Bookkeeping Basics

welcome back to small business university in this video we are going to talk about the

basics

of accounting and several of the videos within the SBU small business university are designed to cover accounting we want to be able to train you in such a way that you yourself can do almost any accounting or financial work that you need to do in your business, so to some extent, this video here is going to start to get into some of the details about financial record keeping and we're going to talk about debits and credits, we're going to talk about accounting accounts, so to be a decent accountant for your business, you must be interested in delving into the details of accounting and learning how to do some of this if you have no interest in accounting.

Don't try to do it yourself and you should probably go out and hire someone to do this job for you, but let me tell you this, the best business owners I have ever worked for started by trying to do most of their own accounting and there is a A simple reason for accounting is the language of business and understanding what happens in your business was impossible if you didn't try to learn how to do accounting, understand financial reporting and understand how all this works, so if you are interested in giving yourself the best chance for success.

In fact, I would highly encourage you to try watching these accounting videos, practice, and learn this yourself. You won't regret it if you take the time to do it. Okay, let's take a look at the agenda here. so I have five different things that I want to go over today first we're going to talk about the financial statement and what's in it, what it means then we're going to get into double entry accounting. I promise you this is not a college level accounting class. I'm going to try to explain it very simply, I think you'll get it at the end of the video and then transaction workflows, we'll talk about some banking and then we'll do an overview of the software. where I'll show you QuickBooks Online, the software we recommend and use in our practices every day.

I'm going to take you on a little introductory tour because in the next few videos you're going to need to know how it works. the software to a certain extent, so to start with the financial statements, what I have on the screen are the two statements that you need to familiarize yourself with and when we are doing accounting when we are doing financial statement accounting for our businesses. is on the quest to try to create these two statements, so that one is the balance sheet and the other is the income statement. Now, first, the income statement is often called by some others the profit and loss statement;

However, they are one in the same and I will do it. I mainly use the word income statement because I think it's more official and it's what most of us accountants say when we refer to profit and loss, but even in the fast book world they still call that loss statement and profits, so profit and loss statement is the same thing. Alright, when we do accounting, we try to create these two statements. Let's review in a very general way what is in them first on the balance sheet. The first thing we need to understand about the balance sheet is that the balance sheet is taking a snapshot in time.

So if it's ten o'clock on Wednesday, it's like a camera that takes a snapshot of your assets, your liabilities, and your equity, and what it says is at that moment, this is what you owned in terms of assets, what you owed in liabilities and what was its capital. was in your business now, the first calculation you need to understand about the balance sheet is that your assets minus liabilities equals equity, so if you think about that, if you had assets of $100 and debts or liabilities of $50, 100 minus 50 is equal to $50, that is the equity you have in your business because if you liquidated your business today you would need to pay your debts, you would have to spend $50 of your cash to do so and you would have $50 left, so assets minus liabilities equal .

The capital now at the top of the balance sheet is assets and will have things like current assets, investments, property, plant and equipment. Don't worry too much about these, but we'll delve into them in the deeper dives. accounting, but I know that these are usually things that have some value and that they are good guys. You know it's good to own assets in general. Do you want assets? So I try to think about assets, as these are the things I'm glad I have. On the other hand, having liabilities are generally things where we owe something to someone or some other group and I try to think of liabilities as if they aren't bad, sometimes you need to take out loans to properly grow your business, but not necessarily. they are. something that you want out there is something like "yes sir, I will have it but I don't want it", so in many ways, very healthy companies in a very simplistic way would only have assets, they would not have liabilities and therefore, all Your assets would also be equity claims because if you had a hundred dollars in assets and zero liabilities you would have a hundred dollars in shareholders' equity, shareholders' equity is often confused with the value of your business, don't think of it that way. that goes on, keep it in a different type of conversation, we'll talk about that in small business college, but don't think that's what your business is worth, your business is usually worth a multiple of what it makes or what it has, but Capital is really the place where we say this is what we have accumulated, so think of it that way, this is what we own directly and what we have accumulated for arson and our owners, so going back to the beginning, here, the active ones, the good ones, the passive ones, they are not good. guys and then capital is what we have accumulated for ourselves, so it's assets minus liabilities equals my capital.

