Easy Accounting: Simple Steps, Simple Solutions

INTRODUCTION

Why are You Doing This?

Hello and welcome to Easy Accounting: Simple Steps, Simple Solutions . If you are starting a small business, you already have one, or if you’re considering going freelance and the idea of keeping track of everything scares you, you’ve come to the right place. If you’re a student of accounting – or you are mystified by accounting and just want to learn more about accounting from someone who does this for a living and can explain it in plain English – you’ve also come to the right place.

My name is Becky Egan, and I’m a CPA with a tax practice in Manhattan. This means I like numbers and I like accounting – but I also have a teaching mindset so I like to explain accounting to anyone who will listen. My firm works with hundreds of small businesses and freelancers every year to prepare their taxes, and we also help them organize their finances. We work with countless folks each year who are very successful in their own industry but who come into the office saying that they don’t ‘get’ money, or that they’re ‘not good at’ finances. I’m here to tell you that everyone – and I mean everyone – I’ve worked with can be taught to understand accounting. I’ve trained hundreds of folks on QuickBooks – my preferred method of accounting recordkeeping – and I haven’t had a single failure yet.

Why do you want to have a good accounting system in place? I start every training session with a new client by reminding folks that you have two reasons for doing your bookkeeping. The first is what most folks think of first, and it’s actually the least important – for taxes. Yes, I’m a CPA in tax practice, and yes, my firm files thousands of returns each year, so I’m constantly thinking about taxes. But even I realize that it’s pretty complex to set up a bookkeeping system just for tax purposes. Don’t get me wrong, I love when my clients have accurate financials all ready for me at tax time – makes my job much easier. But the number one most important reason to do your books is for yourself and your business. You want to see where the money is coming from, when it’s coming in, how much you spend each month and why, and what your profit is. That is the most important reason to do your books – so you can unlock valuable data to help you make decisions about your business.

Also, and this is a lesser-known benefit to accounting, when you keep a set of books, everything gets entered in two places. This is called double-entry bookkeeping, and we’ll get to the specifics of it later. But for now, realize that when your books are balanced, every debit matches a credit, the Assets equal the Liabilities and Equity, and there is a harmony in the universe. How many other areas in your life tie out this neatly? Very few, I’d wager. There is something amazingly satisfying and therapeutic about the accounting process.

This book is different from a traditional accounting book – and not only because I’ve just posited that accounting has mental health benefits! I wrote this book after giving countless QuickBooks training sessions to my clients over the past 10-plus years. In each session, in order to train my client in how to use QuickBooks, I have always spent time explaining the general principles of accounting first – and then expanding on those principles during the lesson. I realized after giving so many lessons on accounting basics that I’d developed an easy-to-understand way to walk folks through the basic tenets of accounting. And because accounting is something I love so much but which is often confusing to people, I wrote this book to share my passion for accounting by explaining it in an easy-to-understand way.

The book opens with the very basics in Part One where we’ll tackle the basic financial statements, the chart of accounts, debits and credits, journal entries, T-accounts, and more. If what I’ve just written sounds like a foreign language, don’t worry, we’ll go through these concepts in detail with lots of examples while we go.

Part Two gets into more advanced accounting topics – cash versus accrual, depreciation, inventory and more. These are topics that include words you’ll hear about often, and they will no longer be mysterious.

At the end of both Part One and Part Two, you’ll have some exercises you can try on your own to see if you’ve gotten the hang of it. It’s vital that you really do these! Going through the process of making journal entries, posting to the T-accounts and preparing the financial statements is how you’ll cement this knowledge into your brain, and you’ll have a deeper understanding of the concepts you have read about.

So, as I tell my clients when I send them off to do QuickBooks homework, pour a glass of wine, get comfy and get ready for some easy accounting!

Part One

Easy Accounting Basics

CHAPTER 1

The Big Two Financial Statements

Whenever I begin explaining accounting to people, I like to begin with the end in mind – the financial statements! For business owners, investors and tax preparers, we need financial statements in order to evaluate our businesses, to evaluate the viability of investing in another business and to prepare our tax returns. Financial statements are reports, and they are produced by summing up all the various transactions that happened over a period of time.

The two big financial statements we’re going to focus on here are:

■The Balance Sheet (aka the Statement of Financial Position) and

■The Income Statement (aka the Profit and Loss Statement)

These two statements are both critical, and they tie together in a very neat way.

The Balance Sheet

What is a Balance Sheet? Also known as a statement of financial position, it shows what you OWN, minus what you OWE, and the RESULT is your Equity. It’s important to note that the balance sheet is a snapshot, not a filmstrip. This means that the balance sheet shows where you are at a specific moment in time – nothing more. Your balance sheet could change dramatically the day after you prepare it. Keep this in mind as you review balance sheets from other companies as well.

When you look at a balance sheet, you’ll notice there are three components:

1)