You don't need an accounting degree to do your bookkeeping in QuickBooks. However, it's good to know the basics. Use this glossary to learn more about what goes on behind the scenes in QuickBooks.
Accrual method accounting
If you use the accrual method, your business reports income and expenses for completed and pending transactions. That means you also report transactions in accounts payable (A/P) and accounts receivable (A/R).
If you use the accrual method in QuickBooks, completed and pending transactions show up on financial reports. You see customer transactions even if you haven't been paid and bills you haven't paid yet.
The accrual method gives you a complete view of your finances since you track current and future transactions. However, keep an eye on what you actually have in the bank. Since you also count unpaid transactions as income, it may seem like you have more money than you actually have.
Example: Your business uses the accrual method. You just got a $100 invoice payment, but you didn't deposit it. You also have an unpaid invoice for $100. If you run a Profit and Loss report, you'll see both transactions.
Tip: When you start your business, pick one accounting method and stick with it. You can change methods, but it requires help from your accountant.
(Also see cash method accounting)
Accounts receivable (A/R)
Accounts receivable is an account that tracks the money that's owed to your business. Usually, this means unpaid customer invoices. It's sometimes written as A/R. QuickBooks tracks your unpaid invoices in your accounts receivable account.
Example: You sent out ten invoices last week. You haven't been paid yet, so they're part of your accounts receivable.
Accounts payable (A/P)
Accounts payable is an account that tracks money the money your business owes to others. Usually, these are bills from your vendors you still need to pay. It's sometimes written as A/P. QuickBooks tracks your unpaid bills in your accounts payable account.
Example: You purchased 100 lbs of coffee from different vendors last week. You now have several unpaid bills on your desk. These bills are part of your accounts payable.
Assets are items you own and use to run your business. They generally keep their value for a year or more. There are a few types of assets:
- Fixed assets: These are physical items you own and only use to create or provide products and services. Fixed assets have a "useful life" of one year or more. Unlike other types of assets, fixed assets can be depreciated. Property and equipment are examples of fixed assets. And while they may not seem directly related to your operations, office furniture is also a fixed asset. Products you sell aren't fixed assets. Rent isn't an asset since you don't own the property - it's actually a liability.
- Other assets: intangible items you own and plan to hold onto for a year or more. This includes things like long-term investments.
- Other current assets: converted to cash or used up in a year.
Example: You bought a new pizza delivery truck for your pizzeria. The truck is a fixed asset. You also bought a dough tossing machine. It's also a fixed asset.
(Also see liabilities)
A balance sheet gives you a snapshot of everything in your business at a certain point in time. It shows what you own (assets), what you owe (liabilities), and what you've invested in your business (equity). This includes sales and expenses as well as things like office furniture and loans.
Unlike a trial balance report, balance sheets group accounts by type: assets, liabilities, and equity. It also summarizes account balances as money totals.
It's the report most accountants use to measure the health of a business. They look at the value of what a business owns and has invested and subtracts that from what they owe. This tells them a business's actual value.
Example: If you want to apply for a loan, you'll need a balance sheet. This is one of several reports that help the bank decide if you're eligible.
Cash flow is the movement of money in and out of your business. Cash inflows are income while exchange gain or loss is an expense.
You want to have a positive cash flow. That means making more money you’re spending. However, it's normal for new businesses to go through periods of negative cash flow, especially when they're growing.
Example: You own a pie shop. The income from pie sales is part of your cash inflow. The cost of pie ingredients is part of your cash outflow.
Cash on Hand/Petty Cash
Cash on hand is the money you keep around for general use. It's for making small, immediate business purchases. It's also commonly called petty cash. For example, instead of writing a check for $1.50, you can just use your cash on hand. Think of it as a rainy day fund.
In QuickBooks, you categorize petty cash separately from your sales income. Designate one person on your team to keep track of your petty cash.
Example: The cash you keep in your safe to buy extra printer paper when you run out is petty cash.
Tip: In QuickBooks, you first need to make a bank deposit to move money into your Petty Cash/Cash on Hand account. Then you can use it record purchases.
Cash method accounting
If you use the cash method, your business only reports the income and expenses for completed transactions. You don't report pending transactions in your accounts payable (A/P) or accounts receivable (A/R).
