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Here we are online in our browser searching for QuickBooks Online test drive looking for the result that has Intuit.com and the URL into it being the owner of QuickBooks selecting the United States version of the software and verifying that we're not a robot. We're going to be opening up the reports like we do every time the major two financial statement reports on the reports left hand side and then we'll be right clicking on the balance sheet in the favorite reports open link in new tab right click on the profit and loss report open link in new tab let's go up to that tab up top that we just opened in the middle closing up the hamburger this is our balance sheet we'll do a range change up top bringing it back to two thousand twenty three oh one oh one two three tab twelve thirty one two three tab run it to refresh it tab it to the right closing up the hamburger scrolling up and changing that range oh one oh one two three tab twelve thirty one two three and tab run it to refresh it so we're going to go back to the balance sheet that's going to be our point of focus this time noting the major two financial statements once again balance sheet and the income statement which QuickBooks generally calls the profit and loss statement so we'll do some kind of accounting standpoint here to think about these two reports and why they are so important and then we'll also think about it in terms of QuickBooks in that we'll see how QuickBooks is used to make financial statements to generate uh these reports so the general idea of the bookkeeping process what we're doing as the bookkeeper two main goals one is that we're trying to create the financial statements from the data inputs balance sheet income statement and related reports and number two we're trying to facilitate the transactions so we can communicate well with the people we're involved with which includes the customers vendors and employees so we want to make the transactions as smooth as possible but we're creating the balance sheet and the income statement for internal use possibly for tax preparation possibly by the end of the year that we're going to need at least the income statement for and maybe for external users like the bank that might need financial information if we want like a loan or something like that so the balance sheet then of these two reports is going to be the report that shows where we stand as of a point in time and the income statement then is going to be the report that gives us detail about how we are doing or what our performance was over a time frame so the first thing we want to realize is that on the balance sheet if we just have a normal balance sheet we only really need one date so this is as of December 31st 2023 you can see we still put a range in here you might be asking why do I put a range in QuickBooks why doesn't it just ask me for one date well one reason for that is that the drill down function when I drill down into a particular account such as the checking account then we get a report that is in a range feature this being the transaction report that gives us that whole years worth of data within it so by putting a range into the balance sheet it won't change the actual balance sheet but it will give us some detail when we go into the transaction detail reports so that we don't have to then change the range once we're in here which is nice let's go back to the balance sheet in other words if I was to change this if I if I look at these numbers 20015281 and so on if I change this to like the beginning date as of 06323 and run it we get the same numbers 20015281 if I change it even to 1231 123123 there's no distance between these two dates we get the same numbers here it's just that when I drill down on the data then I have to then adjust the range because now now there's nothing in this report which is a range report as opposed to a point in time report so let's go back and we'll say starting over from 010123 and running this again so every transaction that we put in play from this plus button will have an impact on at least two accounts one of them is going to be a balance sheet or could be two balance sheet accounts but two accounts on the balance sheet and income statement every journal entry that we make that will be the double entry accounting system now the balance sheet if I close up all the triangles we can see that we have assets liabilities and equity they equal each other that's the accounting equation assets equal liabilities plus equity and now you can think about that like a couple different ways so we might say what is the balance sheet that's what the company has and who they owe the stuff to so in other words whatever the company has are the assets we don't report the assets just as cash well they don't just have cash they have any other types of assets equipment inventory and whatnot but we have to value it in terms of dollars dollars are our measuring tool and then the other side the liabilities and equity is who has claim to the assets so the assets would be the value of the company in essence if there were no liabilities and equity right that's that's the stuff that we have reported in dollar terms and then the liabilities and equity is kind of the other half of the coin it represents who has claim to the stuff so that doesn't mean that we can really just give out 23,436 to the liabilities and the equity people because we don't actually have that money right what we have is a bunch of stuff usually property planting equipment inventory that we're valuing at 23,436 so but the idea would be if I actually sold all of that stuff and I was able to receive the dollar amount that it's on the books for then I would have the 23,436 and I can pay it out