QuickBooks 2017 All-In-One For Dummies - Nelson Stephen L.

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Table 2-15 should make sense to you. But just in case you’re still trying to memorize what debits and credits mean, I’m going to give you a bit more detail. To calculate the ending balance shown in Table 2-15, you add up the debits, add up the credits, and combine the two sums. The net amount in the cash account equals the $5,000 debit. If you recall from the preceding paragraphs, a debit balance in an asset account, such as cash, represents a positive amount. A $5,000 debit balance in the cash account, therefore, indicates that you have $5,000 of cash in the account.

Cash is usually the trickiest account to analyze with a T-account because so many journal entries affect cash. In many cases, however, a T-account analysis of an account balance is much more straightforward. If you look at Table 2-16, you see a T-account analysis of the inventory account. This T-account analysis shows that the beginning inventory account balance equals $3,000. But when journal entry 8 credits inventory for $3,000 – this is the journal entry that records the cost of goods sold – the inventory balance is wiped out.

      TABLE 2-16 A T-Account of the Inventory Account

Paying off the accounts payable and loan payable accounts is similarly straightforward. Table 2-17 shows the T-account analysis of the accounts payable account. Table 2-18 shows the T-account analysis of the loan payable account. In both cases, the T-account analysis shows that the liability accounts start with a credit beginning balance. (Remember that a liability account would have a credit balance if the firm really owed money.) Then, when the payments are recorded to pay off the accounts payable and loan payable in Journal Entries 9 and 10, the liability account is debited. The result, in the case of both accounts, is that the liability account balance is reduced to zero.

      TABLE 2-17 A T-Account of Accounts Payable

      TABLE 2-18 A T-Account of the Loan Payable Account

      I’m not going to show T-account analyses of the other accounts that the preceding journal entries use. In every other case, the only debit or credit to the account comes from the journal entry, which means that the journal entry amount is the account balance. Only one journal entry affects the sales revenue account: Journal Entry 7, which credits sales revenue for $13,000. Because the sales revenue account has no beginning balance, that $13,000 credit equals the sales revenue account balance. The expense accounts work the same way.

       Using T-account analysis results

If you construct (or your accounting program constructs) T-accounts for each balance sheet and income statement account, you can easily calculate account balances at a particular point in time by using the T-account analysis results. Table 2-19 shows a trial balance at the end of the day for the hot-dog-stand business. You can calculate each of these account balances by using T-account analysis.

      TABLE 2-19 A Trial Balance at End of Day

      The first line shown in the trial balance in Table 2-19 is the cash account, with a debit balance of $5,000. This debit account balance comes from the T-account analysis shown in Table 2-15. The account balances for inventory, accounts payable, and loan payable also come from the T-account analyses shown previously in this chapter (Tables 2-16, 2-17, and 2-18).

      As I note in the preceding section, you don’t need to perform T-account analyses for the other accounts shown in the trial balance provided in Table 2-19. These other accounts show a single debit or credit.

      I need to make one final and perhaps already-obvious point: The information provided in Table 2-19 is the information necessary to construct an income statement for the day and a balance sheet as of the end of the day. If you take sales revenue, cost of goods sold, rent, wages expense, and supplies expense from the trial balance, you have all the information that you need to construct an income statement for the day. In fact, the information shown in Table 2-19 is the information used to construct the income statement shown in Table 2-1.

      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 reading Book 1, 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’d 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. 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. If you purchase some fixed asset by writing a check, for example, the purchase of the fixed asset gets recorded automatically by QuickBooks. But 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.

      

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

Chapter 3

      Special Accounting Problems

      IN THIS CHAPTER

      ❯❯ Sorting out accounts receivable and accounts

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