Section 1: Principles of Accounting

Any discussion of how to utilize QuickBooks to operate your company more effectively starts with a review of accounting fundamentals. For this reason, I make an effort to present the same knowledge in this chapter and the following two that you would learn in an introductory college accounting course. Naturally, I personalize the entire conversation to QuickBooks and the small-business setting. The accounting process in a small-business context while using QuickBooks is essentially described in this chapter and the following two chapters of this book.

You don't need to study this section or the one after it if you have accounting experience, know how to interpret an income statement and balance sheet, or how to write a journal entry. Take your time reading this chapter carefully if you are new to accounting and business bookkeeping. I begin the chapter by outlining the main goals of accounting in general terms. After that, I go over the standard financial statements that every reliable accounting system generates. I also go over some of the crucial accounting tenets and accounting philosophy. Finally, I briefly discuss tax accounting and income tax law.

The Purpose of Accounting

Peter O'Toole plays a peculiar professor in the film Creator. O'Toole's persona makes an attempt to persuade a young student to work as an unpaid research assistant at one point. O'Toole constructs a special 15-credit independent study course called "Introduction to the Big Picture" in response to the student's objections that he requires 15 credit hours. I go into detail about accounting's "big picture" in the following section. Accounting is fundamentally logical and flawless.

The broad views

The fact that accounting gives stakeholders access to financial information is the most crucial concept to comprehend. The individuals that conduct business with or engage with a company are known as stakeholders; these individuals include management, employees, investors, banks, vendors, government agencies, and bodies that may impose taxes on a company. More conversation about stakeholders and their information needs is warranted. Why? Because what an accounting system must perform depends on the information needs of these stakeholders.

Entrepreneurs, managers, and investors

The managers, investors, and business owners of the company fall under the first category of stakeholders. For this group to establish whether a business is profitable, financial data is required. Additionally, this group is interested in any data that can reveal if a company is expanding or declining as well as how healthy or ill it is. This group frequently need specific information in order to carry out its tasks and duties. A manager or business owner could be curious about whether clients are particularly profitable—or not. An active investor would be interested in learning whether product lines are expanding or shrinking.

Asset and liability record keeping information requirements are a connected set of requirements. An asset is something that a business owns, such as money, supplies, or machinery. A liability is a debt or obligation that the company owes, such as accounts payable and bank loans.

The amount of money a company has in its bank accounts, the goods it has in its warehouse or on its shelves, and the machinery it owns and employs in its operations must all be very carefully tracked by someone at the company, either a manager, bookkeeper, or accountant.

Nothing I've mentioned is very startling if you review the first two or three paragraphs. Yes, it makes sense. Anyone who manages a business, works for a business, or actively invests in a business needs to have a solid understanding of the company's finances in general and, frequently, in-depth knowledge of key assets (like cash) and obligations (such as bank loans).

External Lender and Creditors

Outside companies that lend money to a business and credit-reporting organizations that provide information to these lenders make up a second category of stakeholders. Before making a loan, for instance, banks seek to understand the financial situation and affairs of a company. The accounting software must generate the financial data needed by a bank to evaluate a loan request.

What details do lenders require? Lenders require evidence of a company's profitability and healthy cash flow. A company can easily pay off debt if it is making money and has positive cash flow. Additionally, a bank or other lender wants to see any assets that might need to be liquidated in the worst case to pay back a loan, as well as any other debts that could be considered claims on the company's assets.

Vendors frequently request financial data from a company. Trade credit is a common way for a seller to lend money to a business. This finding is relevant because sellers occasionally need special accounting. Authors are one type of vendor that a business like John Wiley & Sons, Inc. engages with. Wiley puts in a fair bit of labor to compute royalties-per-unit amounts and then reports and remits these amounts to authors in order to pay an author the royalty to which he or she is due.

Similar financial reporting obligations for vendors can exist in other companies. Franchisees (like the individual who owns and runs the neighborhood McDonald's) pay a fee based on their revenue. Retailers can receive rebates and incentives from the companies that make the goods they sell by doing special accounting and reporting.

Government institutions

The federal and state governments that have jurisdiction over the company are another predictable stakeholder that requests financial information from a corporation. Every company in the US is required to provide reports on its income, costs, and profits in order to accurately determine the amount of federal income tax (and frequently state income tax as well) that must be paid, and then to do so.

Companies with employees are also required to file payroll tax returns with the federal and state governments depending on variables including the number of employees, wages paid to employees, and unemployment benefits received by former employees.

One of the main responsibilities of an organization's accounting system is to provide this kind of financial data to governmental organizations.

Creation of business forms

Accounting systems often carry out a crucial role for businesses: creating business forms, in addition to the financial reporting mentioned in the previous paragraphs. For example, an accounting system virtually always generates the checks required to pay vendors. Additionally, payroll checks and invoices are created via an accounting system. Purchase orders, monthly customer statements, credit memos to customers, and sales receipts are just a few of the various business documents that are prepared by more advanced accounting systems, such those used by big businesses.