A Quickbooks Accounting Primer

A QUICKBOOKS ACCOUNTING PRIMER
By Jeanie R. Hoshor, M.S. Accounting

Introduction
Businesses run on information: information about the purchase of goods and
services from their vendors, about the sale of goods and services to their
customers, about their inventories of products, about their employees and the
services they perform and the wages they earn, about all the things (cash,
buildings, equipment, patents, supplies, etc.) they use to carry on their operations
and activities. Most of this information deals with things that have a value
that can be measured in dollars and cents; this is financial information.
This course (OAS 120) and your textbook deal with the keeping of financial
(accounting) records, using a software package for personal computers
called QuickBooks (QB).
CHAPTER 1: BASIC CONCEPTS IN ACCOUNTING

The Two Main Financial Statements
The two main end products of accounting are the two financial statements which
are presented to investors and creditors outside the business: the Balance
Sheet and the Income Statement (which QB calls Profit & Loss). All the other
reports you prepare in this course are for internal use by accountants and
managers.
The Profit & Loss report shows the revenues (QB calls them income) the
business earned by performing services or delivering goods to customers
during a given period of time, together with the expenses incurred (what
was used up) in the process of earning the revenues. Revenues and
expenses are both part of owner equity, because the owner is responsible for
whatever the business does. Revenues increase the owners equity and
expenses decrease it; the owner hopes for a net increase in his equity
(called a Net Income) but may suffer a net loss from the operation of the business
during the period.
The Balance Sheet shows, as of a given point in time, the companys
assets and the interests (equities) in those assets. There are two kinds of
equities: creditor equities, called liabilities, and owner equities. The
equities record the sources of the assets: when they come from creditors,
it creates creditor equity (liability); when they come from the owner or
from the operation of the business which belongs to the owner, it creates

owner equity. As the name Balance Sheet suggests, total assets must equal
total equities.
On the next page is a sample of a Profit & Loss report done in QuickBooks
(QB). The numbers on the left of the account names are account numbers. For
example, 4010 is the number of the revenue account named Web Page Design
Fees. Notice the date in the heading at the top of the report: June 2010.
This report shows revenues earned and expenses incurred during the
entire month of June. It does not include any revenues or expenses from any
other time period. Each Profit & Loss report covers one specific period of
time: one month, one quarter (three months), or one year. The fee income
(revenue) shown on this report must come from services provided to customers
during the month of June.
The customers may or may not have paid us cash for these services in June; it does
not matter. The revenue (income) is recognized (included on the Profit &
Loss report) when it is earned. Revenue is earned by delivering goods or
providing services to customers. In most cases, service is provided on credit
and cash will be received later, but the revenue is earned and recognized when we
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do the work, not when we collect the cash. This is called the accrual basis of
accounting. The accrual basis also means that expenses will be recognized
when they are incurred (consumed or used up) rather than when they are
paid for in cash. For example, we may use up some office supplies as we prepare
invoices and other documents (office supplies expense). We consume the labor
service of our employees as they carry out our business operations (salaries and
wages expense).
Why is Interest Expense given a special section at the bottom of the Profit
& Loss report? All of the income, and all of the other expenses, are ordinary:
they come from doing what we are in business to do. In this case, we are in
business to design web pages and give consultation on the internet. Interest
expense comes from borrowing money. We are not in business to borrow
money, so this is Other.
In summary, the Profit & Loss report shows revenues earned (increase in
owner equity), expenses incurred (decrease in owner equity), and the
resulting Net Income or Net Loss in owner equity from the operation of the
business during one specific period of time. It is one of the two main
financial statements presented to investors and creditors outside the
business.
The other main financial statement is the Balance Sheet. What, exactly, is
in balance on a Balance Sheet?
Assets and equities are in balance. Recall
that liabilities are also equities: the equities of the creditors of the business. So the
equation in balance is: Total Assets = Total Equities, where the total
equities include both creditor equities (liabilities) and owner equities.
Assets are what the business uses to carry on its operations and activities; they
are anything expected to be of some benefit to the business in the future.
In general, assets are one of two things: a physical object (inventory, supplies,
equipment, vehicles, buildings, land, etc.) or a legal right. The right is most often
a right to collect money (such as accounts receivable from customers) but
may also be a right to do something (such as patents, which give you the right
to make some patented product) or to receive a service (such as prepaid
insurance, which gives us the right to insurance coverage). Cash is also an
asset, as it has certain legal rights of exchange.
Liabilities are obligations to creditors who have given us money, goods, or
services on credit. They are usually obligations to pay money (such as accounts
payable to vendors), but may also be obligations to provide a service or to
deliver goods for which money was collected in advance.
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Owner Equity is the owners residual interest in the business; if the business is
sold off, the creditors claims will be settled first, then the owner will get
whatever is left over. For a business that is not a corporation, which is what your
text deals with, it consists of a Capital account that will (eventually) include
all transactions that affect the owners equity, a Drawings account that
keeps track of the owners withdrawals of assets from the business for personal use
during a given time period, and revenue (income) and expense accounts that
keep track of revenues earned and expenses incurred by the business during a
given time period. When the time period is over, the information in the temporary
accounts is presented on the financial statements, and then their balances are
cleared out and included in the Capital account.
Now lets take a good look at the sample Balance Sheet on the next page
(done in QuickBooks but processed through Excel to make the font larger). Notice
the date in the report heading: As of June 30, 2010. The Balance Sheet is a
snapshot of the business at one moment in time, on the one specific day
given in the report heading. The amounts shown here have been accumulating in
the various asset, liability, and owner equity accounts since the business
began; they are the net result of all the increases and decreases up through the
Balance Sheet date. Check the totals: Total Assets = $43,575.00 and Total
Liabilities & [Owner] Equity = $43,575.00. The Balance Sheet is in
balance, as it must be,
OWS4 [Your Name] Olivias Web Solutions
BALANCE SHEET
As of June 30, 2010
Jun 30,
10
ASSETS
Current Assets
Checking/Savings
1010 Cash-Operating
22,625.00
Total Checking/Savings
22,625.00
Accounts Receivable
1200 Accounts Receivable
6,050.00
Total Accounts Receivable
6,050.00
Other Current Assets

1300 Computer Supplies
350.00
1305 Office Supplies
325.00
1410 Prepaid Advertising
1,000.00
1420 Prepaid Insurance
1,650.00
Total Other Current Assets
3,325.00
Total Current Assets
32,000.00
Fixed Assets
1700 Computers
1725 Computers, Cost
1750 Accum. Dep., Computers
5,000.00
-75.00
Total 1700 Computers
4,925.00
1800 Furniture
1825 Furniture, Cost
3,200.00
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1850 Accum. Dep., Furniture
-50.00
Total 1800 Furniture
3,150.00
1900 Software
1950 Accum. Dep., Software
1900 Software - Other
Total 1900 Software
Total Fixed Assets
TOTAL ASSETS
-100.00
3,600.00
3,500.00
11,575.00
43,575.00
LIABILITIES & EQUITY

Liabilities
Current Liabilities
Accounts Payable
2010 Accounts Payable
Total Accounts Payable
5,225.00
5,225.00
Other Current Liabilities