Now the other statement is the income statement and this is one that most new business owners and most business owners probably pay more attention to because this is like a scorecard of how your company is doing. your business, whereas the balance sheet is a snapshot of the things you own or, oh, this is about how much you're earning, how much you're spending, and what your net income is at any given time. time, unlike the balance sheet, which was a snapshot in time, the income statement runs over a period of time, so you can run it Monday through Friday, you can run it from January through June, and more frequently, will run it over January to December, so you can see your time periods, it's not a snapshot in time and every time you run this it will have some very common elements, the first one will be revenue, revenue is another way of saying money , has earned income.

No I don't really like saying revenue, in accounting we normally say revenue a lot more because revenue is a word that we often name these different accounts, so when we try to talk about all of them together, let's say something like revenue, then at the top of Every income statement there is a Grigore, a total of all the income you have made during that time period, so if you are running an income statement for January, your income will be different than if you are running an income statement for January and February because that income statement captures both months, while January only captures one.

The same thing goes for expenses now, just like income, expenses are money that goes out, out the door. So income in expenses comes out of money and what we are trying to calculate on an income statement is that income minus expenses equals net income. Well, one thing I try to point out as quickly as I can is to notice that the income is all positive numbers and also. how expenses are all positive numbers, don't ever think that an income statement is supposed to be positive here because this is income and then a bunch of negative numbers down here, that's actually not how it works because net income is trying to subtract a positive. number and a positive number, so if you ever see any kind of negative value on your income statement, it should be a quick indicator that something may be wrong, the same goes for the balance sheet, all assets, liabilities and stockholders' equity are generally positive and if you see things that are negative on your balance sheet, although there are a couple of things that can typically be negative on a balance sheet and we'll get into that, but for the most part everything is assumed to be positive here If there is one thing you stay with.

In this video today it should be like this, if I see negative amounts on my financial statements, at some point I should wonder if something is wrong and that will save you a little bit of a headache in your life because, believe me, it's very quick that the American accountants also do to try to find out if things are going well now. Let's talk a little bit about double entry accounting and what I'm going to do here in a moment is bring in copies like actual copies of a profit and loss on a balance sheet, but before we do that I want to touch on this idea of ​​what double entry accounting is. double, so double entry accounting was invented hundreds of years ago and basically what it says is that for every transaction two things happen. and those two things are called debit and credit.

Now in your life you have heard these terms before and they mean things to you. Generally, a credit means you got a statement credit or increased the value in the way it is a credit. I'm glad I got that credit even on a tax return, when you get a credit on a tax return that's good, it helps you offset the tax you owe and by the same token a debit that you can believe is something bad. A debit is where they are subtracting money from you. That type of thing, I understand it, but for accounting purposes, don't think like that when we talk about double-entry accounting because really, and this is what one of my professors wants, it should stop being debit, it only means left side and credit. it just means right side and what it really means is and what it is, to get to the essence of that debit and credit, they are just ways of saying that there are two transactions or two entries in each transaction. and then debit in the world of accounting can mean increase or decrease and credit can mean increase or decrease, so whenever we start talking about these things, let's know that we have to lose the connotations and say that debits and credits They can be anything, really what matters is that they are the separation of entries in a transaction here in a moment I am going to show you an example transaction where a company makes a bank deposit and what happens and when they write a check what happens D R means debit see R stands for credit, so in a bank deposit and we'll get into this here in a second, cash is debited for $100 and revenue is credited for $100, in fact, though, this is a great explanation, It means that your cash went up, it was a debit and your cash went up and on your credit side your income went up and we're going to get into some of that when you write a check on the debit side your expenses actually went down and on the credit side credit your cash actually went up down, so here's an example where both things went down, both things went up here, both things went down here, so see that debit and credit have nothing to do with what you think they are, now they are just a separation of entries before we start explaining. this a little bit more, let me look at a PDF that I have that shows a little bit more and I'll narrow it down a little bit more on what the P&L and balance sheet looks like in a moment.

In a more complex form, this is the profit and loss account, that is, the income statement, and you can see that it says October 2016. What that means is that this income statement is from October 1 to October 31. October 2016 and you can see at the top that you have multiple incomes. articles income income income all of these things now seen here pest control services negative 30 and that's one income that could be a problem, couldn't it be the same here? These are given discounts, so actually it's probably okay because it's a discount for the at this amount, but down here pest control services have a negative 30 on the income element, you might want to look at that because what What that really means is that more money was spent on pest control services than came in and it may need to be here under expenses, but as you can see, we add all these things together to get the total income here and then we start with the expenses .

