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In This Chapter

▶ Checking out the fiddle-faddle method of accounting

▶ Grasping how double-entry bookkeeping works

▶ Looking at an (almost) real-life example

▶ Figuring out how QuickBooks helps

The preceding chapter describes why businesses create financial statements and how these financial statements can be used. If you’ve read Book I, Chapter 1, or if you’ve spent much time managing a business, you probably know what you need to know about financial statements. In truth, financial statements are pretty straightforward. An income statement, for example, shows a firm’s revenues, expenses, and profits. A balance sheet itemizes a firm’s assets, liabilities, and owner’s equity. So far, so good.

Unfortunately, preparing traditional financial statements is more complicated and tedious. The work of preparing financial statements – called accounting or bookkeeping – requires either a whole bunch of fiddle-faddling with numbers or learning how to use double-entry bookkeeping.

In this chapter, I start by describing the fiddle-faddle method. This isn’t because I think you should use that method. In fact, I assume that you eventually want to use QuickBooks for your accounting and, by extension, for double-entry bookkeeping. However, if you understand the fiddle-faddle method, you’ll clearly see why double-entry bookkeeping is so much better.

After I describe the fiddle-faddle method, I walk you through the steps to using and understanding double-entry bookkeeping. After you see all the anguish and grief that the fiddle-faddle method causes, you should have no trouble appreciating why double-entry bookkeeping works so much better. And I hope you’ll also commit to the 30 or 40 minutes necessary to learn the basics of double-entry bookkeeping.

The Fiddle-Faddle Method of Accounting

Most small businesses – or at least those small businesses whose owners aren’t already trained in accounting – have used the fiddle-faddle method. For example, take a peek at the financial statements shown in Tables 2-1 and 2-2. If you’ve read or reviewed Book I, Chapter 1, you may recognize that these financial statements stem from the imaginary hot dog stand business. Table 2-1 shows the income statement for the one day a year that the imaginary hot dog stand business operates. Table 2-2 shows the balance sheet at the start of the first day of operation.

Table 2-1 A Simple Income Statement for the Hot Dog Stand

Table 2-2 A Simple Balance Sheet for the Hot Dog Stand

With the fiddle-faddle method of accounting, you individually calculate each number shown in the financial statement. For example, the sales revenue figure shown in Table 2-1 equals $13,000. The fiddle-faddle method of accounting requires you to somehow come up with this sales revenue number manually. You may be able to come up with this number by remembering each of the sales that you made during the day. Or, if you prepare invoices or sales receipts, you may be able to come up with this number by adding all the individual sales. If you have a cash register, you may also be able to come up with this number by looking at the cash register tape.

Other revenue and expense numbers get calculated in the same crude manner. For example, the $1,000 of rent expense gets calculated by either remembering what amount you paid for rent or by looking in your checkbook register and finding the check that you wrote for rent.

The balance sheet values get produced in roughly the same way. You can deduce the cash balance of $1,000, for example, by looking at the checkbook or, in a worst-case scenario, the bank statement. You can deduce the inventory balance of $3,000 by adding the individual inventory item values. You can calculate the liability and owner’s equity amounts in similar fashion.

Some of the values shown in an income statement or on a balance sheet get plugged – meaning that they’re calculated using other numbers from the financial statement. For example, you don’t look up the profit amount in any particular place; instead, you calculate profit by subtracting expenses from revenue. You can also, of course, calculate balance sheet values such as total assets, owner’s equity, and total liabilities.

Okay, I admit it: The fiddle-faddle method of accounting works reasonably well for a very small business as long as you have a good checkbook. So for a very small business, you may be able to get away with this crude, piecemeal approach to accounting.

Unfortunately, the fiddle-faddle method suffers three horrible weaknesses for a firm that doesn’t have super-simple finances:

✔ It’s not systematic enough to be automated. Now, admittedly, you may not care that the fiddle-faddle approach isn’t systematic enough for automation. But this point is an important one: A systematic approach like double-entry bookkeeping can be automated, as you can do with QuickBooks. This automation means that the task of preparing financial statements requires – oh, I don’t know – maybe five mouse clicks. Because the fiddle-faddle approach can’t be automated, every time you want to produce financial statements, you or some poor co-worker goes to an enormous amount of work to collect the numbers and all the raw data necessary to produce information like that shown in Table 2-1 and Table 2-2. In reality, of course, with more complicated financial statements, someone does much, much more work.