to who I owe it to which would be third party liabilities and the equity in accordance with whoever I owe it that would happen on a liquidation when you close a company right you'd have to sell everything to get the money and then pay off your liabilities and then the equity liabilities represent third party people such as the bank or possibly accounts payable that you owe money to so and then the equity represents the owner equity is often confusing for people because there's different like business types or entities that could name equity different things so for example if you're sole proprietorship the equity is just the owner's equity that's the easiest scenario because that means that all of the equity is yours right so you can also think of it as assets minus liabilities equals the equity which would be like the book value of the company that if you were only had one owner sole proprietor would be yours but if you're a partnership then you have partners equity you can still think about the equity as though all of the equity is the owner's claims to the assets but in a partnership of course multiple partners have to then break up that ownership and say how much of that equity is per partner and that actually becomes fairly complex in a partnership possibly even more complex than a corporation whether it be a C corporation or an S corporation will have then the equity is going to be stock holders equity and the reason that's actually a little bit easier oftentimes than a partnership is because the idea of stockholders is that we're going to have all that lump sum in equity meaning owners claim to the assets and and then instead of us putting capital accounts for each partner each owner of the business we're just going to issue shares and the shares will be equal units and whatnot and so therefore when we track it the bookkeeping I can just put everything into the retained earnings account or the equity account in essence and then who has claimed to that will be dependent upon the shares which will all be equal units basically of ownership in the entity so but that's the general idea so if I open this back up just to drill this down a little bit further if we say now we see the assets and here's the liabilities equity so a lot of finance people will see this equation as 23 436.29 assets minus the liabilities 31097.33 there's actually a negative equity which isn't good of 7661 that being that means the owners actually owe the company money basically right so usually hopefully you want to have a positive equity typically but in any case that that then equity would be like the book value of the business right that would be the the value of the business owned to the shareholders as accountants we typically see the equation as assets equal liabilities plus equity rather than assets minus liabilities equals equity because from an accounting standpoint you've got you've this is basically your double ledger your double entry accounting meaning you've got your assets on one side of the coin and then who has claims to the assets third party people liabilities or the owners equity all right let's go through each of these line items then so I'm going to try to close everything up here on the asset side and we'll just go through what is in the assets so we've got total assets the asset account is a standard financial reporting term so when you have external financial reportings of the balance sheet you'll of course will have the first section of the balance sheet being assets current assets also a financial accounting term so we so those are going to be assets that are going to be more liquid assets meaning they'll more likely to be converted to cash or used up in a short period of time and then if I open that up and I've closed these triangles now we have the bank accounts accounts receivable and other current assets these three are tying out to account types and are kind of more tied into instead of external financial reporting best practices type things they're tied into what QuickBooks needs to report the accounts as because each of these different account types have different needs to see that let's go to the first tab and then I'm going to go down to the transactions tab and then I'm going to close the hand boogie and go on over to the chart of accounts so in the chart of accounts we can see the account types that are going to be set up here so we have bank accounts accounts receivable other current assets we saw this when we looked at the general ledger these accounts are going to have specific needs within QuickBooks so when I set up a new account if I went to the setting up of a new account and new up top then I would choose the type of account that we're going to be setting up up top so the question we might ask from a general reporting standpoint is why don't I call of all all of these stuff should just be called current assets right from just an external reporting standpoint but from QuickBooks standpoint it's saying hey look this one has to be something other than just generic current asset because I want to make the bank accounts be able to connect to the financial institutions therefore they they need their other their own category instead of just instead of just a current asset account so that's why everything that has its own category is going to end up with a drop down when you get into the financial statements so now you've got the bank accounts if you're looking at normal balance sheet reporting you probably wouldn't call it bank accounts right you would call it you would call it just cash and cash equivalence but here in QuickBooks they want to call it the bank accounts because those are the ones that connect to the financial statement which is useful for internal bookkeeping purposes right and