2020 Notes Payable
2030 Interest Payable
Total Other Current Liabilities
Total Current Liabilities
Total Liabilities
2,500.00
25.00
2,525.00
7,750.00
7,750.00
Equity
3010 Olivia Chen, Capital
3020 Olivia Chen, Drawings
Net Income
Total Equity
TOTAL LIABILITIES & EQUITY
27,500.00
-500.00
8,825.00
35,825.00
43,575.00
because the equities simply show us the source of the assets. Some portion
of them came from creditors, giving rise to creditor equity or liability, and the rest
came directly from the owner or from the operation of the business for which the
owner is responsible, giving rise to owner equity.
Take another look at the Balance Sheet. The assets are divided into two
groups: Current Assets and Fixed Assets. Current assets include cash and
anything that will be collected in cash (receivables) or sold (inventories)
or consumed (supplies, prepaid services) within one year of the Balance
Sheet date. The key here is short life: one year or less. Fixed assets, on
the other hand, have a long life, more than one year. Fixed assets include
vehicles, equipment, machinery, buildings, and land. In accounting, they
are also required to be physical objects and to be actively used in
business operations and are called Plant Assets. QuickBooks has
included computer software among Fixed Assets, even though it is not a
physical object. We will follow QuickBooks for this course.
Liabilities also have two groups: current and long term. Only current
liabilities are shown in the example above. Current liabilities must be paid
or settled (by delivering goods or providing service) within one year of the
Balance Sheet date. Long term liabilities are not due until more than a
year in the future.
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When you set up a new account in QuickBooks, you must tell QB what kind
of account it is. If it is an asset, you have to choose either current asset or
fixed asset. If it is a liability, you must choose either current liability or long
term liability. If it is an expense, it may be an ordinary Expense (rent, salaries
and wages, insurance, etc.) or it may be an Other Expense (interest).
QuickBooks includes the net effect of the current periods revenues and
expenses, the Net Income or Net Loss, in the Owner Equity section of the
Balance Sheet. This Net Income or Net Loss will then become a part of the
balance in the owners Capital account, and the next Balance Sheet will
show the next periods Net Income or Net Loss.
In summary, the Balance Sheet shows all of the assets the business owns
and expects will provide some future benefit, and all of the equities (both
creditor and owner, but NOT the separate income and expense accounts)
in those assets, at one specific point in time. It is one of the two main
financial statements presented to investors and creditors outside the
business.
The amounts shown on the financial statements come from the balances in
the named accounts. An account is a record of one particular item of
interest for the business, showing all increases and decreases and the
current balance. We have a Cash account to keep track of the business cash, an
Accounts Receivable account to keep track of the amount owed to us by our
customers, an Office Supplies account to keep track of our paper, pens, paper clips,
etc., an Accounts Payable account to keep track of how much we owe to the
vendors who sell us goods and services, and many, many more. The General
Ledger (see next section) contains all of the accounts seen on the financial
statements. Before we prepare the financial statements, we make a list of
all of the accounts in the General Ledger and the balance of each account.
This list is called a Trial Balance.
Below is a sample of a Trial Balance done in QuickBooks. Notice that the
amounts are listed in one of two columns: Debit (left) or Credit (right).
Debits and credits are used in accounting (in internal records only, NOT on
the financial statements) to make sure that the Balance Sheet equation
(Assets = Liabilities + Owner Equity) will stay in balance when each
transaction is recorded. The Trial Balance is an internal report, NOT a
financial statement.
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Note: The Adjusted in the report title above just means that this trial balance was
prepared after adjusting journal entries (AJE) had been made. AJE are discussed
later.
The Two Main Record Books
Every business we deal with in QuickBooks keeps two main books for financial
records: a General Journal and a General Ledger. The Journal is organized
by transaction, and the Ledger is organized by account, so they are useful for
different purposes.
Information about business transactions is first entered in the form of
Journal entries; hence, the Journal is sometimes referred to as the book of
original entry. The Journal records each transaction or event affecting the
business accounts as one unit, in the time order in which they occur. A Journal
entry shows for each transaction this information: the transaction date, the name
of each account changed by the transaction and the amount by which it is changed,
and sometimes a memo or explanation of the transaction. Increases and
decreases are indicated by recording each amount in one of two columns:
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Debit (on the left) or Credit (on the right). The system of double-entry
bookkeeping, which helps keep our books correct, uses debits and credits as a
way to make sure the Balance Sheet will stay balanced with Assets =
Equities (Liabilities + Owner Equity). It does this by recording every increase in
an asset as a debit and every increase in an equity as a credit. Each
transaction must have the same total debits as total credits.
At this point you may be confused, if you have ever used a bank statement
in reconciling your personal checking account. You have just learned that Cash
is an asset, and that assets are increased by debits and decreased by
credits. Yet on your bank statement, increases in your cash held by the
bank are listed as credits and decreases are listed as debits. There is no
contradiction here, just a different point of view. When you put cash in the
bank, it is still your money, your asset. When the bank accepts your money,
it also accepts the obligation to pay that money out on your order when
you write a check or make a transfer to another account. An obligation is a
liability, so on the bank statement the bank is accounting for its liability to
you. Meanwhile, on your own books, you are accounting for your Cash, an
asset. So, both of you are following the same rules: debits to increase an
asset, credits to increase a liability.
If assets increase, equity must increase by the same amount to make the
Balance Sheet balance. If the increase in an asset gives us a debit and the
corresponding increase in an equity gives us a credit, then making sure
debits equal credits will also make sure that assets equal equities. Note
that in this system, decreases in assets must be credits and decreases in
equities must be debits. Asset: Cash increase = debit, Cash decrease =
credit. Liability: Accounts Payable increase = credit, Accounts Payable
decrease = debit. Revenues = credit (always, because they are an
increase in Owner Equity), Expenses = debit (always, because they are a
decrease in Owner Equity.
Note: Debits and credits are an internal tool used in the Journal and
Ledger, and do NOT appear on the financial statements (i.e., they are NOT
seen on the Profit & Loss report or the Balance Sheet).
In a manual system, Journal entries look like this:
Feb. 1 Accounts Payable

Cash
to record payment of an account due
DEBIT
600.00
CREDIT
600.00
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Here, we are paying to a vendor money owed for goods or services received earlier
on credit. We give cash (asset, decrease = credit) to settle our account
payable (liability, decrease = debit). In a manual journal, the debit is always
listed first, and the credit is indented as shown above. The debit column is
always on the left and the credit column on the right.
You may not make a formal journal entry in the first few chapters of the text, and
the QB window for making general journal entries looks somewhat different from the
manual form above, but it contains the same elements. However, from the
moment you enter your first transaction into any activity window, QB will
be creating journal entries behind the scenes to record what you have
done. For example, if you enter a bill for utilities services (electric power
from LI Power) in the Enter Bills window, QB will create this journal entry
(though not in this format):
DEBIT
CREDIT
Aug. 21
Utility Expense
125.00
Accounts Payable LI Power Company
125.00
to record bill for electric power (see Trans. #11 below)
Here is part of a Journal created by QuickBooks:
Page 9 of 40
Every transaction you record, in any of the activities windows, produces

an entry into the Journal. If you open the Reports menu, then the Accountants &
Taxes category, and click on Journal, you can see all of the journal entries that QB
has created for you. Note that each one includes the date, one or more accounts
debited, and one or more accounts credited. They also have specific real life
information such as reference numbers, and transactions involving vendors or
customers have the name of the specific vendor or customer involved.
Each journal entry completely captures one transaction with all of its
information and with equal debits and credits to ensure the Balance Sheet
stays balanced, which is very useful for some purposes, but not so useful when it
comes time to prepare financial statements or when the manager wants to know
how much cash is on hand now. There may be hundreds of transactions in the
journal involving increases or decreases in the Cash account; we need to
put them all together in one place to figure out what the current balance
of Cash is. That is what a Ledger is for. Each transaction recorded in the
Journal is copied over into the Ledger, where it is entered into the
separate accounts.
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A Ledger contains all of the information that the Journal contains, but
organizes the information by account rather than by transaction. Each
account is a record of the effect on one item of all of the transactions that have
increased or decreased that item. The Cash account, for example, is a record of all
cash receipts and cash payments. A formal ledger account has three amount
columns: debit, credit, and balance. A new balance is calculated after
each transaction.
A formal Ledger account in a manual system looks like this:
1010 Cash Operating [the 1010 is the account number; accounts are usually
numbered]
Date Description
Debit
Credit
Balance
2010
Jan. 1 Owner invested to start business
5,000.00
5,000.00
2Paid first and last months rent on office
1,600.00
3,400.00
3Bought office supplies
120.00
3,280.00
When accounting students are making calculations for a homework problem, they
often use an informal kind of ledger account called a T-account. This is what
you will see in your text. It has just two columns, debit and credit, and the
balance is taken manually after all the entries needed for the problem have been
made.
Here is a T-account:
..1010 Cash Operating

Debit (Dr.)
Jan. 1
Credit (Cr.)
5,000.00
Jan. 2
Jan. 3
This is how you would

take the balance:
5,000.00
1,600.00
120.00
1,720.00
3,280.00
Lets do a little review of the rules for debits and credits: Debits are
always on the left, and credits are always on the right. Debits increase
assets but decrease equities (liabilities and owner equity). Credits
increase equities but decrease assets. Using T-account forms, this can be
represented graphically on the next page:
Page 11 of 40

.ASSETS
=
.LIABILITIES
.OWNER EQUITY
Debit (Dr.) Credit (Cr.)
Debit (Dr.) Credit (Cr.)
Debit (Dr.)
Credit (Cr.)
Increase
Increase
Decrease
Decrease
Increase
Decrease
Asset rule is followed by:

