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Paying Bills in Quickbooks

Lesson 18 from: Small Business Finance Basics: QuickBooks & Beyond

Ken Boyd

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Lesson Info

18. Paying Bills in Quickbooks

Lesson Info

Paying Bills in Quickbooks

where we left off with is a nice tie into the next segment, which again is some of the day to day stuff that you're going to do when you're in QuickBooks. The first slide paying bills, receiving payments, which we have touched on. Yes, sir. Yeah. Segment had a question on the previous one about the sole proprietor limited liability situation. Um, does that mean you should keep your cash account? They're kind of low in case something were to happen. Or if you expect an incident is coming up down the road, just empty everything out. How does that work? Can you? That's a valid. That's a really valid question. So let's go through a scenario. Let's say that you have, ah, $10,000 bank account balance and somebody slips on the ice and falls outside of your pizzeria, and now you're concerned that there's some legal liability. If a business owner were to move assets out of the business, whether it's cash or anything, in a legal matter, a person seeing that you did that would probably think it w...

as intentional on those assets would be included in the litigation. I talked to an attorney, but that's what I think would be suspected. So should you keep them low as you can throw out, I think the idea is you. You maintain whatever you cash, you need to run your business, which is a segment we're gonna cover tomorrow and work with an attorney. Work with an account to protect yourself. In other words, I would not want a cash balance to be so low that you can't run your business. And I've seen people in that in that situation. Question. Can you have too much cash? Yes, you can. Let's talk about that for a second because this is a natural progression into a segment we're going to do tomorrow on cash. The idea would be but the cash that sure you have in your business you're using. And by using that, I mean, you're using it for payroll to buy inventory to, you know, buy equipment, whatever. If you have too much cash in your business that you're not using, it's and you're not and there's not some utility to it. There's no point in having it. For example, if you had a business with $50,000 you're only using $20,000 month to month, and we're gonna talk more about this in a minute tomorrow. That $50,000 came from a source? No, it was either you putting money in the business or an investor coming in or a lender. Well, there's no use bringing that business in and having somebody have a claim on that asset in this case, cash unless you need it. So in corporate world, when you look at performance of a company, they're very big on how are you using your assets? And if you're not using them effectively, why do you need our cash? All might say an investor might say, Okay, anything else for ago? Go, go, go On his question that's actually like for my business. That's why I have general liability insurance. Eso it takes me out of like living in fear that if someone trips over my camera bag while I'm doing wedding, you know I have to have my accounts low. And I can't you know, I'm in business to make money, so I don't want toe. Always have, ah, super low account. I don't want to live like in fear that someone's gonna sue me, So I just have my insurance and I could be a sole proprietor and on that kind of takes care of it for me, right? And as a matter of fact, I'm glad you brought that up because Christine and I had a conversation about the break about insurance and whether my, in my example, when the money was stolen from this tree service company insurance would have covered that. It's been so long. I don't remember if he had liability insurance, but certainly a message to everyone is talk to when you talk having a conversation with an attorney about setting up your business. You need to have an oh, by the way, what about ensuring against theft, things like that, which would protect from that? Yeah, exactly. One of the big focus is that I have again is to do two things. Have you create a system and have you get comfortable enough with the system that when you have MAWR transactions that it's not overwhelming, have a system and have enough have enough experience with the system that it's not overwhelming? One of the things you need to have in place in an operations manual is all the systems you have for your accounting. So this segment is kind of nuts and bolts stuff that we haven't covered. I'm gonna go into detail on MAWR transactions than we've covered so far. We talked about she accounts already. And in fact, we've seen four or five examples on the flip chart and in QuickBooks how we do t accounts we saw posting to balance sheet accounts. I'm going to go on and do a on extra step, and it's the first thing I'm gonna do of how this income statement accounts get closed at the end of the year. Remember what I mentioned that gonna do that First Cavil accounts versus comment or common stock and then handling payroll. So again, if you're concerned and we had an account on Twitter, say, Well, you know, my anxiety level about running my business is getting a little bit lower. The way to solidify that is to go through mawr transactions that you'll typically do understand how to do it. Now. Another thing about, um, this course generally because this relates to when I when I teach people online, I find that people online learned two ways. First of all, you've got to give him good graphics and pictures, which is why I started using the flip chart today while we're using multiple things. And the other thing is, it's very likely that you'll have to go back over this ground again. And I'm not saying that. You know, everybody in the free world should buy the course, but if whether it's this course or something else, you need the review, you need the review, particularly in accounting. Accounting is about repetition repetition. Okay, so if you walk away from this course and you're like, I have no idea what he was talking about, If you go back in and do the repetition, it'll help for it. Just as an example, you may want to watch this video again and get out a piece of paper while I'm going through it and do those tea accounts while I'm talking about them. Then you think Oh, okay, I kind of get it. If you physically do what I was doing on the white board before now, and for