Research # 10

Assets: tangible and intangible items that the company owns that have value (e.g. cash, computer
systems, patents)

Liabilities: money that the company owes to others (e.g. mortgages, vehicle loans)

Equity: that portion of the total assets that the owners or stockholders of the company fully own; have
paid for outright(e.g.Common stock, dividends and retained earnings)

Revenue or Income: money the company earns from its sales of products or services, and interest and
dividends earned from marketable securities

Expenses: money the company spends to produce the goods or services that it sells (e.g. office supplies,
utilities, advertising)

The chart of accounts is a listing of all accounts used in the general ledger of an organization. The chart
is used by the accounting software to aggregate information into an entity's financial statements. The
chart is usually sorted in order by account number, to ease the task of locating specific accounts. The
accounts are usually numeric, but can also be alphabetic or alphanumeric.

Accounts are usually listed in order of their appearance in the financial statements, starting with the
balance sheet and continuing with the income statement. Thus, the chart of accounts begins with cash,
proceeds through liabilities and shareholders' equity, and then continues with accounts for revenues
and then expenses. Many organizations structure their chart of accounts so that expense information is
separately compiled by department; thus, the sales department, engineering department, and
accounting department all have the same set of expense accounts. The exact configuration of the chart
of accounts will be based on the needs of the individual business.

Example 1: Owner invests $5,000 in the company. Analysis: Since money is deposited into the checking
account, Cash is debited (the balance increased by $5,000). What account receives a credit? An Equity
account called Owner’s Equity or Capital Contribution. Since Equity accounts are ‘negative’ accounts,
crediting this Equity account increases its balance by $5,000.

Debit Cash (increase its balance)

Credit Owner’s Equity (increases its balance)

Number line showing negative accounts and positive accounts

Example 2: The Company borrowed $8,000 from a bank. Analysis: Since the money will be deposited
into the checking account, Cash is debited (the balance increased by $8,000.) The account to receive the
credit is a Liability account called Loans Payable (you may create a separate account or subaccount for
each loan). Liability accounts are credit accounts, so crediting the Liability account increases its negative
balance by $8,000 (move to the left on the number line).

Debit Cash (increases its balance)

Credit Loans Payable (increases its balance)

Example 3: Your bank charges you a $14 a month statement fee. Analysis: This transaction is entered via
a journal entry each month when the statement fee is identified on the bank statement. Since money
was removed from the checking account, Cash must be credited (the balance decreased by $14). The
Expense account called Bank Service Charges will receive the debit.

Debit Bank Fees (increases its balance)

Credit Cash (decreases its balance)

Example 4: You write a check for a loan payment of $540 for the $8,000 loan you acquired in Example 2.
Of this amount, $500 is being applied to the principal, and $40 is loan interest. Analysis: Since a check is
being written, the Accounting software will automatically credit Cash. In this case the debit is split
between two accounts. To reflect the $500 that has been applied to the loan balance, debit the loan
account. (Since it is a liability account, a debit will reduce it's balance, which is what you want.) The $40
interest paid is an expense, so debit the expense account called Interest. Remember that even though
the debit is split between two accounts, the total debit must always equal the total credit.

Debit Loans Payable $500 (decreases its balance)

Debit Interest Expense $40 (increases its balance)

Credit Cash $540 (decreases its balance)

Example 5: the Company wrote a check for $8,500 of equipment. Analysis: Since a check was written,
QBP will automatically credit Cash. We will debit an Asset account called Equipment or something
similar. Note: Remember, if you purchase an item for more than about $500, you should depreciate the
item; not expense it. ($500 is a "rule of thumb," but I am not suggesting you use it.) So the Asset account
receives the debit instead of an expense account. To record the depreciation, journal entries would be
entered for one or more years. Always consult with your Accountant when purchasing company assets.

Debit Equipment (increases its balance)

Credit Cash (decreases its balance)

[Remember: A debit adds a positive number and a credit adds a negative number. But you NEVER put a
minus sign on a number you enter into QBP.]

Example 6: the Company wrote a check for $318 of office supplies. Analysis: Since a check was written,
QBP will automatically credit Cash. We debit the Expense account called Office.