Liability rule is followed by:
Owner
Equity rule is followed by:
Cash
Accounts Payable
Expenses
Revenues
Accounts Receivable
Interest Payable
Prepaid Insurance
Wages Payable
Always
Always
Office Supplies
Etc.
Debit
Credit
Furniture
Capital
(usually
Etc.
Credited)
Drawings (always
debited)
When this pattern is followed, as long as we make sure debits equal

credits, we can be sure that total assets will equal total equities (the sum
of liabilities and owner equity) on the Balance Sheet. As assets and
equities move up together, the assets give us debits and the equities give
us credits. When they fall together, assets give us credits and equities
give us debits.
For every transaction you enter, in any activity window, QB creates a
journal entry with debits and credits, and copies the information from that
journal entry into the appropriate accounts in the General Ledger, which
contains all of the accounts that appear on the financial statements. QB
also copies any information about a vendor into that vendors account in
the Vendor Center, and any information about a customer into that
customers account in the Customer Center.
The Vendor Center and the Customer Center provide the necessary details
supporting the balances in the Accounts Payable (Vendor) and Accounts
Receivable (Customer) accounts in the General Ledger. The balance of
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Accounts Receivable, for example, may tell us that all of our customers together
owe us $24,000 but that is not much help when the time comes to try to collect it.
We need to know exactly who each customer is, how much that customer owes us,
and the specific transactions in which we provided the goods or services for which
the money is owed, so that we can know if they pay what is owed and take action
against them if they dont. All of these details are in the individual customer
accounts in the Customer Center (it is organized by account), which is why
it is like a subsidiary (supporting) ledger for the Accounts Receivable in
the General Ledger. The Vendor Center is like a subsidiary ledger for the
Accounts Payable account.
CHAPTER TWO: VENDOR TRANSACTIONS

The Three Main Types of Vendor Transactions
The three main types of vendor transactions you will handle in QuickBooks
are:
1. Bill Received for Purchase of Goods or Services on Credit
2. Payment of Bill Recorded Earlier
3. Purchase of Goods or Services for Immediate Cash Payment
Vendor Transactions: Bill Received for Purchase of Goods or Services on
Credit
Lets revisit that Aug. 21st transaction when a bill was received from a utilities
company for service (electric power) we used up in an earlier month. This
is something already used up in our business operations, not something that will
benefit future operations, so it is clearly an expense. Also, we have an obligation
to pay money to the utility company, and they have given us 30 days to pay, so
this is a liability called an account payable. This is the journal entry required to
record the transaction:
DEBIT
Aug. 21
Utilities Expense
Accounts Payable LI Power
to record bill for utilities
CREDIT
125.00
125.00
You will not make this entry; QuickBooks (QB) will make it for you. In the Enter
Bills window, you will enter the name of the vendor, the date, a reference
number for the bill, the amount due, and a due date. You will also select an
account from a drop-down list just ONE account. But the entry above has
two accounts; why do you select only one for this transaction? Because QB
already knows that this entry needs a credit to Accounts Payable: the Enter Bills
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window is designed to create journal entries that credit Accounts Payable,
and every transaction that you record in the Enter Bills window will
automatically credit Accounts Payable, whether you want it to or not, so
be sure you want it! Do not record any transaction into the Enter Bills window
unless it involves a transaction in which you have purchased goods (computers,
computer supplies, etc.) or services (electric power, rental occupancy, etc.) from a
vendor on credit, with an obligation to pay some time later. QB will do the credit
side of the journal entry, and all you have to do in the Enter Bills window is
tell QB which account to debit. This account will be either an asset (future
benefit in the form of a physical good or a right to service) or an expense
(if you are paying for a service already used up). QB will record the proper
journal entry.
Note: In a manual system, bills would be recorded in a special journal
called a Purchases Journal. In QB, there are no special journals. The
various activity windows capture transactions the way that special
journals would do, and only the General Journal is used. The Enter Bills
window is like the Purchases Journal because entries there are always
credited to the Accounts Payable account, but different accounts can be
debited.
Here is one more example: We receive a bill for the purchase 20 boxes of
CDs for data storage for $200.00 on credit from CompuStore. In the Enter
Bills window, select Computer Supplies as the account to be debited. QB debits
Computer Supplies and credits Accounts Payable in a journal entry, then adds
$200.00 to the balance of the asset account Computer Supplies and the
liability account Accounts Payable in the General Ledger, and adds
$200.00 to CompuStores account in the Vendor Center.
Vendor Transactions: Payment of Bill Recorded Earlier
When the due date for a bill arrives, it must be paid. We will settle our
obligation to the vendor by paying cash. This will decrease our asset Cash
(credit Cash account) and decrease our liability Accounts Payable (debit
Accounts Payable). This is the required journal entry:
DEBIT
Sept. 20 Accounts Payable LI Power
Cash
to record payment of electric bill
CREDIT
125.00
125.00
In QuickBooks (QB), payments to vendors for bills recorded earlier that are
now due to be paid are entered into the Pay Bills window. This window
shows all of the bills that are currently outstanding (exist and have not been paid
Page 14 of 40

yet). All you have to do is tell QB which bills you want to pay and the date
that should be put on the check to make payment. You dont select any
account to be used in the journal entry QB will make for the transaction; QB
already knows because when you use the Pay Bills window, the debit is
always to Accounts Payable and the credit is always to Cash, so be sure that
is what you want to do before you use the Pay Bills window. It doesnt matter what
you bought to create the debt dump trucks or delivery service, advertising or
angle wrenches the debt is now in Accounts Payable, and that is what we are
paying. QB will make the journal entry and copy the information into the
General Ledger accounts (Cash and Accounts Payable), and also update
the vendors account (APS) in the Vendor Center. How does QB know
which vendor is involved? It takes the information from the bill you
selected; remember that when you entered the bill, the first thing you did was
choose the vendors name.
Vendor Transactions: Purchase of Goods or Services for Immediate Cash
Payment
Sometimes when a bill is received, it is paid immediately in cash. The
vendor has not offered us any credit terms to pay later, so it never becomes
a debt, and does NOT go into Accounts Payable or a vendor account in the
Vendor Center. This transaction CANNOT be recorded correctly using the Enter Bills
window, because that would automatically credit Accounts Payable. We are paying
cash now, and must credit the Cash account. To do this, we use the Write
Checks window. The Write Checks window looks very much like a check in your
personal checkbook (if you have a personal checking account), and you fill out the
information in the Write Checks window much as you would in a personal
check, and the result is much the same: cash is taken from the business
bank account and paid to a vendor or other person or company. So every time
you write a check, the asset Cash is decreased, and QB will automatically
record a credit to Cash in its journal entry. You will have to tell QB what
account or accounts should be debited to complete the entry.
For example, suppose a pest control company comes into your office each
month to spray for insects. They dont work on credit; as soon as they finish
the job, they hand you a bill and you must write them a check to pay
immediately. When you write the check, you still have to name the vendor
(so they can cash the check), but QB will NOT copy the check information
to that vendors account in the Vendor Center, because the Accounts
Payable account is not involved. The journal entry will look like this:
DEBIT
CREDIT
June 5 Pest Control Expense
50.00
Cash
50.00
to record payment for pest spraying
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Remember that every time you write a check in the Write Checks window,
QB will create a journal entry that credits (decreases) the Cash account.
Be sure that is what you want to do before you write a check!
Note: There is one small quirk in recording services that extend into the
future. Technically, whenever you pay in advance for a future service, you
have bought an asset (future benefit). However, as a practical matter,
bookkeepers will debit expense when the service will be used up within
the next month. This is because reports are done at the end of the month, and by
that time the service will be used up and you will have an expense instead of an
asset. Suppose our landlord, Boring Office Parks, sends us a bill on June 1 st for the
June rent on our office space, for which it wants immediate payment. In recording
this payment, we will debit an expense (Rent Expense) rather than the more
technically correct asset account (Prepaid Rent). If you pay rent for one month,
you just debit Rent Expense; if you paid for six months or a year in
advance, you would debit the asset account named Prepaid Rent. The
same rule applies when you pay in advance for other services, such as
advertising or insurance: if it is for one month, debit an expense account; if
is for a longer period, debit an asset (prepaid) account.
SUMMARY OF VENDOR ACTIVITY WINDOWS:
Window
Type of Transaction
Account
Debited
Enter Bills
Purchase goods or services
asset or
on credit
expense
Pay Bills
Pay amount due on account
Accounts
to vendor
Payable
Write
Purchase goods or services
asset or
Checks
for cash
expense
Account
Credited
Accounts
Payable
Cash
Cash
CHAPTER 3: CUSTOMER TRANSACTIONS