The first expense we look at is the cost of goods sold, which is a way to spend the things we can. maintain an inventory and then we have a bunch of other advertising expenses on equipment, all of this and as we scroll down through all of these expenses and notice that they are all positive, we come to the net operating income and this is what the income minus the total expenses are equal and this means that this is what you did, this was your profit for the month now it seems that there is another miscellaneous expense here that was not up here and now you have the income up to 163, you know , loss of 163 dollars. that negative meanswhich actually lost money, had more expenses than income, but illustrates how this report works, let's look at the balance sheet.

I'll narrow it down a bit, and the balance sheet at the top says balance sheet as of October 31, 2016, so what does this say? This is not from October 1 to October 31. Remember that a balance sheet is a snapshot, so this is a snapshot only on this day, October 31, 2016, and that. day we had total assets of 24,000 336 and you can see that some of them are bank accounts, part of it is people owing us money, part is inventory and undeposited funds, funds that we have received from customers but have not taken. to the bank yet and then this is a truck so these are all active now if I scroll down these are all the things we owe these are accounts payable the bills we have this is our MasterCard balance right now , are payrolls and loans that we have to pay to two different boards for taxes owed and a loan payable. and then this is a big note payable at 25 thousand dollars so these are all liabilities here we have 31 thousand dollars in liabilities we will wait a minute Chris if we have $31,000 for liabilities but only 24,000 in assets no If we owe more than we have so you're absolutely right look here equity is negative equity is negative negative seven thousand 641 when your liabilities exceed your assets you have negative equity that means you owe more on your business than you have Now, one thing to keep in mind: see how the total assets here are 24 3 36 and the total liabilities and shares 24 3 36, those will always match, so the total assets will always match the total liabilities plus equity and the other equation we use for the balance sheet is The assets minus liabilities equals equity that's why these two things always balance out this is what a real financial statement looks like and if we were trying to figure out if this looks good here are numbers mostly positive positive positive positive positive except for the equity section and the equity section can be negative if liabilities exceed assets, but for the bus, everything else, at least on first review, can be pretty good.

Now let me put this aside and we'll move on to the next slide here. so in double entry accounting, the first example I want to talk about is this $100 deposit in the bank, this first example and what's happening is this is going to illustrate double entry accounting because two things happen, although it seems like maybe just one transaction i.e. you're just taking $100 to the bank, well on the balance sheet, okay, this is where your checking account resides and when you took that hundred dollars to the bank, what happened to the balance sheet? general? That's right, cash increased by a hundred dollars, so just like when you think about your checkbook on the balance sheet, when you make a deposit at the bank, your cash increased by a hundred dollars, so that's a double-entry

bookkeeping

entry. , at the same time, this hundred dollars that you received was from a Client, okay, they paid you one hundred dollars for a service that you provided, so there is an entry on the income statement about the revenue that increased by one hundred dollars because your statement results should reflect that you have won $100 right now, very simply.

In terms of terms, his income increased by a hundred dollars and the check he received was for the work he did. Is this starting to make sense? See how two things always happen. The balance sheet went up. The income statement account went up. Now there may be times when. one income statement account went up and one income statement account went down those are the two entries or there may be times when one balance sheet account went down and another balance sheet account went down, that can happen and I'll show you some of them here on wait, but no matter what happens, there are two things that happen, it doesn't mean they have to be one on each, my point, it has to be one on the balance sheet and one on the income statement, it can be both here . of them here or one here and one here, since this transaction was good now let's look at another one, now I am cutting a check to pay my electricity bill, okay and in this case just the opposite of what happened with the income in the balance every time I sent that check out the door and it was essentially cashed fifty dollars came out of my account so my balance account went down now my balance account went down fifty dollars from this check also on the income statement I need Record the spending and spending increased fifty dollars.

Now this is where people sometimes get confused and this is why I emphasize on the income statement that there is never a negative number because you may be seeing this is going well, this went down fifty why didn't it go up? we went down fifty well because when we increase expenses it is a positive thing, we are increasing spending now, later the income statements are going to subtract this from the income, but we never put a negative amount in an expense account, it is always positive, but It's still the same transaction. you increase your expenses, so you spent money, etc., on the income statement you are showing an expense and your cash decreased.

