Bookkeeping Made Easy - How to Get Started in QBO

Finances can be one of the most difficult and daunting concepts to get a grasp on. They can be our greatest enemy if we don’t understand them, or our most powerful ally empowering us with clarity. Everyone knows how stressful it can be to try to get overdue books up-to-date. If you start getting behind, it feels like an impossible mountain to climb.  What is a debit vs credit? Do I need a Balance Sheet or Profit and Loss? When is a reconciliation necessary? What the heck even is a reconciliation?

When these questions start to pile up, it gets harder and harder to correctly manage a bookkeeping process. The good news is that it is never too late to learn! The sooner you can pick up these practices, the quicker you can get your books in order. I can’t promise it will be easy, but I can promise it will be worth it!

The first step on your bookkeeping journey is to get a good cup of coffee. This is the most important step, do not skip this.

Software

I recommend taking a look at how your books are currently being kept. Do you use accounting software that you are familiar with, or are you doing things by hand? We do most of our work in QuickBooks Online and I highly recommend it. Fortunately, they have options that work for whichever stage your business is in. If you have been keeping your books by hand, it may be a good time to take a look at some software options. Software is getting easier and easier to manage and it will keep you from some major headaches down the road.

Chart of Accounts

After deciding what is best for you and your business, it is worth going through your Chart of Accounts to understand each account and what it is used for. This is an easy way to learn how your different accounts interact with one another while also becoming more familiar with the specific accounting needs of your business.  Each account will fall into one of the following account types:

Assets – What You Own
Liabilities – What You Owe
Equity – The Financial Position of The Company
Income – Money Brought In
Expenses – Money Spent

Along with these account types, there is one more thing that is important before we start: the basic accounting equation…

Assets = Liabilities + Equity

Or, as basic algebra would tell us…

Assets – Liabilities = Equity

This formula helps it all to process a bit easier as you learn how to keep the books. Put another way, it essentially says “what you own – what you owe = the financial position of the company.

For a deep dive into Chart of Accounts and how to best set them up for your business, be sure to check out our Bookkeeping Made Easy – Chart of Accounts and Classes post.

Coding

With these things in mind, we can really dive into the meat of bookkeeping. If you have been running your business for a while, but are quite behind on your books, I would absolutely recommend starting with getting all of your transactions added to your accounting software. If you are using QuickBooks, that can be done in the “Banking” sidebar. You will want to make sure each transaction you add to your books has a correct Vendor or Customer assigned to them, as this makes searching for a specific transaction much easier in the future. Use each transaction’s bank detail to quickly identify where any purchases were made. If you haven’t been using Vendors in the past, that is ok, now is a great time to start.

You may not know exactly what to do with each transaction, so anything you are unsure of, you can assign to uncategorized income/expense for you to circle back to later on. If you leave transactions in the banking section, however, they won’t be considered in your “books” yet and therefore left out of your financial statements.

Reconciliations

Once all of your transactions are coded into the correct account, you can move into the reconciliation process (my personal favorite). Reconciliation is the process of confirming that the numbers in your accounting software match the statements provided by the bank. This is a way for you to confirm that everything leaving your bank is accounted for in your books, and it’s a very important step.

To do this, you need to collect all the relevant statements from your bank (most banks offer PDFs online). If your accounts have never been reconciled, it is best to start with the first month your account was opened. You will be going month by month here to confirm that your statement matches QuickBooks (or any other software). The good news is that QuickBooks makes this quite simple, through the reconciliations tab on your sidebar. If you are in a reconciliation and notice some transactions are missing or don’t belong, I recommend printing your statement to confirm things match line by line.

This is also a great spot to maybe grab a second cup of coffee.

Reporting

After you’re done adding all transactions and reconciling your accounts, it is time to pull some helpful reports! There are 3 main financial reports that are incredibly important to understand: Profit and Loss, Balance Sheet, Statement of Cash Flows. Knowing how and when to utilize each of these reports lets you understand your finances on a much deeper level.

Profit and Loss

The Profit and Loss shows you how profitable your business has been during a specific period of time. Reading the P&L can be a little bit tricky, but there are definitely a few tips I can offer that should help. The Profit and Loss is organized in such a way that each section reveals something important about either your income or expenses. The last line of each section will show the total amount for said section. The top of a P&L will show all of your income accounts. Cost of Good Sold will be after that (if applicable.) Your expenses will come below that, followed by any Other Income or Other Expenses. When people talk about the “Bottom Line” they are referring to the last line on a P&L, your Net Income. While the Net Income is important on its own, understanding where that number comes from is ultimately more helpful.

Balance Sheet

The Balance Sheet shows you a snapshot of your Assets, Liabilities, and Equity for a specific date. We can use the formula from earlier to better understand the Balance Sheet. Assets, which include bank accounts, Accounts Receivable, and Fixed Assets, are shown on the top of the report. We next have Liabilities; things such as Accounts Payable, Credit Cards, and any Loans or Notes. Your Equity will be shown at the bottom. If your Liabilities outweigh your Assets, you will see a negative Equity Balance.

Cash Flow Statement

The Cash Flow Statement can be best thought of as the connection between the P&L and Balance Sheet. It helps you understand Cash entering and leaving the business during a specific time window, but also shows important transactions that are not on the P&L like debt reduction, investments and distributions to owners. The Cash Flow Statement begins with Net Income (which comes from the P&L) and ends with Net Cash (which is where the Balance Sheet begins). Although this report may not be looked at quite as often as the P&L or Balance Sheet, there are plenty of helpful insights to be gained from it.

Happy Bookkeeping!

The good news is that all this information builds on itself the more you use it. When you combine all of this together, you have some powerful tools you can use to tackle a myriad of financial situations. I assure you, the more you are involved and understand your books, the more you will understand your business.

Also, as you continue to navigate your bookkeeping process, please be sure to reach out should you need some help. Whether it’s a couple of hours a month or a completely outsourced finance team, we are here to help business leaders achieve financial clarity in their organizations – and we would love to help you too!