The Three Main Types of Customer Transactions
The three main types of customer transactions you will handle in
QuickBooks are:
1. Invoice Created for Sale of Goods or Services on Credit
2. Payment Received for Invoice Recorded Earlier
3. Sale of Goods or Services for Immediate Cash Receipt
Notice how these parallel the three types of vendor transactions; basically,
we are looking at these exchange transactions from the other point of view.
Sometimes we are the customer, buying from our vendors; and sometimes we are
Page 16 of 40

the vendor, selling to our customers. As with the vendors, the customer
transactions are recorded in three different activity windows.
Customer Transactions: Invoice Created for Sale of Goods or Services on
Credit
When we provide goods or services to our customers on credit, we earn
revenue (increase in owner equity, credit) and create the right to collect
money from the customer in the future (increase in asset, debit). For
example, suppose we have completed monthly bookkeeping services for our client,
Fantastic Fabrics, on credit. We must send them an invoice letting them know how
much they owe us and when it must be paid (credit terms). In QuickBooks, an
invoice is created using the Create Invoices window. Here, you will select
the customer, enter the date and the invoice number, and select the credit
terms and the service provided (which tells QB which revenue account to
credit). In this example, you will select Bookkeeping Services as the service
provided. You do not have to tell QB which account to debit: In the Create
Invoices window, the debit account is always Accounts Receivable.
Accounts Receivable is the name of the asset account in the General Ledger that
keeps track of how much (in total) our customers owe us.
This is the journal entry QB will make using the information you have
entered into the Create Invoices window:
DEBIT
CREDIT
May 2 Accounts Receivable Fantastic Fabrics
150.00
Bookkeeping Services Revenue
150.00
to invoice customer for monthly bookkeeping
This information will be copied into the General Ledger accounts, increasing
the asset Accounts Receivable and the owner equity account Bookkeeping
Services Revenue. The debit will also be copied into the Fantastic Fabrics
account in the Customer Center, so we can keep track of how much of the
total Accounts Receivable is due from this particular customer.
Customer Transactions: Payment Received for Invoice Recorded Earlier

When the due date comes, the customer will pay our invoice, sending us
actual money in place of the right to collect money, so one asset is
increased (debit) and another is decreased (credit). This transaction is
recorded in the Receive Payments window. For example, on June 1 we collect
the $150.00 due from Fantastic Fabrics on our May 2 invoice. In the Receive
Payments window, we select the customer, enter the date and the amount
received and a reference number (usually the check number of the
Page 17 of 40

customers check, since most payments are by check), and select the invoice
which is being paid. One customer may have more than one invoice unpaid
at a given time. If you dont choose one, QB will pay the oldest one first.
The journal entry QB makes here may not be quite what you expect. QB will
always credit Accounts Receivable when you use the Receive Payments
window, and will always credit the customers account in the Customer
Center, but even though we are receiving a cash payment, the debit may not be
to Cash. Thats because payment is by check, and the check must be
deposited into the bank for it to reach our Cash account, which is actually
our bank account. Many businesses, including those in your QuickBooks
textbook, use a special account called Undeposited Funds to keep track of
customer checks received but not yet deposited into the bank. So, the
journal entry QB makes to record the information in the Receive Payments
window looks like this:
DEBIT
CREDIT
June 1 Undeposited Funds
150.00
Accounts Receivable Fantastic Fabrics
150.00
to record receipt of payment for invoice
All checks collected on a given day are normally deposited together into
the bank on that same day after the business has closed. This is recorded
using the Make Deposits window, where you just select the payments to be
deposited. QB will then make a journal entry that debits Cash and credits
Undeposited Funds, so the checks received do end up in the Cash account where
you would expect them to go.
Customer Transactions: Sale of Goods or Services for Immediate Cash
Receipt
Just as we sometimes purchase goods or services (like the pest control) from our
vendors for immediate cash payment, so our customers may purchase goods or
services from us for which we receive immediate cash payment. These
transactions do not involve credit terms, and must not go through
Accounts Receivable or the customers account in the Customer Center, so
they cannot be recorded in the Create Invoices window. When a customer
purchases goods or services from us for immediate cash payment, we have made a
cash sale that must be recorded using the Enter Sales Receipts window.
Of course, the cash will actually be a check written by the customer, so we will
use the Undeposited Funds account for the debit. The credit will be to an
appropriate revenue account.
Do not be misled by the fact that you start by selecting a customer in the
Enter Sales Receipt window; this transaction does not go into the
Page 18 of 40

Customer Center, because no account receivable is created. The customers
name is still important information on a cash sale, in case there is a question or a
return, and to document the source of the revenue. Example: We have a delivery
business with both regular and casual customers. The regular customers are
invoiced monthly with credit terms, but the casual customers (special, one-time
deliveries) must pay us immediately. On July 3, TheBest Hotel pays us $240.00 for a
rush pickup and delivery of 20 cases of champagne; they are not a regular
customer. In the Enter Sales Receipts window, you will select the customers
name (you may have to set them up as a new customer first; the customers name
is in the Customer Center, but the transaction amount will not go there), enter the
date and the Sale Number (Confusingly, QB may refer to this as an Invoice
number, but this is not an invoice. In the homework, if it says received
payment immediately and gives an invoice number, use the invoice
number as the Sale No. in the Enter Sales Receipts window. ) , and select
the revenue account. For this transaction, QB will make this journal entry:
DEBIT
240.00
July 3 Undeposited Funds

Delivery Service Revenue
to record cash sale to TheBest Hotel
CREDIT
240.00
QB will copy this information to the General Ledger, increasing the

balances of the asset Undeposited Funds and the owner equity account
Delivery Service Revenue. It will not copy it to TheBest Hotels account in
the Customer Center, because it is not part of Accounts Receivable.
TheBest Hotels check, along with all other checks received on July 3, will
be deposited into the bank after closing. This will be recorded in the Make
Deposits window, as illustrated earlier.
SUMMARY OF CUSTOMER ACTIVITY WINDOWS:
Window
Type of Transaction
Account Debited
Create
Invoices
Receive
Payments
Enter Sales
Receipts
Make
Deposits
Sell goods or services

on credit
Collect amount due on
account from customer
Sell goods or services
for cash received
immediately
Deposit customer
checks in bank
Accounts
Receivable
Undeposited
Funds
Undeposited
Funds
Cash
Account
Credited
Sales
Revenue
Accounts
Receivable
Sales
Revenue
Undeposited
Funds
Page 19 of 40

CHAPTER 4: ADJUSTING THE ACCOUNTS BEFORE
PREPARING FINANCIAL STATEMENTS
Suppose you are the worlds best bookkeeper, and never ever make an error
when recording transactions. You started recording the transactions for a
new business on January 1, 2010. Every transaction you recorded was
absolutely correct at the time you recorded it. Now it is the end of the
month, and you must prepare the financial statements (Profit & Loss and
Balance Sheet) to be presented to your business investors and creditors,
especially the bank from which it hopes to borrow money. You print a Trial
Balance report, which lists every account in the General Ledger (these are
also all of the accounts that appear on both the financial statements) in
the order in which they appear on the financial statements: first Assets,
then Liabilities, then Owner Equity accounts (including income and
expenses), together with the debit or credit balance of each account. This
report is used by accountants to confirm that the ledger is in balance with
total debits equal to total credits.
Page 20 of 40

Can you now put these account balances on the financial statements? You
must be very careful, because errors in the financial statements that
mislead investors or creditors, especially errors that overstate assets
(claim more assets than the business really has) or understate liabilities
(claim that debts are less than they actually are) can cause the business
to be sued. They might even get you put in jail. You look carefully at the
account balances and realize that many of them are NOT correct as of the
Balance Sheet date, with many assets overstated and some liabilities
missing. Yet you made no errors when you recorded the transactions that
created these balances.
What happened? TIME happened. The passage of time affects the
balances of assets, liabilities, and owner equity accounts. Suppose the
business buys a machine for $6,000 which is expected to be used in the
business, providing benefits, over the next five years. The $6,000 has
bought a pool of usefulness, or future benefits, that will be gradually used
up day by day as the machine is used. This is not like an exchange with a
vendor or customer, and does not generate any paperwork that demands to be
recorded immediately. No one actually cares about this change, because it is
so gradual, until the time comes to prepare financial statements at the
end of the month (or quarter, or year, whatever time period is used for reporting).
Before we present the Balance Sheet, we must be sure that each assets
balance shows only the benefits that remain for the future (after the
Balance Sheet date). Before we present the Profit & Loss report, we must
be sure that each expense account shows everything that has been used
up during the period covered by that report. We must also make sure that
every debt we owe is included in a liability account balance, and that all
revenues earned during the period have been recorded.
To do this, we adjust the balance of every account that has been changed by
the passage of time. We do this with a special set of journal entries called
adjusting journal entries. These entries fall into one of four patterns:
1.
Debit an expense account (decrease owner equity) and credit an

asset account (decrease the asset) to show that some of the asset has
been used up and an expense has been incurred. Examples: Many. This is
the most common type of adjusting journal entry (AJE). We use up prepaid
services (such as insurance and advertising), supplies (such as office or
computer supplies), furniture, equipment, machinery, and buildings.
2. Debit an expense account (decrease owner equity) and credit a
liability account (increase the liability) to show that we have used up a
service for which we must pay cash at a later time. Examples: interest on
debt, salaries and wages due to employees.
Page 21 of 40