Let's look at it together now, on the balance sheet as a summary of both transactions on the balance sheet. We increased our cash account by one hundred dollars but we also reduced it by fifty dollars. The women paid for it, so the final balance on our balance sheet is fifty dollars. The income statement had something similar. We have recorded revenue of one hundred dollars. We had an increase in electricity costs of fifty dollars and that means our profit is only fifty dollars. This transaction in this transaction is double entry accounting and then this entry in this entry is double entry accounting so it had two transactions each with two entries and it affected both the balance sheet and the income statement so it is a very high level of double entry accounting as we go through accounting, we're not going to stay in this double entry accounting mode, we're going to get into what you would actually do in the software when you do each of these, but get some kind of base of what all this does in the background is always a good idea, so let's go ahead now and we'll jump into Some more topics here, transaction workflows is really what we're going to talk about from now on because Understanding all the different types of transactions and things that can happen in your business and what to do within your accounting software is best. training you can have when it comes to accounting in this video.

I'm going to show you a few different workflows, namely, receive money, pay expenses, these are similar to what we just went over in the simplified examples, and then withdraw profits from your business, so let's say you made some money, It's the end of the month and now you want to withdraw those profits and give them to the owners. I'll show you how to do it later in future videos that we'll go over. More complex things like purchasing inventory and paying employees, we'll look at how to write bounced checks, we'll look at how to make larger transactions with multiple accounts, so we'll show you how to do everything.

I think you would need to do something for your business, but let me show you these three here real quick, so the first thing is going to be a client's money and I have kind of a workflow here, you can see. how we start here on the right and work our way to the right and then down and then back to the left and I'll explain to you that this is just a high level, but it's an idea of ​​what's really happening in our accounting software , so when we have a client that we have worked well for and we are about to start the process, the client needs to pay us, the first thing we will do is create an invoice or a sales receipt will define what some of these are in videos future, but we will create an invoice or sales receipt in our software and send it to the customer, the customer will then pay us via a verify credit card or cash type that the payment matches this invoice, where now that invoice or sales receipt no longer shows us pending, it shows that it has been paid and basically you can almost think of it as canceling itself when payment was made. matches the invoice or sales receipt, the check or cash goes to the bank and the credit card deposit will go to your bank in about three days, while the checks and cash go to the bank today because you drive them until there. with the credit card deposit you don't get anything, you just get a kind of receipt that it happened and then two or three days later the cash will drop into your bank account, what happens then is income and cash entitlement income in the income statement. and the cash on the balance sheet, both accounts increase boom boom just like we did in our previous example and then the receipt is provided and the transaction is now complete, as you know or maybe you have a gut feeling that there are other things that are happening there, but this is the essence of this, this is the essence of this and getting that foundation right is critical to knowing what to do within the accounting software later on, as we look at specific examples and how to do things, let's take a look at a look at an expense. type of item and this is paying suppliers so the process is very similar the money goes out the door rather than coming in but this is one of the things you will notice about accounting once you master it, the Things are very similar regardless of the direction the money flows, so in this case the supplier sends us an invoice and we enter it into our accounting software that we owe this person, kind of like when we enter an invoice that someone tells us. owed, in this case we are entering an invoice to say we owe someone, then we pay the supplier with a credit card check or collect the payment like when we were talking about an invoice, the payment matches the invoice, which It means that now this invoice is no longer pending. check or cash if you paid if you paid the supplier by checkbook in cash that cash comes out of the bank, right?

Now when you cash the check or receive your cash, it comes out of the bank and a credit card if you pay with credit. The card shows us a charge on your credit card bill. What happens then is that the expenses on your income statement increase because we just paid someone, so the expenses increase and the cash you paid them with decreases on the balance sheet. The strange thing is that he does have credit. Your cash may not go down, in fact your liabilities go up because you essentially have a loan now so it's a liability not an asset, but in any case the balance sheet account is affected depending on whether you use cash or check versus credit card, but they are both very simple and we will show you how to do all of that.