the rest of the course, watch it again and do it yourself. You might find that it helps you a lot of times when our tutor online. I've got an excel document that I'm going through. And I tell my students at the end, I'm gonna send you the Excel document. Go through it again on your own repetition. Get the hang of it. Okay, First thing I want to talk about is closing accounts, which is not in my slide deck. Not that you need to do this. This is not something you need to do. This is something QuickBooks will do for you. Closing accounts at the end of the month. So I mentioned before in the course that income statement accounts all get adjusted to zero at the end of a month. We start over at the beginning of the next month. Right? New revenue. This is the blessing and the curse of being an entrepreneur. Everyone starts at zero. Well, I wonder how to make a living this month. Now you guys get clients, you get record, you get a reputation. It's really not like that. But it's a good analogy. We explain that revenue and expenses we start over every month. They all go to zero. And the question is, where does all that activity go? All right, I am not going to do this in QuickBooks is I don't want to close a month in QuickBooks because I need the data. If I closed it in QuickBooks, I couldn't go back. Okay, so and this is a good point for those of you out there once you close out a month and QuickBooks, that is, once you do when I'm going to do on the screen here in a minute, it's difficult to go back into that month cause it's considered the book is closed. So if it's February 2nd and you are going to click a button and QuickBooks to close the books and zero out all the income and expenses without going into too much detail, it's difficult to go back in and undo it. So make sure that before you hit the button to close a month that you've got all the activity listed. Now, if you make a mistake, you can make a journal entry and fix it, but you're better off to make a clean break. All right, What I'm gonna assume to begin with is that I have balances in my revenue and expense accounts. It's January 30th my revenue account. We credit to increase revenue has a balance of $1000 for the month. I have a whole bunch of different expenses and I add them up and I think it's $220. Okay, if I go into QuickBooks right now, I'm not going to. But if I did, I've got a Siris of revenue and expense transactions for the month of January in the system. You should know that income statements, an income statement is a temporary account, meaning that the balance doesn't carry forward month to month to month income statements or temporary accounts. We zero him out every month. How do we zero him out? Here's how we do it. We increase equity accounts by crediting. I'm gonna assume that my begin. It's the first month my businesses open and my equity balance's zero on 11 2014. Okay, What I do is I move the revenue and I moved the expense over to this category. All right, here's what I do. Number one I debit to reduce the the revenue, and I move it over here. So this has a balance of zero debit to reduce it. Put it over here. I credit number two to reduce all the expense. So that is now a zero balance. And I move that over here. I credit to reduce the expense moving over here. That's entry number two. I debit to reduce the revenue. Put it over here. That century number one. Okay, the net effect of that is I have a $780 profit that's sitting in my equity. It increases my equity. We do it one more time. I debit to reduce the revenue, and I move it over here. I credit to reduce the expense, and I move it over here. When I take the net difference between the two, it's $780 it increases my equity. Now, I have a choice of what I do with this equity. This increase due to the profit, I could take the profit out of my business or I could leave it in. So on January 30th all these accounts get adjusted to zero. The balance sheet accounts continue forever. Okay. Ah, good example, I use General Electric is one of just a few companies left that are traded in the stock exchange that have been in business for over 100 years. If you looked at General Electric's equity section of the balance sheet today, it would be the sum of 100 years worth of profit, less the sum of 100 years of dividends pay their equity. General Electric would be the sum of 100 years of equity increasing last 100 years of dividends decreasing. See what I mean? The account goes on forever. The balance sheet accounts go on forever. Okay, So what we just did is that we talked about closing the accounts at the end of the month were on Lee closing the income statement, the revenue and expense accounts because they're temporary. We do that by deboning to get rid of the revenue and move it over here. We credit to get rid of the expense moving over here. Take the net difference. That's our province. I know. That's a lot to throw at you. That is something that QuickBooks does automatically for you when you click a button at the end of the month. Okay. Questions on that. So in QuickBooks is that under Ah, a tab that says closing accounts. I'll shoot when we go into QuickBooks, I'll make sure and show it to you. Please remind me if I don't There's a month in close. Essentially, it's a little different, depending on the version of QuickBooks Again, a little too a little pushing the envelope in the accounting you need to know. What I don't want to happen is I do not want a situation where you do not close your accounts because what's gonna happen if you leave the revenue and expense in here and start working in February, your revenues shouldn't be in there. And your expense shouldn't be in there because this is January. So what I'm saying is you have to close the books or else you're gonna be accumulating a bunch of stuff that doesn't belong in February. Okay, QuickBooks does it automatically for you? Okay. Closing the books. I just thought Come through. J. D. Peter's wanted to know if you have to close out at the end of the month or can you do it mid the next month? Can you wait to do it made the next month? Even if you're doing it once a month, that's tricky. Okay, let's say it's February 10. What? I would prefer somebody do is close out on the last day of the month. Or if you're not gonna close in the last day of the month. Don't do any transactions in February until you close. Okay? The problem with waiting till mid month is I wouldn't want anything from January from February 1st of 15 to be in there, cause it's