then so then you've got the total bank accounts here on the sub account and then accounts receivable has the same thing why don't we just call it like we would for normal external reporting purposes a current asset account well it is a current asset but it has its own category its own GL account type that's more detailed than current assets because QuickBooks wants to make sure that the accounts receivable has special uh things tied to it which include the ability to track to a sub ledger and accounts receivable will be restricted from reporting anything to that account that doesn't have a customer related to it so that you can track it out to a sub ledger so as we look at these you can also think about the other reports that will be involved with it with the checking accounts we'll have the statement of cash flows which will ultimately tie out to the cash accounts and then we also have uh the you know deposit uh registers and check registers that will tie out to the checking account and so on with accounts receivable we're going to have the added reports that we saw over here let's right click and duplicate another one and say that uh if I go into the reports on the left hand side the accounts receivable will be the major account that have sub reports on who owes you money of that category of reports are usually going to be tying into the accounts receivable because we need a sub ledger by customer and then we've got the uh other current and by the way if I go into the checking account here just to look at each of these the checking account is going to have mo more types of transactions than any other account so that's because the checking account is the lifeblood of the company uh it's the it's the it's the oil that that is going through all of the machine of the accounting and therefore it's going to have more transaction types and more transactions within it typically than any other account if you go into an accounts receivable account then you're only going to be seeing increases with invoices and decreases with the payments on the invoices it should be very strict in terms of the forms that you're going to see within it and you're only going to have accounts receivable on the books if you're using an accrual based accounting system meaning you're billing people with invoices instead of using sales receipts or deposit forms to record your revenue and then in other current assets we've got the everything else that is a current asset in this case inventory now you might think that inventory should have a special account for itself because it also has a sub ledger similar to the accounts receivable but even if you're tracking inventory perpetually within the quickbooks system quickbooks isn't forcing you to record an item every time you record something to the inventory whereas with accounts receivable they are restricting you from recording whenever you record something to a accounts receivable to have a customer so i think that's why quickbooks doesn't need an added or special kind of account category for inventory it's going to act just like an other current asset account even though it's going to have a sub ledger if you're tracking inventory on a perpetual inventory method the sub ledger tying into the inventory asset account in dollar amount that's what it's in here also tracking the units of inventory and then we've got the undeposited funds this is that account that we use as an intermediary account so that we can then put the money in here and then deposit it into the checking account why do we do that because we might have payments from credit card companies or payments that we have received from cash and then we need to group those payments that we have received together and then we want to deposit them into the checking account in the same format the same grouping as will be on the bank feeds so that when we do the bank reconciliations we have we can easily match out our deposit side to what's on the bank side of things so we that's the use of the undeposited funds sometimes you might not need undeposited funds if you have a simple system then you might be able to deposit directly into the checking account but if you're getting paid with credit cards and or you're having multiple cash transactions at a cash register it's likely that you're going to want to use undeposited funds so that you can group your deposits in the same way that as they'll appear on the bank account now also realize you might be saying well undeposited funds then is like a cash account it represents cash that we have or have claimed to at least with a credit card or with the cash actual physical cash that hasn't yet been deposited into the bank so from normal accounting standpoint you would think it would be up here under the category that wouldn't normally be called bank accounts but rather cash and cash equivalents that's where it should be right but again quick books from a from an internal software standpoint i believe the reason would be is that the undeposited funds doesn't act like a checking account because they don't want you to tie the undeposited funds to the to like a to like a bank feeds it has a different use for it and therefore they put it down here into other current assets a little bit confusing but it should clear out to zero and when it clears out to zero it will then be moved up here also note that if you look at your statement of cash flows and you're trying to tie out the statement of cash flows to your assets you gotta if there's something in undeposited funds it's going to be included in that bank account total so just be aware of that so then if we go down to by the way the inventory as we saw goes up when we purchase inventory and then it's going to and then it's going to go down purchase with