Debit Office (increases its balance)

Credit Cash (decreases its balance)

Example 7: the Company purchased $318 of office supplies on credit and you entered a bill into QBP.
Analysis: When you enter a bill, QBP automatically credits the Liability account called Accounts Payable.
And since you purchased office supplies, the Office expense account is debited.
Debit Office (increase its balance)

Credit Accounts Payable (increases its balance)

Example 8: You paid the bill for $318 of office supplies purchased in Example 7. Analysis: When the bill
was entered, Office was debited and A/P was credited. Now as we write a check to pay the bill, QBP will
automatically credit Cash. And QBP will debit Accounts Payable - in effect, reversing the earlier credit.

Debit Accounts Payable (decreases its balance)

Credit Cash (decrease its balance)

Number line showing negative accounts and positive accounts

Example 9: the Company paid $450 cash for Product A - a COGS part. Analysis: When you write the
check, QBP will automatically credit Cash. In the check window, choose the COGS account from the
Expenses tab, or choose an Item from the Items tab and then the COGS account associated with the
Item will be debited.

Debit COGS (increase its balance)

Credit Cash (decrease its balance)

Example 10: the Company sold Product A for $650 cash. Analysis: When you enter the cash sale, QBP
automatically debits Cash (or you could choose to deposit to Undeposited Funds - see Example 14). You
will have to choose an Item for the sale … it might be “Prod A income” and associated with the Sales
account.

Debit Cash (increases its balance)

Credit Sales (increases its balance)

Example 11: the Company sold Product A for $650 on credit. Analysis: When you create an invoice, you
must specify an Item for each separate charge on the invoice. QBP will automatically credit the revenue
account(s) associated with these Items. And QBP automatically debits the Invoice amount to A/R.

Debit Accounts Receivable (increases the balance)

Credit Sales (increases the balance)

Example 12: the Company received a payment for the $650 invoice above. Analysis: When you created
the invoice, QBP automatically debited the A/R account. When you post the invoice payment, QBP will
automatically credit A/R - in effect reversing the earlier debit. QBP will debit Cash.

Debit Cash (increases the balance)

Credit A/R (decreases the balance)

Example 13: The owner’s writes himself a check for $1,000. Analysis: Since a check was written, QBP will
automatically credit Cash. The account you chose for the debit is and Equity account called Draw (Sole
Proprietor) or Distribution (Corporation). Note: These are the only non-contra Equity accounts that are
positive accounts and receive debits.

Debit Owner’s Draw (increases its balance)

Credit Cash (decrease its balance)

Example 14: the Company has many sales receipts during the day, but you would like one deposit to
Cash for the entire day's sales. Scenario: You receive over 50 cash payments each day, enter each
transaction into QBP, put the money/check in the cash drawer, and take the lot to the bank at day’s end.
For each cash sale, you use Create Sales Receipt. For payment of an invoice, you use Receive Payments.
You may also opt to enter a payment directly using Record Deposits. (Terminology may vary with
different versions of QBP.)

For each transaction, you must tell QBP where to deposit the money. If you choose Cash each time, you
will have over 50 transactions in your QBP check register for that day and every day! Not good. Wouldn't
it be nice if you had just one deposit to Cash in QBP to mirror the actual bank deposit? This would also
make balancing your checkbook easier. You can accomplish this by using the Undeposited Funds
account - the “cash drawer” of QBP.

The Undeposited Funds account acts as a temporary holding place. When you enter each transaction
into QBP, deposit the money to Undeposited Funds instead of Cash. THEN, at day’s end, transfer the
money from Undeposited Funds to Cash. This gives you one deposit (debit) to Cash in QBP for the day as
desired.

How is this done? Click Record Deposits. In the Payments to Deposit window you should see all the
payments you posted to Undeposited Funds. To deposit them to Cash, click “Select All” and click OK. You
will now have one deposit in your QBP check register … just like the actual deposit you will take to the
bank.

Important Note: Once you have deposited to Undeposited Funds, each time you go into Record Deposits,
you will first be presented with the Payments to Deposit window. If you do not want to transfer the
money sitting in Undeposited Funds but want to actually make a deposit, just X out of this window and
then you will be presented with the Record Deposits window.