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While you don't need to be a Certified Public Accountant (CPA) to use QuickBooks, there are some basic concepts that you need to know to set up and manage your books like a pro. If you are an Enrolled Agent (EA), CPA, or aspiring bookkeeper or accountant, the concepts that we cover in this section will be familiar to you. However, if you are brand new to bookkeeping, make sure you grab a notepad to take notes, and a cup of coffee to stay alert.One of the benefits of using QuickBooks to manage your books is that you don't need an accounting degree to learn how to use the software. However, you should have a basic understanding of how bookkeeping works and what's happening behind the scenes in QuickBooks when you record transactions.The key aspects of small-business bookkeeping are the following:

• Money coming into your business (sales)
• Money going out of your business...

Recording sales

Every business generates sales by either selling products, services, or a combination of the two. For example, Small Business Builders generates sales by providing consulting services to their clients. Meanwhile, a retailer that sells custom T-shirts in various sizes and colors provides a product to generate sales.In general, there are two types of sales: cash sales and credit sales. The primary difference between the two is when you receive payment from your customer. Cash sales are sales that require payment at the time a product is sold or services have been provided. For example, let's say a customer walks into a T-shirt shop and buys a T-shirt. This sale would be considered a cash sale because the sale of the T-shirt and payment by the customer take place at the same time.Credit sales are the opposite of cash sales because the sale and the payment by the customer take place at separate times. For example, let's say Small Business Builders spends...

Recording expenses

Most of the money that flows out of a business is used to pay for business expenses. Business expenses can be categorized as recurring or non-recurring. A recurring expense is one that repeats, such as rent, utilities, or insurance, which are typically paid on a monthly basis.A non-recurring expense is one that is unexpected or takes place less frequently. For example, let's say the air conditioner goes on the blink at your office and you need a repairman to come out and fix it. This would be considered a non-recurring expense because it isn't likely to happen routinely.QuickBooks is designed to help you easily track both recurring and non-recurring expenses. In Chapter 8, Recording Expenses in QuickBooks Online, we cover how to create recurring transactions in QuickBooks so that you don't have to manually enter them each time they occur. Plus, you will learn how to pay non-recurring transactions by writing a check, making online payments...

Recording inventory and fixed-asset purchases

To keep track of all the costs and quantities for each item that you purchase, you create a purchase order and send it to your vendor supplier to place an order. When you receive the goods, you record them in your inventory. As you sell products to customers, you record the sales in QuickBooks so that your inventory, cost, and quantities can be adjusted in real time. In Chapter 18, Advanced Inventory Management, we cover in detail how to set up and manage the products that you sell.If you purchase computers, printers, or other equipment for your business, these items are called fixed assets. When you record these items in QuickBooks, they will be categorized as fixed assets. Fixed assets should be depreciated over their useful life. Depreciation is the reduction of the value of an asset due to wear and tear. In Chapter16, Closing the Books in QuickBooks Online, we will cover how to add fixed assets to QuickBooks.

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Recording liabilities

Many people think that liabilities are expenses, but they are not. A liability can be described as money that is owed to creditors, such as a loan you have with a financial institution or money that you owe to vendor suppliers, which is also called accounts payable. The primary difference between expenses and liabilities is that if you were to go out of business tomorrow, you would no longer have to pay expenses. Instead, you would stop making payments for utilities, and you would lay off employees to eliminate payroll expenses.On the other hand, if you go out of business, you still have to pay your outstanding liabilities. They don't just disappear as expenses do. For example, if you have an outstanding loan with a bank, you still owe that money and will have to contact the financial institution to make payment arrangements. The same would apply to unpaid bills for products and/or services you received. This means you would have to contact the...

The chart of accounts

The chart of accounts is a systematic way of categorizing financial business transactions. Every transaction for your business can be categorized into one of five primary categories: assets, liabilities, owner's equity, income, and expenses.Here is a brief description of each category, with an example:

• Assets: Assets are items that your business owns. For example, the money in your business checking account is an asset, and the inventory that you have on hand is an asset until it is sold.
• Liabilities: As discussed, liabilities consist of money that you owe to creditors. This includes loans, lines of credit, and the money owed to vendor suppliers (for example, accounts payable (A/P)).
• Owner's equity: Equity is everything the owner has invested in the business. For example, any money that you invest in your business is equity.
• Income: Income refers to proceeds from the sale of products, such as T-shirts...

Choosing an accounting method

One of the key decisions a business will make when setting up their books is which accounting method to use. There are two accounting methods to choose from: cash-basis accounting and accrual accounting. The primary difference between the two accounting methods is the point when you record sales and purchase transactions as having occurred in your books.Cash-basis accounting involves recording sales and purchases when cash changes hands. Going back to our previous example, where Small Business Builders invoices a client for consulting services provided, based on cash-basis accounting, Small Business Builders cannot count the consulting services as income until they receive payment in cash, by check, or by credit card.Accrual accounting involves recording sales as soon as you have shipped the products to your customer or have provided services. Going back to our example, Small Business Builders would count the consulting services they provided...

Double-entry bookkeeping

One of the key reasons why you don't need to have prior bookkeeping knowledge to use QBO is that the software records all debits and credits for you in the background. However, I thought it would be helpful to explain what's actually taking place when you record an invoice, a bill, or another transaction in QBO. You may have heard the term double-entry accounting/bookkeeping. This means that for every financial transaction you record, there are at least two entries—a debit and a credit. This ensures that both sides of the accounting equation always remain in balance.The accounting equation is as follows:

Assets = Liabilities + Owner's Equity

Let's look at the following example. A T-shirt business owner goes out and purchases $100 worth of T-shirts from a supplier. They don't pay for the T-shirts right away, but the supplier will send a bill later on. For this transaction, inventory increases...

Financial Statements

Having access to accurate and reliable financial statements is one of the benefits of tracking your business finances in QuickBooks as opposed to Excel spreadsheets or the dreaded "shoe box". There are five key reports that you should be familiar with: Profit and Loss report, Balance sheet report, Cash flow statement, Accounts receivable aging report, and the Accounts payable aging report.Below you will find a brief description of each one of these reports:

• Profit and Loss report: this report is sometimes referred to as the Income statement. It provides you with a summary of all income generated from the sale of your products and/or services. In addition, a summary of all expenses incurred by your business are also summarized on this report. The difference between the income and the expenses is calculated and show on this report as either a net profit (if total income is greater than expenses) or a net loss (if your total expenses...

Summary

In this chapter, we have covered the eight main areas of focus when managing the books for your business: money coming into a business in the form of sales to customers; money going out of a business for expenses such as office supplies and rent; inventory and fixed-asset purchases, and how to record them in your books; money you owe to suppliers and creditors (liabilities); how to manage the chart of accounts; the two accounting methods (cash-basis versus accrual); how double-entry bookkeeping works, and a brief overview of five key financial statements. //In the next chapter, we will explain in detail what QuickBooks is, the subscription plans available and how to choose the right one, how to create your QBO account and we will share some navigation tips and tricks.