a check or bill and it's going to go down when we sell inventory either with an invoice or a sales receipt and then the undeposited funds if I go into it what's going to happen with the journal entry related to it it's going to be going up when we when we receive a payment on an invoice or enter a sales receipt and then it's going to be going down when we make the deposit and the deposit group them together and deposit it into the checking account typically then we have the fixed assets so now we're on the fixed assets now fixed assets is often a point of confusing for a lot of people because a lot of times people in small businesses particularly might say hey look I just want to be on a cash-based system I just want to record my outflows when they happen when they clear the bank but if you're in the United States you're at least going to have to do tax you're going to have to do taxes and you're going to have to deal with large purchases which are going to have to have an accrual component to it meaning you're going to have to put it on the books as an asset the tax code will force you to do it even if you don't want to do it yourself and the general idea would be if you purchase something large and the example the extreme example would be like a building if you paid a hundred thousand dollars for a building even if it was cash if you if you put it on the books as an expense what's going to happen is when you compare one period to the next like I bought a hundred thousand dollar building in January and in February I didn't then you can have this huge loss in January when you compare to February and it'll look like you had a horrible January because you got this big loss but that's not really what happened because you purchased a building that's actually going to benefit you for 30 years so that comparison problem is why the accrual method differs oftentimes from the cash method so that example being so extreme that even if you're on a cash based system you're going to have to put like a building and large purchases on the books as an asset doing an accrual thing to them and then expensing them in the form of depreciation this is also a different kind of field as well because you don't always purchase equipment it's not something that happens all the time therefore there's no form up top here specifically designed for the purchase of equipment you could use an expense form if you paid cash for it for example but you might have financed the equipment in which case there's no form for it generally because we don't purchase equipment on a fixed basis we don't it's not something we do in our normal cycle it's something we do very less often periodically and so that's another thing that kind of throws people off sometimes and if you're using bank feeds to decrease your checking account and records your expenses if you have a large purchase then that might be something that you have to put on the books as an asset and you can have questions in terms of for example if i'm buying stuff from the same place an office warehouse store or something like that most of the time they will be expenses but if i buy some large piece of equipment from that same office warehouse store and i'm using bank feeds then i have to know that okay wait a second that large piece of equipment i'm going to have to put on the books as an asset and not expensive so we'll talk about that more in future presentations and then if we add those all up of course this is the total current assets and then the current assets the fixed assets the cash gets us to the total assets of the 23 4 36 29 liabilities and equities let's first take a look at the liabilities so i'm going to close up the equity and okay so the the liabilities has an has the liabilities term is a normal external reporting term uh that that is general right and then you've got the current liabilities also a normal balance sheet reporting category representing those liabilities liabilities what you owe to third parties these current ones being those that are going to be due within a year so you've got the current liabilities then you've got this other sub account thing here which once again it's a little bit strange because these categories tie out to the different types of accounts that have been set up and you might say well why do i have accounts payable with this drop down it should just be called a current liability well the same reason they did it for the accounts receivable when we set up the chart of accounts down here they have its own account type why do they have its own account type because accounts payable needs a special purpose of being able to track the liability by vendor the sub ledger once again quickbooks will force you to add a vendor every time you post something to accounts payable therefore it has its own category and everything that has its own category has its own little triangle drop down here so if i go into accounts payable this is also an accrual type of account and therefore it's only going to go up if you're entering bills when you make your expense payments as opposed to using an expense form or check form and it's going to go down when you pay down the bill with a bill payment type of check form decreasing the checking account decreasing the accounts payable so there's going to be that one and then let's close up the rest of these for now then we have the credit card so the credit card is going to have its own special account again why don't we just call it an other current liability that's what it normally would be in external reporting purposes because it has its own special need because the credit card could be connected to a bank feed like with the checking account so the credit card you can think of is acting just like the checking account you