The best path to success in business is emulating the actions of successful entrepreneurs who preceded you. One thing they all share in common is an ability to effectively manage financial matters.
Operating a business requires accurate financial statements for making effective management decisions. This begins with a deciding to use a bookkeeping system like QuickBooks for business accounting. A personal finance program – such as Quicken – is inadequate for keeping track of revenue and expenses. Business records are maintained using double-entry bookkeeping. This is a process of creating verifiable financial records. By understanding how double-entry bookkeeping works, you can verify that business transactions are accurately recorded in QuickBooks.
Double-entry bookkeeping is based upon an equation that always remains in balance. Every business transaction affects more than one account in the equation, which states that Assets minus Liabilities equals Net Worth. Since profit creates Net Worth, your Revenue and Expense accounts are all part of Net Worth. The Assets accounts include bank balances, accounts receivable, inventory, and equipment. Liabilities accounts are comprised of loans, credit card balances, and amounts owed to suppliers.
A change in one account is offset by an equal change to one or more other accounts. That’s all there is to understanding double-entry bookkeeping. For example, an increase in Revenue from making a sale is deposited in your bank account. You have an increase in Net Worth and an increase in the Asset for your bank balance. The equation stays balanced. This makes keeping track of revenue and expenses much easier.
Utilizing accurate financial statements allows you to understand and manage your business. For example, QuickBooks reports inform you about your inventory and sales categories. QuickBooks reports also allow you to examine your input costs.
Every business must understand the cost incurred to make a sale. These items vary among industries. For some, advertising expenses are a major component of generating sales. For others, certain costs for materials are important. For companies that acquire items for resale, there’s a need to monitor inventory cost and shipping expense. Labor-intensive businesses must frequently review employee expenses. The Profit and Loss report in QuickBooks can show expenses as a percentage of sales or compare various periods and show the changes over time.
Does your business extend credit to customers? Many types of companies send a bill after merchandise is shipped or services rendered. Keeping track of who owes you and how much is essential. QuickBooks does that.
Simply keeping track of your revenue and expenses is not sufficient. In addition to the Profit and Loss report, QuickBooks provides your company’s Balance Sheet. The Balance Sheet shows assets acquired with business profits and any debts incurred. An important part of business management is supervising how much the business owes as well as amounts owed to the business.
The most important function served by the Balance Sheet in QuickBooks is that it permits you to locate accounting mistakes. Bad bookkeeping is easily revealed on the Balance Sheet. You should examine it daily.
Because of the double-entry bookkeeping process in QuickBooks, any incorrectly recorded expenses or unrecorded revenue creates offsetting erroneous amounts on the Balance Sheet. Does the figure for your inventory look about right? Or does the Balance Sheet reflect an inventory amounting to a hundred thousand dollars when you know that your warehouse has only a few thousand dollars of items for resale? If so, your accounting entries are not correctly recording the cost of goods sold. Is accounts receivable a negative figure on the Balance Sheet? Then your accounting entries are not recording your revenue. Is accounts payable a negative figure on the Balance Sheet? Your accounting entries are not recording your expenses. Keeping track of revenue and expenses is a breeze when you use QuickBooks for business accounting.
Finally, the Balance Sheet provides account balances that are verifiable against independent sources. Bank balances are reconciled to statements from the bank. Inventory balances are verified to a physical inventory count. Loan balances and credit card balances are reconciled to statements from financial institutions.
Double-entry bookkeeping happens in the background in QuickBooks because the program only shows you a single side of each entry. That simplifies the data entry. But you must use the financial statements to assure accurate accounting. A single-entry system like Quicken doesn’t give you that opportunity. You can’t make sound business decisions with inaccurate details.
Don’t let inexperience with accounting inhibit your business success. You only need the right tools to maintain financial records. Then you can exercise some money monitoring skill. Using QuickBooks for business accounting is a popular choice. Just make sure you review the reports, reconcile your data, and get professional data entry help when needed. Most of all, study the rudiments of double-entry bookkeeping. All successful entrepreneurs know their way around business financial statements because they understand the process behind creating them.
About the Author
David Heistein, CPA
Dave is co-founder and managing partner at Profitwise Accounting. Dave is a Certified Public Accountant in the state of California, as well as an advanced QuickBooks Pro Advisor and Instructor. As a small business owner, he is dedicated to educating and informing other business owners on bookkeeping and accounting matters.