3. Debit an asset account (increase the asset) and credit a revenue
account (increase owner equity) to show that we have been providing a
service which earned revenue and the right to collect money in the future.
Example: interest on investments.
4. Debit a liability account (decrease the liability) and credit a revenue
account (increase owner equity) to show that we have been providing a
service for which we collected money in the past, thus settling our obligation
and earning revenue. Examples: landlords earning rent collected in advance,
attorneys earning fees collected in advance.
Your textbook may use only the first two patterns, but in real life you could
encounter any of the four, so it is a good idea to at least know the patterns.
Look carefully at the four patterns; notice that every AJE pairs either an expense
OR a revenue (from the Profit & Loss) with either an asset OR a liability
(from the Balance Sheet). AJE always use one account from the P & L and
one from the Balance Sheet.
An AJE will NEVER pair expense with revenue (both P & L), and NEVER pair
asset with liability (both Balance Sheet). When the debit is to expense, the
credit is either to an asset or to a liability. When the credit is to revenue, the debit
is either to an asset or to a liability. Also, an AJE will NEVER involve the Cash
account, because cash is changed only by actual cash receipts or payments, not by
the mere passage of time.
Here are a few examples of Adjusting Journal Entries (AJEs):
Pattern 1 (debit expense, credit asset): On January 1, we paid $3,000 for one
year of insurance coverage on our office property. At the end of the month, 1/12 th of
that coverage has been used up. We must account for the expired coverage (Note:
Expired is a word accountants like to say when an asset that is not a physical
object is used up.) by decreasing the asset and recording an expense:
DEBIT
CREDIT
Jan. 31
Insurance Expense
250.00
Prepaid Insurance
250.00
to record one month of insurance coverage expired
Pattern 1 (debit expense, credit asset): On January 1, we bought office

supplies costing $100. We bought more office supplies at a cost of $40 during the
month, so the account ended the month with a balance of $140. A physical
inventory done on January 31st shows that the supplies still on hand cost only $30,
which means that $110 worth of supplies are gone (used up). Here is the AJE:
Page 22 of 40

DEBIT
Jan. 31
Office Supplies Expense

Office Supplies
to record office supplies used up during January
CREDIT
110.00
110.00
Here is what the Office Supplies account will look like in the General
Ledger:
1325 Office Supplies

Date Description
Debit
Balance
2010
Jan. 1
Purchased envelopes, stationery, etc.
100.00
20
Purchased copy paper, paper clips, etc.
140.00
Jan. 31 AJE for supplies used up in January
30.00
Credit
100.00
40.00
110.00
Notice that the ending balance of $30.00, which we will include with
Assets on the Balance Sheet for January 31, correctly states the supplies
on hand at that date to benefit future operations. When the AJE was copied
into the ledger account, it reduced the balance to the amount determined by the
physical inventory count.
Pattern 1 (debit expense, credit asset) Special case: Fixed Assets
Assets that are physical objects with long lives that are actively used in
the business (called Fixed Assets in QuickBooks; usually called Plant Assets
or Property, Plant, & Equipment elsewhere) get special treatment in the
accounts because their original cost is a very important and useful piece
of information for investors and creditors. If the debit for the cost of buying
the asset and the credits for using it up went into the same account, the original
cost amount would soon be lost. Consider what happens in our Prepaid
Insurance account in the General Ledger as the coverage expires over
time and we reduce its balance:
1410 Prepaid Insurance
Date Description
Debit
Balance
2010
Jan. 1
Bought one-year property insurance policy
3,000.00
Credit
3,000.00
Page 23 of 40

31
One month of coverage expired
2750.00
Feb. 28 One month of coverage expired
2500.00
250.00
250.00
The January 31 Balance Sheet will just show Prepaid Insurance of

$2,750.00, and the Feb. 28 Balance Sheet will show Prepaid Insurance of
$2,500.00, and the reader will never know that it originally cost $3,000.00.
This is fine for short-lived assets and intangible (non-physical) assets, but
not enough for the long-lived physical assets. For them, the Fixed Assets,
we keep two separate accounts, one for the original cost and another to
show how much of its benefits have been used up. We then put these two
amounts together on the Balance Sheet so the reader can see how big it
was to start with and what portion of it has been used up so far. Consider,
for example, two companies: A and B. Each has a factory building. Suppose all you
saw on each Balance Sheet was Factory Building $50,000. But what if A has a
factory building that cost $900,000 and is now almost used up, and B has a factory
building that only cost $90,000 but has more than half of its benefits left? Wouldnt
you learn a lot more, get a better picture of their operations, if you had the
information about original cost? This is why we use the two separate accounts.
QuickBooks actually keeps three accounts for each Fixed Asset, although
you use only two of them. The first account is called the parent account,
and it will have just the name of the asset: Office Furniture, for example. The
parent account has two subaccounts, which are the ones you use in
recording transactions and making adjustments. The two subaccounts for
each fixed asset are Cost and Accumulated Depreciation. One is used to
record the original cost when you buy the asset: Office Furniture, Cost, for
example. The other is used to record the accumulated depreciation, the
part of the assets benefits that have been used up. When a fixed asset is
used up (its pool of usefulness has been reduced), the term for it is
depreciation. As always, when something is used up in the business, an
expense is created. This expense is Depreciation Expense (debit). The
account that takes the credit entry that reduces the balance of the asset
is Accumulated Depreciation (for example, Accumulated Depreciation, Office
Furniture), so Accumulated Depreciation shows how much of the assets
benefits have been used up in the past. When Accumulated Depreciation is
subtracted from Cost, the balance shows what portion of the assets
benefits remain for the future.
Example:
Page 24 of 40

On January 1, we bought $7,200 worth of office furniture. This furniture is expected
to be used for 8 years, or 96 months. This means we will use up 1/96 th of the
furnitures future benefits each month, or $75 per month.
DEBIT
CREDIT
[Entry for original cost]
Jan. 1 Office Furniture, Cost
7,200.00
Cash
7,200.00
Bought desks and chairs for the office
[Adjusting journal entry]
Jan. 31
Depreciation Expense, Office Furniture
Accumulated Depreciation, Office Furniture
to record one months depreciation of furniture
75.00
75.00
On the Balance Sheet for January 31, 2010, we can now report these two
account balances and net them together to get the current balance for the
asset:
Office Furniture, Cost
$7,200.00
Accumulated Depreciation, Office Furniture
75.00
Total Office Furniture
7,125.00
Each month, the balance of the Accumulated Depreciation account will
increase, but the balance in the Cost account will stay the same, so the
assets total balance will be reduced over time as its benefits are used up,
but the reader will always know how much the asset cost when we bought
it.
Note: Your text treats computer software like a Fixed Asset, with the two
separate accounts for Cost and Accumulated Depreciation, even though it is not
a physical asset. Traditional accountants will amortize rather than
depreciate non-physical assets, using only one account, but we will follow
the text in this class.
Pattern 2 (debit expense, credit liability):
Now lets look at an example of the second pattern, which involves a debit
to an expense account and a credit to a liability account. On Jan. 1, we
borrowed $10,000 from the bank on a note due in three years with 6.0% annual
interest. We wont pay until the third year, but every month we are using the
service of using someone elses money, and the cost of this service is called
interest. Here is the AJE we must make on January 31st:
DEBIT
CREDIT
Jan. 31
Interest Expense
50.00
Page 25 of 40

Interest Payable
50.00
to record one months interest due on bank note
(10,000 * .06 * 1/12)
Another example of Pattern 2 would be to debit Salaries and Wages Expense and
credit Salaries and Wages Payable for salaries and wages due to employees for work
performed but not yet paid. Most businesses pay after the fact, so if the month
ends in the middle of a pay period there would be some work done that would not
be paid for until the next month.
Pattern 3 (debit asset, credit revenue): Many businesses invest surplus cash in
short-term investments so they can earn interest rather than letting the cash sit
idle. This gives the third pattern of AJE, a debit to an asset account and a credit to a
revenue (income) account: debit Short-Term Investments, credit Interest
Income.
Pattern 4 (debit liability, credit revenue): This requires an original entry
that creates a liability in the form of an obligation to provide service. For
example, a landlord collects rent money in advance on a one-year lease. This
creates a liability called Unearned Rent. Each month, a portion of the rent service is
provided, so revenue is earned and part of the obligation is met. The AJE for this is
to debit (reduce) the liability and credit a revenue (increase owner equity): debit
Unearned Rent, credit Rent Revenue.
You are now primed and ready for the first four chapters of QuickBooks
and for the exam on this Primer. The basic accounting concepts also apply
to the later chapters, but most of these chapters have some new specific
types of transactions and reports, new activity windows, and new lists to
maintain.
CHAPTER 5: DEALING WITH PRODUCT INVENTORY