could connect it to the bank feed when you purchase things with the credit card however instead of decreasing the checking account it will be increasing the liability so if i go into this one you can see that it's going to be going up in the liability direction with the expense forms and so on and then we'll pay it off with some kind of payment form payment from the checking account form so it might be a credit card payment form so then i'm going to open that back up again and then all of the other current liabilities liabilities that are going to be due within a year are into the category of other current liabilities because they don't have any special needs that are tied to them no special sub ledgers that are tied to them so here we have the these are these two happen to be the the sales tax now you might think that sales tax has a special thing tied to it and it kind of does because you use the sales tax widget you know to help you to record the sales tax but that i think the thing that requires that the special category up top is when quick books like restricts you from posting something to it so i don't think you're restricted to make a journal entry to the sales tax account or anything so therefore it's still an other current liability sales tax of course as we have seen will go up when we make sales invoices and sales receipts are the forms we make sales with and then go down when we have a sales tax payment going back then we have the loans now loans this is the long term liability if you have a loan then it could be either short term or a long term loan meaning if it's due within a year it would be short term if it's due longer than a year it would be long term oftentimes you have both a short term and long term portion to the loan because you might have a loan that's going to be you know paid off in 10 years similar to like a mortgage type loan and in that case you're going to be paying it monthly if it's an installment loan and therefore the amount of the loan principle that's due within a year would be short term and the amount that is due after that year would be long term so that gets a little bit messy a little bit confusing that's kind of a something that if you're small business you definitely you kind of you might not need to do that unless you're doing external reporting purposes although it's good information for internal reporting because if you're doing it just for taxes you really just need the income statement right you need the profit and loss to do the taxes but if you're going to if you have to have the reporting for external uses then you might have to do it on an accrual based method and therefore what you should do periodically is is adjust the long term short term and long term portion of the loan in accordance with the amortization table and so we'll talk about how to do that as we go through our practice problem and then we've got the equity which once again is often the most confusing section noting that equity simply just means it's going to be the assets minus the liabilities right assets minus the liabilities is going to be the equity section or this is what we have this is what is claimed by third parties that we've made a commitment to that they have a claim to and then this is what should be ours which in this case is negative so that's not good but if I open this up then we have opening balance equity within it now opening balance equity is actually an account that is a setup kind of account helps you to enter the beginning balances in the system as we will see when we start a new company file in a future course or section it's not something you actually really want to balance in because it looks kind of unprofessional this is a plug account this is an account that QuickBooks just dumps money in when you're doing the setup process so it's not really exactly a proper naming of something so really what you want to do is take it out of opening balance equity when you first set up the company file and put it somewhere else and then never use opening balance equity again right but and then the retained earnings also a little bit strange of an account because many users of QuickBooks are going to be sole proprietorships and partnerships possibly not corporations although they could be corporations and S corporations as well if you're a sole proprietor then you're not going to call it retained earnings right you're going to you might just call it owner's equity or the owner's capital account if you're a partnership you're going to have multiple capital accounts per partner so this retained earnings account represents the the the money that is going to flow through within QuickBooks so we can't really delete the retained earnings account you can only rename it because this account is a special account that has special uses to it in that the net income from the income statement is going to roll into it so if you're a sole proprietorship you might want to find the retained earnings account just rename it to you know an owner's equity account or something like that if if you prefer that that name because retained earnings indicates that it's going to be a corporation and then in a corporation you've got the retained the retained earnings so and then you've got the net income this is also a little bit wonky because normally in external reporting we don't put net income oftentimes on the balance sheet because it's going to be on the income statement this isn't actually its own like account it's basically QuickBooks trying to tie in the income statement to the balance sheet it actually causes some problems sometimes when you're trying to allocate the net income to the to the different partners so for example if I go over to the income statement here's the profit and loss the bottom