gonna get skewed and it might get in the wrong month. So don't It's a good point. Don't post anything for February until you close January. Anything else? Okay, this we've covered. So I'm gonna keep going. But I'm gonna put a finer point on posting entries now. I did this on the flip chart at the beginning of the day. Sort of, sort of. But we're gonna make a finer point. Your the magic formula. This is the E equals M C. Squirt of accounting assets, equal liabilities plus equity debits on the left credits in the right. Now, intuitively, I think you figure this out because we've had enough examples. But just in case, how you posting account differs depending on the type of account. Okay, let me write down. I've got written down actually on here. What the differences are asset accounts get increased by debuting. So what you've seen me do is every time I increase cash, it's a debit. So you could make a little note on this. This is different graphic than what I have here. But you could make a note on this. If you want. Assets get increased by debuting. Okay. Next bull in port on the slide client pays $2000 cash for photography. We debit to increase an asset of $1000. We credit to increase sales. Which brings us something new. We just saw that equity is made up of revenue and expenses and we see that that sale is created, which means that a sale gets posted or increased by crediting. Okay, Next life liability accounts get in peak Priest by crediting in fact, liability and equity In case I didn't say it on the slide example, is it a. We purchased photography equipment on credit, which really haven't done much with we debit equipment. We increase in asset account, but we credit an account called accounts payable. We increase the liability account accounts payable. You almost have to memorize. Make a note to yourself on what's going on here, and I don't have laid out exactly this way on my stack of slides. Okay? Hopefully I can tie this formula into the debit and credit for you to make helping make this clear. Assets get increased by deboning on the left hand side of the equal sign. Liability and equity gets credited. Gets increased by crediting on the right hand side of the equal sign. So another way of saying it is I've got asset increases on this on the debit. I've got liability and equity increases on the credit side. Why does that matter? Because it does two things. This equal sign remains in balance. And the debits equal the credits one more time. The assets equal liabilities plus equity. This formula holds true. Number one debits, equal credits number two. Okay, Even when I teach undergraduates or MBA students who've never seen accounting before, you just have to about memorize this until you start getting the hang of it by doing transactions. Okay, so if you're at home and you see this, make a note of that. Make a note of that. It is not in my slide deck exactly like that Capital accounts. Remember and this is important worth showing a little bit different way. Because, remember, there's a difference between how common stockholders. I'll get it in just a sec. Wait. There's a difference between how equity is handled between sole proprietorships on the partnerships with one hand they call it Capital equity equals the sum of the capital accounts for sole proprietorships and partnerships. Equities of some of the capital. Bob's Capital. Jim's capital, Jos Capital, equals total capital. Okay, so one more time it's worth it. And it clears up a question that was asked in the last segment. Let's talk about the total capital. The business total. The total capital. The business is made up of Bob and Sue. They each have their own capital account built into QuickBooks. I'm going to see for capital Bob. See sues See. Okay, so we envision that you got five owners, five capital accounts. Su puts $1000 cash in the business. We would increase cash by deboning. She gets $ because she contributed capital investment cash. Okay. The total company equity also increases because this is for sue. All right, Bob puts in a piece of equipment. That's $500. We credit his capital because he invested equipment. Abbreviate it the capital for the whole company goes up for the equipment. And by the way, we would debit on account called equipment. That would be the other side of this transaction. We would debit cash for this. So, So far, we have capital of $1500. Okay, we haven't really talked about this. We had put a fine point on this. What about it? Withdrawal. You really haven't talked about what I did. Talk about it is It could be, um called anything You could call it salary. You could call it a return to Capitol. It really doesn't matter if you are taking dollars out of the business. We call it a withdrawal. Let's just keep it that simple. Is it alone? Is it Sally? Let's just keep it simple. It's a withdrawal. Let's say that Sue takes out $700. I'm gonna abbreviate the world withdraw. That's going to reduce the capital of the whole company. Sue W d for withdrawal. All right. The point I'm trying to make is is that in a QuickBooks system, the total capital is gonna be the some of these smaller accounts, okay, increased by contributions, decreased by withdrawals. One more thing and this gets to Josh, is the conversation that we have right at the end of the last second profit. We just saw that profit increases capital say it's $ profit based on a partnership agreement that profit will get. CAT will get credited to these two sub accounts. So in other words, if this one adds up to 3000 and they agree to split profit evenly, depending on the partnership agreement, we get a credit to Bob's account. 1500. We gets credit to Souza, count 1500 in the sub accounts, and they add up to 3000. All right, now. Careful, this is crediting profit. This is not taking money out, okay? It's sitting in their accounts. This is a withdrawal 700. This is just increasing the balance of the capital accounts, not a withdrawal. Okay, we just talked about capital. Now let's move to another screen, and we're gonna talk about common stock. The last point on this screen increased by capital contributions, we saw that it could be cash or equipment decreased by a payment to an owner Sue took out bucks. Or if you have a company loss, the profit increased the account by credit. If I had a loss, it would be a debit, and it would reduce these because if they take 50% of the prophet and share it, they give 50% of the los assigned to them.

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