If our business deals with inventories of physical products (also called
merchandise or goods) rather than (or in addition to) services, recording
transactions with vendors and (especially) customers will be a little
different than in the earlier discussion of vendor transactions and customer
transactions, though the basic concepts are the same. Furthermore, paying
bills from vendors, collecting money (checks) from customers, and
depositing customer checks in the bank are all done exactly the same way
as discussed earlier. It doesnt matter whether inventory products, other
assets, or services are involved.
Page 26 of 40

The main difference between transactions with inventory products and
transactions with other assets is that while assets we buy to use ourselves
have only one value (their cost), inventory products have two different
values: the COST at which we buy them from our vendors, and the
SELLING PRICE at which we sell them to our customers. The difference
between the two values is our profit.
This difference means that whenever inventory products are SOLD, we must
make TWO journal entries: (1) to record the COST of the asset used up (by
giving it to the customer) and the expense incurred in making the sale,
and (2) to record the revenue earned and the asset created (Accounts
Receivable or Undeposited Funds) at the SELLING PRICE. The second
entry is exactly like ones you have already seen in the section dealing with
customer transactions, and is entered in the same windows: Create
Invoices for credit sales, Enter Sales Receipts for cash sales. You do have
to choose a different form of invoice in the Create Invoices window, one
designed for sales of a product rather than a service, so it can handle the
extra entry required. But in QuickBooks, you do not see the entries being
made; you just see the activity window, which looks much the same as it
always does. Behind the scenes, though, QuickBooks is making both the
needed journal entries using the information you provide in the activity
window.
The information you provide, whether in Create Invoices or in Enter Sales
Receipts, includes only the Customer name, date, the name of the item
sold, and the quantity sold. All the rest of the work is done by
QuickBooks. How is this possible? QuickBooks will get all of the other
information it needs from the items record in something called the Item
List. This is a List window, not an activity window, and is like the Vendor
Center or Customer Center. It has a record, a kind of account, for each
separate inventory product you buy and sell, so the Item List is like a
subsidiary ledger for inventory.
Before you buy or sell an inventory product, you set it up in an item record
in the Item List. The products item record in the Item List contains all of
the other information that is needed for the entries: the unit cost, the
unit selling price, the inventory asset account to be debited when it is
purchased, the Cost of Goods Sold (COGS) expense account to be debited
when it is sold, and the sales revenue (income) account to be credited for
the selling price when it is sold, and whether sales tax should be collected
on the sale.
If the sale is on credit, you will use the Create Invoices window with the
Product Invoice form rather than the Service Invoice form you used for
sales of services. Accounts Receivable and the named customers account
Page 27 of 40

in the Customer Center will be debited for the selling price you entered in
the Item window, and the income account you have chosen in the Item
window will be credited for the selling price. If the sale is for immediate
cash, you will use the Enter Sales Receipts window, Undeposited Funds
will be debited for the selling price, and the same income account will be
credited.
(Note: Remember that Undeposited Funds become Cash when the
customers checks are deposited into the business bank account using the
Make Deposits window.)
Whether the sale is for cash or on credit, QuickBooks will make the same
journal entry for the cost of the product. It will debit the COGS expense
account you chose in the Item window, and credit the inventory asset
account you chose there.
You must be very careful when setting up a new inventory product (which
QuickBooks identifies by the Type Inventory Part), because the values you
enter and the accounts you choose in the New Item window (a List
window, not an activity window) will be used by QuickBooks every time
this product is bought or sold. There are usually some default accounts
already showing when you set up a new inventory item, and these accounts are
rarely the ones you want, so be sure you check each of the three accounts
(COGS, Asset, and Income) and make sure it is correct for your new item.
Lets look at an example of a sale of an inventory product on credit.
Suppose one of our products that we buy and sell is printers. Their
inventory asset account is Inventory of Printers, their COGS account is Cost
of Printers Sold, and their income account is Sale of Printers. Their unit
cost is $80.00, and their unit selling price is $120.00. Suppose than on Nov. 9
we sell ten of these printers to a customer named Glendale Medical Clinic. In
the Create Invoices window, in the Product Invoice form, we will give
QuickBooks the customer name, the product name, and the quantity sold.
QuickBooks will get the unit selling price from the item record, calculate
and enter on the invoice the total selling price (ten units at $120.00 each =
$1,200.00), and if the item is marked as taxable in its item record, calculate
and add the sales tax on the invoice. Lets ignore sales tax for now. This is all
you will see on the invoice: customer, product, quantity, selling price,
total sale amount, and sales tax (if any). But QuickBooks will pull all the
other information it needs from the item record in the Item List: unit cost,
COGS account, inventory asset account, and income account. Then it will
make these two entries (which may be combined into one entry with two
debits and two credits):
Page 28 of 40

DEBIT
[Entry for COST]
Nov. 9 Cost of Printers Sold
CREDIT
800.00
Inventory of Printers
800.00
Sold ten printers
[Entry for SELLING PRICE]

Nov. 9
Accounts Receivable - Glendale Medical Clinic
Sale of Printers
Sold ten printers
1,200.00
1,200.00
What is happening in each of these two entries? In the first entry, an asset is
used up (given to a customer), so it is reduced (asset, decrease = credit),
and an expense is incurred (owner equity, decrease = debit). In the
second entry, revenue is earned (owner equity, increase = credit) and a
new asset (the right to receive money from the customer, Accounts
Receivable) is created (asset, increase = debit). Here is the pattern:
DEBIT
CREDIT
[Entry for COST]
Nov. 9 Expense - COGS
COST
Asset - inventory
COST
Sold inventory product
[Entry for SELLING PRICE]
Nov. 9
Asset receivable or Undep. Funds
PRICE
Revenue - Sales
PRICE
Sold inventory product
SELLING
SELLING
Every sale of inventory products follows this same pattern, whether it is

for cash or for credit. The only difference in a cash sale is that the asset
debited for the selling price is Undeposited Funds rather than Accounts
Receivable.
What about purchases of products for inventory? They are recorded in the
same way, using the same activity windows as described in the earlier
discussion of vendor transactions. There is one difference in the Enter Bills
window. The Enter Bills window has two tabs: Expenses and Items. The one
that is displayed when you bring up the window is the Expenses tab, which is
what you used before when recording expenses and (strangely) assets
Page 29 of 40

that were purchased for use by the business in its own operations. The
other tab, the Items tab in the Enter Bills window, is used for recording
purchases of assets to be sold to customers (inventory products).
As soon as you enter the name of the product and the quantity,
QuickBooks will complete the bill using the unit cost taken from the item
record in the Item List. It will also make this journal entry:
DEBIT
CREDIT
[Date] Inventory of (product name)
COST
Accounts Payable Vendor Name
COST
Purchased (product name) for inventory
The inventory account debited will again be taken from the item record in
the Item List.
For example, suppose that the printers we sold on Nov. 9 had been purchased on
Nov. 2 from BigTech Equipment. That entry would have been:
DEBIT
CREDIT
Nov. 2 Inventory of Printers
800.00
Accounts Payable BigTech Equipment
800.00
Purchased ten printers for inventory
If inventory is purchased for immediate cash payment (which rarely
happens), use the Write Checks window. QuickBooks will pull the same
information from the item record, and the only difference in the entry from
that above will be a credit to Cash instead of Accounts Payable .
SUMMARY: NEW PROCEDURES WHEN TRANSACTIONS INVOLVE INVENTORY
PRODUCTS
1. Each inventory product must first be set up in the Item List using
the New Item window. Its item record will include unit cost, unit
selling price, inventory asset account, COGS account, and income
account. All of this information can be used by QuickBooks
whenever the product is bought or sold, so you dont have to enter it
into the activity window for the transaction.
2. When inventory products are purchased on credit, you use the Items
tab instead of the Expenses tab in the Enter Bills window.
Page 30 of 40

3. When inventory products are sold on credit, you use the Product
Invoice form instead of the Service Invoice form in the Create
Invoices window.
CHAPTER 6: SETTING UP A NEW COMPANY IN