If you use the cash method in QuickBooks, only completed transactions show up on financial reports. You only see transactions after customers pay you and you pay your bills.
Some people prefer the cash method because it's simple. You only track money when it moves in and out of your business. However, it can be harder to make long-term plans since you don't account for future income and expenses.
Example: Your business uses the cash method. You just deposited a $100 invoice payment. You also have an unpaid invoice for $100. If you run a Profit and Loss report, you'll only see the deposited $100, not the pending payment.
(Also see accrual method accounting)
Tip: When you start your business, pick one accounting method and stick with it. You can change accounting methods, but it requires help from your accountant.
Cost of goods sold
Cost of goods sold is the total cost of producing a product or service you sell. Sometimes, this is called COGS, cost of sales, and COS. It's an expense to your business.
If you create an item, the cost of goods sold includes the materials, production labor, and expenses incurred selling it. This directly affects how much you make per item sold.
[Sales revenue] – [COGS] = The actual amount you make per item
The cost of goods sold only includes direct costs. Indirect expenses like rent, marketing, or advertising shouldn't be included.
Example: If a cup you sell for $5 costs $2 to make it, the cost of goods sold is $2.
Depreciation is the loss of an asset's value from its original purchase price. All of your physical assets (cars, computers, equipment, machinery, etc) lose value over time. The loss is depreciation.
Assets depreciate due to normal wear and tear, current trade-in value, down payments, outstanding fees, and so on. Since there are so many factors, depreciation can be tricky to calculate. Talk to your accountant about the best way to track it.
Example: You want to sell your guitar. You bought it 5 years ago to play gigs around town. It's very worn and needs repairs. If you sell it for less than the original purchase price, the loss of value is its depreciation.
Equity is the potential value of your business. Equity includes investments in the business and accounts for all profits and losses. It's basically the net worth of your business.
To calculate your equity, subtract what your business owes (liabilities) from what it owns (assets).
Many people use equity to measure the health of a business. A healthy business makes more than it spends. Remember, you don't actually need to sell anything to have equity.
Example: You have $5,000 worth of business assets. You owe $2,000 for a bank loan. This month your business made $1000. Your current equity is $4,000 ($5000 – 2000 + 1000 = $4,000).
Expenses are the costs of things you use for your business. This includes products and services you use to run your business as well as things like utilities. In QuickBooks, you categorize your expenses into different expense accounts for better tracking.
Example: Your work phone is an asset. Your power and phone bills are expenses.
Income (also known as revenue)
Income is the money you make from selling products and services. In QuickBooks, you use income accounts to track your income. Use multiple separate income accounts to track different streams of income.
Tip: Use Other Income account/Other Revenue to track the income you get from outside your normal business operations. Interest is an example of other income (other revenue).
A liability is money you currently owe to other people. They're basically your debts. This includes rent, outstanding bills, credit card debt, taxes you owe, and loan debt. It also includes things you pay on a regular basis, like employee withholdings.
In QuickBooks, there are two types of liabilities:
- Current liabilities: These are short-term debts you expect to pay within a year. This includes bills, sales and payroll taxes, deferred salaries, and short-term loans
- Long-term liabilities (also known as non-current liabilities): debts you expect to pay off for longer than one year. Large loans and mortgages fall into this category.
Example: Let's say you take out a $2,000 loan to pay for a camera. You only use this camera for work. The loan is a liability. The camera, on the other hand, is an asset to your business.
(Also see assets)
Owner's equity is the personal cash or assets an owner has directly invested in their business. When an owner takes money from the business, it's known as owner's draw.
There are many ways to account for owner's equity. It mostly depends on how you set up your business (sole proprietor, partnership, LLC, S-corp or C-Corp). Learn more about different types of owner's equity.
A trial balance is a report accountants use to make sure accounts are balanced at the end of the fiscal year. It lists all accounts on a chart of accounts and their totals as either debits or credits. This lets accountants compare everything side-by-side and quickly catch errors. When the credits from one account don't match the debits in a related account, they know there's a problem.
Unlike a balance sheet, a trial balance doesn't group accounts by type and shows totals as debits and credits.
(Also see balance sheet)