Finally, after all that has happened, the payment transaction verification or payment verification will be sent to you, i.e. as a receipt. from the supplier and then the transactions are completed again, so they are very similar. I mean, if you're looking at customer money versus supplier payment, it's a very similar type of transaction and that's why you'll find it so easy to understand. to do your own accounting because trust me once you start looking at all this you say oh this is pretty simple now the last thing I want to show you is how to withdraw profits and this is really easy so let's say you have traded for the month and it's the end of the month and you've made a profit of $5,000, so you can think of your income as maybe ten thousand ten thousand and your expenses were five thousand, so you made five thousand correctly. ten thousand minus five thousand in expenses equals five thousand profits, well, if the income statement shows profits, then you can, by check or cash, simply transfer that money, so it literally goes into the corporate checking account and transfers five thousand dollars from the corporate checking account. to your personal account and what happens is the cash on the balance sheet goes down because you transferred five thousand out of it, but here's an example of where both entries are on the balance sheet because this is not an expense when you withdraw earnings and this Kind of the point on this slide when you take out profits it's not an expense like if you paid your utility bill, this is a capital transaction, which means every time you take that five thousand dollar profit usually on the balance sheet, remember the balance sheet here on your balance sheet under equity you would have five thousand because that's what you earned, you had the cash earned and you earned five thousand dollars.

When you take it out, your capital account goes down by five thousand dollars, so your cash account goes down, which was an asset, and your capital account goes down, which was part of the liabilities and equity section on your balance sheet. , so it's a transaction where it's just the balance sheet, never, ever, ever, I'm being very literal, right, make distributions to yourself when you're making profits from the business or from a loan or anything else, never. let that affect the state ofresults because it is not a real expense, your expenses are the things that you pay to other people who are not owners, sometimes you can do your payroll and that would be an expense, but only if you run it through a payroll system and pay withholding taxes on it and everything else, otherwise if you just transfer money from your bank account to yourself 99 times out of a hundred, that's a capital transaction just like I'm showing you here, so those are some flows working we're going to delve into the nitty-gritty in accounting deep dive one and accounting deep dive two, which are later videos here in the series, so let's move on. to the next slide here, yeah, banking, so banking is one of these things that you need to understand a little bit.

I'm going to give you an idea and show you something in QuickBooks Online here in just a second, but there's something you need to understand if you have accounting software that's like QuickBooks, that's the QuickBooks logo and every day, every morning, usually QuickBooks will go and log into your bank account in this example, Wells Fargo, it will read the transactions and bring up OK, now one of the things to keep in mind about that interface is that it's always just yesterday's transactions. , you have no idea what is happening today, so whenever your software syncs, always remember that this is pulling in the past from yesterday, so if you enter transactions into QuickBooks today, the system may be a little different of what you see in your bank account because in your bank account you only know what happened yesterday at Prior, so this is a concept that we will cover every time we show you how banking works, but I want to get QuickBooks online very quickly.

QuickBooks Online has this sample company that we'll be playing with most of the time. This is QuickBooks Online and these are my bank accounts here and I'll click on checking account. Right here what's going to appear is it's going to show all these transactions that were seen since yesterday or something like that and what it looks like is that we had a lot of different transactions and some of them were already in our accounting system. and see how it says match, that's because it says hey, I pulled this transaction from Wells Fargo but it matches a transaction that you had already entered here, so I think we just want to match it, we don't want to add it and duplicate it. double count it because this is already here and we just didn't know it was here until we saw the transaction later; however, there are also transactions here where you can add transactions and this basically says do you want me.

To add this, I have no idea. There are no transactions that match this, at least I can find if your QuickBooks and you just want to add this transaction, so this concept of downloading yesterday's transactions will be important when I start teaching. You know how to use this screen because you always have to remember hey, you don't know what happened today, all you know is what happened yesterday, so that was a little introduction, don't worry, we'll delve into every facet of this. and how this works and how to set it up and what to do, but I just wanted to give a little hint about how some of this banking works and emphasize that it only has yesterday's information finally, that's really the end of what I wanted you to know to talk about today , we're about thirty-three minutes in, so that's the kind of link I wanted to have, but do this for me if something doesn't make sense to you while watching this video. go back and watch it one more time, one of the best ways to gain knowledge in accounting because a lot of this can seem confusing on the first pass, just go back and watch it again and maybe three times if after three times you still don't understand it.

Contact us at SBU and we'll help you resolve any type of question you have, but it's the review of accounting concepts and what we're doing that's going to make all of this sink in and what you're waiting for is kind of an aha moment in the one where you say, oh I see what you're talking about, I get it and the more you watch it over and over again, eventually you'll have that aha moment that every accountant has and and you will too from all of us here at SBU, thanks for watching the next videos, our accounting deep dive one and accounting deep dive two, if you want, you can jump to those now because you're ready to watch them now that I've seen the intro here, so I'll see you in those videos.