QUICKBOOKS
During your work in the QuickBooks (QB) text, you will be setting up a new
company. The company is not really new; it is just new to QB. It has been
in operation for some time, keeping its records manually. Now all of the
balances from the manual ledger accounts, both General Ledger and
subsidiary ledgers for customers, vendors, and inventory items, are to be
set up in QB so that accounting for this business in the future can be done
using QB.
You might think that you could make a Trial Balance from the manual
General Ledger, listing each General Ledger account and its debit or credit
balance, then just make one huge General Journal entry in QB with all of
these account balances. If the Trial Balance is in balance, with total debits equal
to total credits, then the journal entry will balance, and when the journal entry is
copied over into the General Ledger in QB, you would be done. That is a
good idea, and close to what you must actually do. It is not quite that simple,
though. We do make one huge journal entry that will set up most of the
account balances when it is copied into the General Ledger, but the
procedure is complicated by the balances that must be established in the
Customer Center, Vendor Center, and Item List. Sometimes the Cash
account is also established separately when a banking account is set up.
The inventory and Cash accounts are the lesser problem. When you set up
an inventory product with an existing balance in an item record in the
Item List, QB will debit (increase) the inventory asset account (such as
Inventory of Printers) and credit (increase) the owners Capital account.
Similarly, when you set up a banking account during the process of setting
up your company, QB debits a Cash account (asset, increase) and credits
Capital (Owner Equity, increase). In each case, all you must do is adjust
the amount for Capital in the major journal entry setting up the other
accounts.
Setting up Accounts Receivable and Accounts Payable also cause the
amount for Capital in the main journal entry setting up other accounts to
differ from the balance shown in the manual General Ledger, but there is
an extra step in each case.
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Each time a new customer with an existing balance is created in the
Customer Center, QB increases both the customers account and the
Accounts Receivable balance in the General Ledger. The journal entry
debits (increases) the asset Accounts Receivable and credits (increases) a
special owner equity account called Uncategorized Income. Once all of the
customer balances have been established, the balance of Uncategorized
Income should equal the total Accounts Receivable shown in the manual
General Ledger account. Suppose this is $12,500.00. It is then
transferred over to the owners Capital account by this journal entry:
DEBIT
CREDIT
[Date] Uncategorized Income
12,500.00
Ima D. Owner, Capital
12,500.00
To transfer balance of Uncat. Inc. to Capital
Note: Before you make this entry, be sure that all customer balances have
been correctly entered into QuickBooks. If you display a Customer
Balance Summary report at this time, it should show a total of $12,500.00
due from all customers, and that amount MUST equal the balance in the
manual General Ledger account for Accounts Receivable. If not,
something is wrong and must be fixed. In your homework, you dont
actually have the manual records, but you can check the total on your
Customer Balance Summary against the amount shown in the solution key
for the above entry.
Each time a new vendor with an existing balance is created in the Vendor
Center, QB increases both the vendors account and the Accounts Payable
balance in the General Ledger. The journal entry credits (increases) the
liability Accounts Payable and debits (decreases) a special owner equity
account called Uncategorized Expenses. Once all of the vendor balances
have been established, the balance of Uncategorized Expenses should
equal the total Accounts Payable shown in the manual General Ledger
account. Suppose this is $9,000.00. It is then transferred over to the
owners Capital account by this journal entry:
DEBIT
CREDIT
[Date] Ima D. Owner, Capital
9,000.00
Uncategorized Expenses
9,000.00
To transfer balance of Uncateg. Exp. to Capital
Note: Before you make this entry, be sure that all vendor balances have
been correctly entered into QuickBooks. If you display a Vendor Balance
Summary report at this time, it should show a total of $9,000.00 due to all
vendors, and that amount MUST equal the balance in the manual General
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Ledger account for Accounts Payable. If not, something is wrong and must
be fixed. In your homework, you dont actually have the manual records,
but you can check the total on your Vendor Balance Summary against the
amount shown in the solution key for the above entry.
ALL General Ledger account balances other than Accounts Receivable,
Accounts Payable, Inventory, and (possibly) Cash are established in a
single (very large) journal entry. The last line of this journal entry will be
an entry to the owners Capital account. This is the ONLY account for
which the amount will NOT match the amount in the manual General
Ledger (or, in your homework, the only account for which the amount is
not given in the textbook). The amount credited (or perhaps debited) to
Capital here has to be adjusted because of separate entries to Capital
caused by setting up Accounts Receivable, Accounts Payable, Inventory,
and (possibly) Cash. You could work out the amount by T-account if you
knew the original Capital balance in the manual records. In your
homework, you will just let QB determine the amount needed to balance
the journal entry. When you choose the owners Capital account as the
last account in the journal entry, some balance will automatically appear
for it as QB tries to make total debits equal total credits in the journal
entry. Accept this amount to complete the entry. You can then check it
against the amount shown for Capital in the journal entry on the solution
key.
(Aside: Why doesnt QB just use Capital for the other side of the Accounts
Receivable and Accounts Payable entries in the first place, as it does with Cash and
Inventory accounts? I have no idea; this is just a QB quirk, and we have to deal with
it.)
CHAPTER 7: ACCOUNTING FOR PAYROLL TRANSACTIONS

Payroll is fairly simple in concept, but can be very messy in practice. One
reason is the number of different items that can be deducted from an
employees paycheck. If you have ever received a paycheck with a stub
attached providing supporting details, you have surely noticed the large difference
between what you have earned and what you are paid by the check.
Amounts are withheld or deducted from your earnings for various
reasons. Some are required by federal, state, or local law: income taxes,
Social Security (sometimes called FICA), and Medicare. Some are voluntary,
such as contributions for retirement savings or charity or medical insurance
(thankfully, our text does not have any of these). In every case, the money that
the company keeps back must be paid on your behalf to some other
agency. In the case of our legally required withholdings, they must be paid by the
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company to the federal or state government. This is the EMPLOYEES MONEY,
earned by the employee, not the companys money. But the employee
owes some of the money to the federal and state governments. The
employee owes income taxes on his earnings, and is required to
contribute to his own Social Security and Medicare accounts. The
company will make these payments to the government on behalf of the
employee.
What is happening here, from the companys viewpoint, is that they are
incurring a payroll expense (decrease in owner equity) called Salary and
Wages Expense at a certain rate as they use up the service of the
employees labor, and they are creating an obligation (increasing a
liability) to pay for this labor service. Most of what they owe will be paid
in cash to the employees who earned the salaries and wages, but some of
it will be paid instead to federal or state governments on behalf of the
employees.
The payroll taxes charged to employees are part of the Salaries and
Wages Expense the company incurs. But employees are not the only ones
who bear the cost of payroll taxes. The second reason that payroll
accounting is so messy is that several different payroll taxes are imposed
on the company that employs the workers. Employers (companies) must
match their employees contributions to Social Security and Medicare out
of their own pockets, and must also pay a tax not borne by the
employees: unemployment taxes. Employers pay both federal and state
unemployment taxes. These payroll taxes are an expense to the company
separate from and in addition to Salaries and Wages Expense. They are
both part of Payroll Expenses for the company.
Before you begin accounting for payroll, all of the accounts that will be
used in the journal entries for each pay period must be set up in your
ledger. Accounts are added to the General Ledger in QB using the Chart of
Accounts window. Your textbook will give you the opportunity to do this
in the first payroll chapter.
Each actual payroll journal entry, done whenever the company has a pay
period, will combine the two entries shown below. Thats a 14-line journal
entry, even without any voluntary deductions. There will also be at least
two more journal entries, not shown here and usually made only annually
or quarterly, when the company pays the payroll tax liabilities due to the
federal and state governments. These entries will just debit the payroll
tax liability accounts (decrease liability) and credit Cash (decrease asset).
The basic pattern for the employee part of the payroll journal entry is:
Page 34 of 40

DEBIT
CREDIT
[Date] Payroll Expense: Salaries and Wages Expense
10,000.00
Payroll Liability: Federal Income Tax Payable
2,000.00
Payroll Liability: State Income Tax Payable
300.00
Payroll Liability: Social Security Tax Payable
620.00
Payroll Liability: Medicare Tax Payable
145.00
Cash
6,935.00
To record salaries, wages, and withholdings for the pay period
In your text, the account names will be somewhat different; for example,
they will use the abbreviations FIT and SIT for federal and state income
taxes, and the order of the accounts may differ. But this is the pattern
used.
The basic pattern for the company part of the payroll journal entry is:
DEBIT
[Date] Payroll Expense: Social Security Company
Payroll Expense: Medicare Company
Payroll Expense: Federal Unemployment
Payroll Expense: State Unemployment
Payroll Liability: Social Security Company
620.00
Payroll Liability: Medicare Company
145.00
Payroll Liability: Federal Unemployment
70.00
Payroll Liability: State Unemployment
230.00
To record company payroll taxes for the pay period
CREDIT
620.00
145.00
70.00
230.00
Again, the names will differ somewhat in your text (such as FUTA for
federal unemployment tax and SUI for the state unemployment tax), and
QB will pair each expense with its related liability in its journal entry
rather than grouping expenses and liabilities as we do in a manual entry,
but the effect will be the same.
Page 35 of 40

