In our QuickBooks Training Courses, we teach the basics of accounting, and the one topic that seems to have the most difficulty is the Balance Sheet.
Understanding the dreaded Balance Sheet and Chart of Accounts will make life much easy (more specially for people using QuickBooks). If you are going to invest in a brand new business or maintaining an existing family business, need a bank loan, looking for bookkeeping work in any small business, or have the any responsabilty to manage your own assets and liabilities, understating some basics of accounting becomes very necessary.
Generally, there are two accounting method, and are split into two categories:
- Cash Basis Method
- Accrual Basis of Accounting
Generally, the Cash Basis Method accounting is found in the way individual, or really small businesses manage their finances. In this example, the person or small business only keeps a track of the money withdrew, deposited, gave or received from someone etc. Some businesses run on “cash basis” but it is functional only for the purposes of tax reporting.. but not too useful for managing a business specially when client’s owe the business money at any point in time. This accounting method comes to life only when actual cash transactions take place… it does not recognize income with open invoices or expenses (vendor bills) that are not yet paid…. most non-accountants call this “real” accounting; since they can only understand financial transactions from the perspective of monetary exchange.
The Accrual Basis Method of Accounting requires the involvement an accountant (or at least a person that has studies accounting from a DEBIT/CREDIT point of view) and they must also recognize the transactions even without money has been actually exchanged. This method works on several principles such as comparing or seeing the ratio of the expenses to expenditure. If the expenditure is more, you need to cut down your luxuries, if not then it ís always good to have some savings for future. This type of accounting tells you the amount that you owed; this mthis almust never match you profit with the money in the bank.
Accounting terms are important also, understanding it involves knowing some key terms that one needs to be familiar with. Some of the most important ones are highlighted below: (known as BALANCE SHEET accounts)
Assets: the assets are generally those possessions of an individual that have a good market value or are quite valuable. Assets are mainly classified into three types-
- Current Assets: the cash is the most basic asset of any individual. The money that is being held in accounts like the checking and savings accounts is also included in the cash. Also inclusive are the marketable securities in the form of bonds, stocks, shares etc. The money lent or payments due from clients, even form a part of it.
- Fixed Assets: comprises of all the tangible valuable things like property, machines, equipments, land and the like that are not meant to be sold.
- Intangible or Other Assets: incorporates all the untouchable things like copyrights, patents, trademarks etc. that have tremendous monetary significance.
The accounting laws of opposites governs the nature; where there are assets, there will be liabilities. These are the debts that you have to pay back to your creditors. This can be done through giving cash or any other asset like jewelry, some other goods etc.
Liabilities are of two kinds:
- Current Liabilities: these are the liabilities that will be paid within a certain time limit and most bu using your current assets such as cash on the bank or previously prepaid credits.. These include the accounts payable i.e. type of bill that you have to monthly, the Notes Payable-loans taken from banks meant to be repaid within 30 days and the Accrued Expenses- the compulsory expenses like taxes, wages, interests etc. where the bills are not received but the balances of each must be repaid.
- Long Term Liabilities: those debts that can be repaid at ease for the tenure is more then a month.
The difference between Assets and Liabilities are the Net Worth of the business, but in accounting terms = Equity. Typically Equity or Capital would be a positive number.
Equity or Capital: is the economic capital. It is any liquid medium or merchandise that stands for wealth or other styles or capital. There are four ways to manage and display the financial capital. First, this capital is needed when a contract is made with any sort of capital asset.
You do not need to take an accounting or bookkeeping class in order to learn these term, sometimes reading from websites or watching accounting videos in youtube could help. In our QuickBooks Training classes we cover these topics to make sure that accounting and QuickBooks usage is being understood hand-in-hand.
Hector Garcia, RTRP
QuickBooks ProAdvisor & Registered Tax Return Preparer
QuickBooks Training Courses, South Florida