QuickBooks 2015 All-in-One For Dummies. Nelson Stephen L.

to construct the income statement shown in Table 2-1.

Table 2-19 A Trial Balance at End of Day

      Similarly, the asset, liability, and owner’s equity balance information shown in the trial balance provided in Table 2-19 supplies the information necessary to construct a balance sheet as of the end of the day.

      

The end-of-day balance sheet won’t actually balance unless you also include the profits of the day. These profits, called retained earnings or lumped into the owner’s capital account, equal $4,000. You can see what this end-of-day balance sheet looks like by turning back to Book I, Chapter 1. In that chapter, Table 1-7 shows the end-of-day balance sheet for the hot dog stand business.

       A Few Words about How QuickBooks Works

      Before I end this chapter, I want to make just a few comments about how QuickBooks helps you. First of all – and this may be the most important point – QuickBooks makes most of these journal entries for you. In Journal Entry 6, for example, I show you how to record a $1,000 check written to pay supplies, but you would never have to make this journal entry in QuickBooks. When you use QuickBooks to record a $1,000 check that pays Acme Supplies for some paper products that you purchased, QuickBooks automatically debits supplies expense (as long as you indicate that the check is for supplies) and then credits cash.

      Similarly, in the case of journal entries 7 and 8, when you produce an invoice that records a sale, QuickBooks makes these journal entries for you. For example, if you sold $13,000 worth of hot dogs and buns, and those hot dogs and buns actually cost you $3,000, QuickBooks debits cash for $13,000, credits sales revenue for $13,000, debits cost of goods sold for $3,000, and credits inventory for $3,000. In other words, for most of your routine transactions, QuickBooks handles the journal entries for you behind the scenes.

      This doesn’t mean, however, that you can always avoid working with journal entries. Any transaction that can’t be handled through a standard QuickBooks form – such as the Invoice form or the Write Checks form – must be recorded by using a journal entry. For example, if you purchase some fixed asset by writing a check, the purchase of the fixed asset gets recorded automatically by QuickBooks. However, the depreciation that will be used to expense the asset over its estimated economic life – something I talk a bit about in the next chapter – must be recorded with journal entries that you construct yourself and enter a different way.

      One other really important point: I note in the preceding paragraphs that the trial balance information shown in Table 2-19 provides the raw data that you need to prepare your financial statement. I don’t want to leave you with a misunderstanding, however. You don’t actually have to take this sort of raw data and prepare your financial statements. Predictably, QuickBooks easily, quickly, and effortlessly builds your financial statements by using this trial balance information.

      Just to put these comments together, then, QuickBooks automatically creates most journal entries for you, builds a trial balance by using journal entry information, and – when asked – produces financial statements. Most of the work of double-entry bookkeeping, then, goes on behind the scenes. You don’t worry about many journal entries on a day-to-day basis. And if you don’t want to ever see a trial balance, you don’t have to. In fact, if you just use QuickBooks to produce invoices and to write checks that pay the bills, almost all the information that you need to prepare your financial statements gets collected automatically. So that’s really neat.

      However, not all the information that’s necessary for producing good, accurate financial statements gets collected automatically. You’ll encounter a handful of important cases that should be handled on a special basis through journal entries that either you or your CPA construct and enter.

Chapter 3

      Special Accounting Problems

       In This Chapter

      ▶ Sorting out accounts receivable and accounts payable

      ▶ Keeping track of inventory

      ▶ Figuring out fixed assets

      ▶ Finding out about asset write-downs

      ▶ Recognizing liability

      ▶ Handling revenue and expense account closings

      Even if you understand the principles of accounting (which I describe in Book I, Chapter 1) and the basics of double-entry bookkeeping (which I describe in Book I, Chapter 2), you still may not have all the information that you need to keep good records. For example, tracking the amounts that customers owe you and the amounts that you owe vendors can be a bit tricky. Inventory can also present challenging record-keeping problems, a fact that’s not surprising to you as a retailer. And things like fixed assets – oh, don’t even get me started.

      For these reasons, this chapter describes the most common complexities that business owners confront. You don’t need to be an accountant or an experienced bookkeeper to understand the material in this chapter. However, you do need to proceed carefully, take your time, and think a bit about how the material I describe here applies to your specific business situation.

       Working with Accounts Receivable

      If you read Book I, Chapter 1, you already know that accounting principles state that sales revenue needs to be recognized when a sale is made and that the sale is made when a business provides goods or services to a customer.

      In other words – and this point is really important – sales revenue doesn’t get recorded when you receive payment from a customer. Sales revenue gets recorded when a customer has a legal obligation to pay you because you have (or your business has) provided the customer the goods or services.

       Recording a sale

      This requirement to record sales revenue at the time that goods or services are provided means that accounting for sales revenue is slightly more complicated than you may have first guessed. The first transaction – the transaction that records a sale – is shown in Table 3-1.

Table 3-1 Journal Entry 1: Recording a Credit Sale

      Journal Entry 1 shows how a $1,000 sale may be recorded. The journal entry shows a $1,000 debit to accounts receivable (sometimes abbreviated A/R) and a $1,000 credit to sales revenue. To record a $1,000 sale – a credit sale – the journal entry needs to show both the $1,000 increase in accounts receivable and the $1,000 increase in sales revenue.

       Recording a payment

      When the business receives payment from the customer for the $1,000 receivable, the business records a journal entry like that shown in Table 3-2.

Table 3-2 Journal Entry 2: Recording the Customer Payment

      Journal Entry 2 shows a $1,000 debit to cash, which is the $1,000 increase in the cash account that occurs because the customer has just paid you $1,000. Journal Entry 2 also shows a $1,000 credit to accounts receivable. This credit to the accounts receivable asset account reduces the accounts receivable balance.

      At the point when you record both Journal Entry 1 and Journal Entry 2, the net effect is a $1,000 debit to cash (showing that the cash has increased by $1,000) and a $1,000 credit to sales revenue (showing that sales revenue has increased by $1,000). The $1,000 debit