QuickBooks makes this process as easy as possible in your text, but
payroll accounting is never really simple. One very important thing the
TEXTBOOK does is to give you the amounts for the payroll deductions for
income taxes, Social Security, and Medicare, as well as the amounts due
for unemployment taxes. In real life, you must either calculate these
amounts manually or you must pay for a service to do them for you. The
calculations are not simple (there are all sorts of rules for base amounts,
annual limits on earnings that can be taxed, and tax rates, and the rates
and limits keep changing). When you pay the taxes, you must also file
payroll tax returns, and the forms for reporting to the federal government
when you make payments are difficult to understand and complete
correctly. We will not make the calculations or fill out the forms in this
course, but you should be aware that they must be done and have some
idea of what is involved.
One thing the QuickBooks PROGRAM always does to make your payroll
accounting easier is to use a Payroll Item List (in real life as well as in your
text). Just as QB uses the Item List to get information for journal entries involving
inventory so you dont have to enter the same information over and over in the
activity windows, so QB uses the Payroll item List to get much of the
information needed for payroll journal entries. Of course, you must first
set up the information in the Payroll Item List.
What information is included in the Payroll Item List? Among other things, this
is where you tell QB which expense and liability accounts to use for each
payroll tax, for both employee and employer (company) payroll taxes. You
also tell QB the accounts (expense and liability) to use for salaries and
wages. QB already knows the annual limits on earnings that are taxed and the tax
rates for federal payroll taxes, but you will have to give it these numbers for your
state payroll taxes.
When you are creating paychecks for individual employees, QB will require
additional information. Much of this information will come from the
Employee Center. Before you start to process payroll, you will have to set
up each employee in the Employee Center. Besides personal information
such as name and address, each employee record in the Employee Center
will have needed payroll information such as whether the employee gets
an annual salary or an hourly wage, the rate at which the employee is
paid, and which payroll taxes must be deducted from the employees pay.
QB will draw on this information when processing pay checks each pay
period.
SUMMARY: PROCESSING THE PAYROLL
1. Set up payroll accounts in General Ledger
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2. Set up salary, wage, and payroll tax items in Payroll Item List
3. Set up employee information in employee records in Employee
Center
4. At the end of each pay period, prepare a paycheck for each
employee. This requires the calculation of each payroll tax amount
to be withheld from the employees check and of each payroll tax
imposed on the company for that employee.
5. QuickBooks takes information from the Payroll Item List, Employee
Center, and individual paychecks to create journal entries recording
each paycheck. (Note: It can also summarize the entire payroll for
the pay period in other reports.) These entries are copied over into
the General Ledger accounts.
6. At appropriate times, annually or quarterly, prepare payroll tax
return forms and submit them to the federal or state government
with cash payment for all of the payroll taxes due from both the
employees and the company.
CHAPTER 8: BANK RECONCILIATIONS

When financial statements are prepared, the Balance Sheet must show the
correct amount for each asset at the Balance Sheet date. This includes
our Cash asset. Suppose we need to present a Balance Sheet at January 31,
2010. At January 31, 2010, our books (General Ledger) will show a certain
balance for the Cash account. We will also get a statement from the bank where
we have the checking account that holds our cash. This bank statement will also
show a certain balance in our checking account at January 31, 2010. The
two balances will not match. Which is the correct amount to put on our
Balance Sheet? NEITHER one is correct.
At this point, neither our books nor the bank statement show the correct
amount of our Cash asset, because each has some information that the
other does not have. To get the correct balance of Cash for the Balance
Sheet, we must combine the information from the books and the bank
statement through a process called bank reconciliation.
What do the books know that the bank statement does not? Usually,
there are two main items: outstanding checks and deposits in transit.
The first, and most important, are outstanding checks. When we write a
check to pay a vendor, we immediately record an entry crediting the Cash account,
reducing the balance of our Cash account in the General Ledger (on our books). But
the check must be delivered to the vendor (called the payee of the check), and
the vendor must deliver it to our bank, and our bank must process it before it will
show up on the bank statement. There can be quite some time lag between
the writing of the check and its processing by the bank, and during this
Page 37 of 40

time our books have recorded the check but the bank statement has not.
This is what is called an outstanding check, and it is one reason the
bank statement balance is not the true balance of our cash.
The second item is deposits in transit. Recall that when we collect payment on
account from our customers or when we make a cash sale, we get checks from
our customers. We debit Undeposited Funds when we get the checks, then at the
close of business we take all the checks received that day and deposit them in the
bank by putting them in the night depository. We record the deposit immediately in
the Make Deposits window, debiting Cash, so on our books the deposit is included in
the balance of our Cash account. The bank wont process them until the next day.
When the bank statement is prepared, it may not include a deposit that
was made the night of the Balance Sheet date. This would be a deposit
in transit (in transit between the company and the bank), and it will
cause the bank statement balance to differ from the true balance of our
cash at Balance Sheet date.
But the bank statement also contains some information that the books do
not yet include. There are three main items in this category: bank service
charges, interest earned on the balance in our bank account, and NSF
checks from our customers. Every month, the bank charges us a fee for any
services they have done, and this fee is taken out of our bank account. These
bank service charges are an expense that we dont record until we see the
amount on the bank statement. Also, most banks pay at least a small amount
of interest each month for the use of our money that is held by the bank. The bank
adds this amount to our bank account. This is interest income to us, but
again, we dont record it until we see the amount on the bank statement.
Both of these items cause the book balance to differ from the correct
balance until we get the bank statement and record them in our journal
and ledger.
When you start a bank reconciliation in QB, the Begin Reconciliation
window comes up. This is where you will enter the ending balance from
the bank statement, the bank service charge, and the interest earned on
the bank account. You will also choose the expense account to be debited
for the bank service charge and the income account to be credited for the
interest earned; the other side of each entry will be Cash. QB will
automatically make journal entries to record these two transactions .
The other item is not a regular monthly item, but may sometimes occur. An NSF
check from a customer is a check that could not be deposited because the
customer did not have enough money (had Not Sufficient Funds) in its
bank account to pay the check. When we got the check, we thought it was
good, and recorded it as an increase in our Cash account before we took it to the
Page 38 of 40

bank. Now we see from the bank statement that it was just a worthless piece of
paper, so the customer still owes us some real money. We have to take this
amount out of our Cash account and put it back into the receivable
account in order to correct our books. QB will not make this entry
automatically. You will have to open the Create Invoices window and
enter the amount of the bad check with an Item Code of NSF. Recall that
the Create Invoices window usually makes a journal entry that debits
Accounts Receivable and credits Sales Revenue. That is not appropriate
here, because it would count the revenue twice. The special Item Code NSF
causes the journal entry to credit Cash instead of Sales Revenue, so Cash
is reduced and the Account Receivable is restored.
When you read the bank statement, remember that it is prepared from the
banks point of view. To the bank, your companys checking account is a
liability they have an obligation to pay out the money in your account when you
write a check or make a transfer order. This means that the bank follows the
rule for liabilities, showing deposits and other increases as credits
(increase in liability) and checks and other decreases as debits (decrease
in liability). You, however, are accounting for an asset, the companys
Cash (asset) account in the General Ledger, where increases are debits
and decreases are credits. Since you are recording from the companys
point of view, be sure you follow the asset rule when you make any
adjustments to the Cash account for items found on the bank statement
that are not yet recorded on the books.
QB will use the bank statement balance and the information we provide
about outstanding checks and deposits in transit (by checking off the ones
that ARE included on the bank statement so QB knows the others are not
included) to calculate the correct balance of cash and compare it to the
balance recorded in our Cash account. Once we have adjusted our Cash
account for any items on the bank statement that were not yet included in
our Cash balance, our Cash account should have the correct balance for
cash and the reconciliation should be complete. In the Reconcile Cash
window, this is indicated by a Difference amount of zero. In your textbook
problems, this will always work.
In real life, you may find that the difference between your adjusted Cash
balance and what QB has calculated for the correct balance will not be
zero. Either your company or (rarely) the bank could have made an error
in recording transactions. For example, you may have recorded the wrong
amount for the bank service charge or for the interest income. The bank may have
paid a different amount than what you wrote on a check. Any such errors
discovered during the reconciliation process must be corrected before the
reconciliation is complete.
Page 39 of 40

CONCLUSION
There are other topic areas in your textbook, but this primer gives you
enough to get started and to understand new material as you encounter
it. The basic concepts of assets, liabilities, and owner equity, of journal
and ledger, of debits and credits, apply in all of accounting and all the
work you do in QuickBooks. You have studied the main List, Center, and
activity windows, seen how they interact and how they affect the
accounts. The activity windows that are introduced in one chapter will be
used again in later chapters. For example, in one chapter of the text you will
learn how to keep track of work done by your companys personnel by specific
customer and job, and how to charge customers for the work when you invoice
them. But this will mean using the same payroll windows and invoice window you
used when recording other payroll and customer transactions. Once you have
mastered this material, you are primed and ready to tackle the
QuickBooks textbook.
Page 40 of 40

A Quickbooks Accounting Primer

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A QUICKBOOKS ACCOUNTING PRIMER

By Jeanie R. Hoshor, M.S. Accounting

CHAPTER 1: BASIC CONCEPTS IN ACCOUNTING