes share later. I would encourage you to document your business processes so that you can train others and keep track of your intellectual property as well. Here's my drawing for those that requested a copy and I also created an interactive copy at this link to my Prezi

Starting with Customers, anyone or anything, that gives your company money. Usually, money coming into the business (inflow) from normal business activities we refer to as Operating Income. There are five methods to record sales in QuickBooks Desktop versions. Four methods using QuickBooks Online. Primarily, we can ask ourselves, "Is this customer paying me now or later?" If the customer pays you later, we use an Invoice. If the customer pays you right away, we use a Sales Receipt. This question is critical to understanding the accounting behind the scenes. If we recognize our sale now but will be paid later, accountants use an account type call Accounts Receivable. This account reflects all the money your customers owe you and is considered an Asset on your Balance Sheet.

Because an Invoice is the first step needed to track the details of the sale, there are two steps that need to be completed afterwards. During Step 2, we need to Receive the Payment which lowers Account Receivable. Now that we have the money and the Invoice is either paid or partial paid, QuickBooks uses an account type called Undeposited Funds, also an current asset. This account went up by the amount that we told QuickBooks we received. This account is used to track all money in transit to the bank. Some money may be used right away, like cash, and should be deposited into a Cash Account (Petty Cash, Cash-on-Hand, etc.) while the remainder may be deposited into a Bank Account (Checking, Savings, etc.). The Deposit transaction (Step 3) lowers Undeposited Funds and increases the depositary account. Skipping any of these steps results in account imbalances which leads to bad decisions and worse, losing track of the money entirely. Although, your accountant can fix account imbalances this can be costly too. Many accountants charge by the hour.

Since Customers are necessary for our businesses to operate, we also need to replenish what we've sold. Products and Services are the things we use to generate revenue. It would be very difficult to keep our Customers happy if we don't have someone or something supplying us the items needed to complete the sale. Vendors are the people or businesses that we pay for items and services that our businesses consume during normal operations. They too want to get paid. Some Vendors we pay right away and others we pay later. Accounts Payable tracks the money you owe others and pay later. This account, like Accounts Receivable, shows on the Balance Sheet; except A/P is at the bottom of this statement.

At the heart of every successful business is accurate financial statements. It breaks my heart when I hear an attendee tell me that they have been taken advantage of, owe more in taxes, or are failing due to cash flow issues. Your next QuickBooks class can be the best two days investment your business makes.

I hope this helps your understanding of QuickBooks. Post your comments or share this to someone that uses QuickBooks. Visit my homepage often to keep up with where I'll be. I hope to see you in my next class!

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