This post will allow you to condense an entire semester of accounting into just a few paragraphs (and many would say that is still too much!).
More importantly, it will help you better understand the jargon your CPA lays on you the next time they want to talk about "posting journal entries" and other complicated accounting stuff.
IT ALL STARTS WITH THE CHART OF ACCOUNTS
In QuickBooks menu bar, if you click Lists > Chart of Accounts (one of several ways to access it), you discover the heart and soul of your accounting system.
In the chart of accounts, you see a listing of accounts with various names such as checking, inventory, rent expense, etc. The common theme in this listing is that each account boils down to one of the following types:
- Asset - something you own (checking account, inventory, etc.)
- Liability - something you owe (sales tax, bank loan, etc.)
- Equity - your ownership share (assets - liabilities)
- Income - dollars into the business
- Expense - dollars out of the business
TAKING ACTION ON THE ACCOUNTS - THE DREADED DEBIT (OR CREDIT)
Every time you write a check, create in invoice in QuickBooks (or enter any other transaction), you are actually interacting with the chart of accounts and creating an accounting entry (though you may not have even realized it!).
Each of these entries is actually creating a "debit" side of the entry and a "credit" side of the entry. For example, if I create an invoice for Customer A in QuickBooks to sell them $100 of design services, here is what QuickBooks actually sees "behind the screen" when you hit save and close (Click the picture to make it easier to see if needed):
IMPORTANT TO KNOW - For every debit, there has to be a credit and the total debits must equal the total credits.
That's the way the accounting police wrote the rules, but it has worked very well that way for centuries. In fact, some entries may have multiple debits and/or credits, and that is perfectly OK as long as they balance out.CLIP AND SAVE!
So how do you know what impact a debit or credit has on the accounts showing in your chart of accounts?
Easy! Just refer to the chart below...
Asset: Debit = an increase in value. Credit = decrease in value. For example, if you credit your checking account, you are decreasing its' value (bummer..).
Liability: Debit = a decrease in value. Credit = increase in value. Example - if you credit your account for the loan payable to your bank, you are increasing its' value (you owe the bank more $$).
Equity: Debit = a decrease in value. Credit = increase in value. You always want your equity to be increasing!
Income: Debit = a decrease in value. Credit = increase in value. So, keep creating invoices, as each invoice credits your income account, and that is a good thing indeed!
Expense: Debit = an increase in value. Credit = decrease in value. Debit an expense account = Yuck (but you gotta do it sometimes!)
And there you have it - an entire semester of accounting delivered in just a couple of minutes!
To see the geeky accounting and debits/credits of ANY transaction in QuickBooks, simply click Reports in the menu bar, then Transaction Journal. It brings up a screen just like the one pictured above (or tap CTRL + Y on your keyboard for instant access too!)
Need help bringing order in the chaos that is your chart of accounts? Contact Scott today for expert insight and assistance!