line of it is 1,676.46 if I go to the balance sheet we could see there's the 1,676.46 so it just pulled in that amount now again why is it a little bit weird well what if I like if I changed the date range up top and I said this was just one month 11 0123 then it doesn't change it doesn't change this number and if I changed the income statement over here you would think if I just wanted one month 11 0123 then my net income for that one month would only be would only be 1,121.87 so you would think that maybe it would it would roll in or do the closing process to retained earnings for the other months and give you one month it doesn't because it just does it on a year by year basis so that's one thing that's a little bit a little bit weird so you just have to remember that that this net income is just going to always be on a yearly rollover closing basis that's how QuickBooks does it right and then if I go to the next year so let's say I go up one day let's say I go from uh uh 12 31 uh let's go from 01 01 01 2 4 to 01 01 2 4 and run that now it has moved it has moved the net income that was here into here so now it's in retained earnings so what does retained earnings mean then it's the earnings that have accumulated from the business so you've got earnings which might hopefully increase your cash as well your assets right your income has been made over expenses and instead of paying that money out to the owner you have retained them so it's earnings not over one year that's what the income statement is the income statement shows you the income over a time period the retained earnings shows you all of the income over the entire life of the business which has not yet been distributed out to the owner now how do you distribute the retained earnings out to the owner well in a sole proprietorship we would call that draws so you'd have a draws account which would be decreasing the equity as you draw the money out for a partnership you would have a draws account for each uh partner you'd have a capital account and a draws account for each partner and for a corporation we call them dividends dividends are like draws in that we're taking the money that has been accumulated and we're distributing it out to the owners the problem with a corporation however is that like you might own stock in apple as a shareholder of that publicly traded company but you can't go over there and say give me a dividend as one owner of the company because the stocks have to all be the same so when you say there's a when you say there's a dividend for a corporation you have to agree on the dividend and then all the shares of the corporation have to be attributed the same amount of the dividend not true for a partnership because that'll be in agreement in accordance with the partnership agreement so you could have different partners taking out different money of the business in a partnership which is confusing from that's why the partnership is actually more difficult so in some ways in a lot of ways for the bookkeeping side of things now the other problem here is if I go in if I go from 010123 123123 and I look down here notice that this net income is not an account I can't do a journal entry to that net income so if I was a partnership then I might have like three partners here that all have different capital accounts and when I want to report my information I would like to take this net income and distribute it according to the partnership agreement to the revenue sharing agreement between the three partners but again I can't really get rid of this account here so that's why also that this net income can be a little bit messy in that in that regard most online softwares do the same thing so if you're a partnership you're just gonna have to work around you're just gonna have to basically work around that right that net income you can't like remove the net you can't like journal entry the net income that's in the balance sheet out to the partners so that's just something to be aware of but that's the major form for the balance sheet for external reporting purposes note that it's pretty nice it's a pretty nice balance sheet but you might also if you wanted to adjust it you can have the summary balance sheet which will basically give you let me just show that real quick if I go into the summary balance sheet I think it's balance sheet balance sheet summary then this balance sheet let's go from 010123 tab 123123 has all of the all of the account see I now I have current assets and then all the bank accounts are within here which is kind of similar to cash and cash equivalence and accounts receivable has one account so this one actually might be better in some ways for external reporting purposes or at least as the starting document for external reporting because you don't have these subcategories for the bank accounts which might which might not be necessary for like external reporting needs you don't usually use the summary balance sheet for internal reporting needs however because I can't expand on these accounts and I would like to because oftentimes I would like to go into the checking account detail here to see what has happened within it so that's the general overview we'll go into some more reporting because we could then start from this balance sheet and make a whole lot of different reports from it such as comparative reports we can use a vertical analysis like percentages within it as well and we'll start to see how we can do that with the tools up top and the principles that we apply to adjust reports will be similar on the balance sheet and other reports as well although there will be a difference between reports that are as of a point in time balance sheet one date and those that are time frame oriented like the income statement