✔ It’s very easy to lose details. This sounds abstract, but let me give you a good, concrete example. If you look at Table 2-1, you see that the hot dog stand business incurs only three operating expenses: rent, wages, and supplies. If you know the operating expense categories that the business incurs, it’s fairly easy to look through the check register and find the check or checks that pay rent, for example. You can use a similar approach with the wages and supplies expenses. However, what if you also have an advertising expense category, a business license expense, or some other easy-to-forget category? If you forget a category, you miss expenses. For example, if you forget that you spent money advertising and, thereby, forget to tally your advertising expenses, that whole category of operating expense gets omitted from your income statement.

✔ It doesn’t allow rigorous error checking. This business about error checking seems, perhaps, nitpicky. However, error checking is important with accounting and bookkeeping systems. With all the numbers and transactions floating around, errors easily creep into the system. I discuss error checking more later in this chapter, but let me give you an example of the sort of error checking an accounting system can (and should) perform. Take a look at the example of the sales transaction. If you sell an item for $1,000, you can actually check that amount by comparing it to your record of what the customer paid. This makes sense, right? If you sell me an item for $1,000, you actually should be able to compare that $1,000 sale to the amount of cash that I pay you. A $1,000 sale to me should correspond to a $1,000 cash payment from me. The fiddle-faddle method can’t make these comparisons. However, double-entry bookkeeping can.

You see where I’m at now, right? I’ve admitted that you can construct financial statements by using the fiddle-faddle method. But I hope I’ve also convinced you that the fiddle-faddle method suffers some really debilitating weaknesses. I’m talking about something as important as how you can best manage the financial affairs of your business. These weaknesses indicate that you need a better tool. Specifically, you need double-entry bookkeeping, which I discuss next.

How Double-Entry Bookkeeping Works

After you conclude that the fiddle-faddle method is for the birds, you’re ready to absorb the necessary accounting theory and learn the bookkeeping tricks required to employ double-entry bookkeeping. Essentially, you need two things in order to work with double-entry bookkeeping. First, you need an understanding of the accounting model, and second, you need a grasp of the mechanics of debits and credits. Neither of these things is difficult. If you flip ahead a few pages, you can see that I’m going to spend only a few pages talking about this material. How difficult can anything be that can be described in just a few pages? Not very, right?

The accounting model

Here’s the first thing to understand and internalize in order to use double-entry bookkeeping: Modern accounting uses an accounting model that says assets equal liabilities plus owner’s equity. The following formula expresses this in a more conventional, algebraic form:

assets = liabilities + owner's equity

If you think about this for a moment and flip back to Table 2-2, you see that this formula summarizes the organization of a business’s balance sheet. Conceptually, the formula says that a business owns stuff and that the money or the funds for that stuff comes either from creditors (such as the bank or some vendor) or the owners (either in the form of original contributed capital or perhaps in reinvested profits). If you understand the balance sheet shown in Table 2-2 and discussed here, you understand the first core principle of double-entry bookkeeping. This isn’t that tough so far, is it?

Here’s the second thing to understand about the basic accounting model: Revenues increase owner’s equity, and expenses decrease owner’s equity. Think about that for a minute. That makes intuitive sense. If you receive $1,000 in cash from a customer, you have $1,000 more in the business. If you write a $1,000 check to pay a bill, you have $1,000 less in the business.

Another way to say the same thing is that profits clearly add to owner’s equity. Profits get reinvested in the business and boost owner’s equity. Profits are calculated as the difference between revenues and expenses. If revenues exceed expenses, profits exist.

Let me review where I am so far in this discussion about the basic accounting model. The basic model says that assets equal liabilities plus owner’s equity. In other words, the total assets of a firm equal the total of its liabilities and owner’s equity. Furthermore, revenue increases owner’s equity, and expenses decrease owner’s equity.

At this point, you don’t have to intuitively understand the logic of the accounting model and the way that revenues and expenses plug into the owner’s equity of the model. If you do get it, that’s great but not necessary. However, you do need to memorize or remember (for at least the next few paragraphs) the manner in which the basic model works.

This may seem like a redundant point, but note that a balance sheet is constructed by using information about a firm’s assets, liabilities, and owner’s equity. Similarly, note that a firm’s income statement is constructed by using information about its revenues and its expenses. All this discussion – all this tediousness – is really about how you collect the information necessary to produce an income statement and a balance sheet.

Now I come to perhaps the most important point to understand in order to get double-entry bookkeeping. Every transaction and every economic event that occurs in the life of a firm produces two effects: an increase in some account shown on the balance sheet or on the income statement, and a decrease in some account shown on the balance sheet or income statement. When something happens, economically speaking, that something affects at least two types of information shown in the financial statement. In the next few paragraphs, I give you some examples so you can really understand this concept.

Suppose that in your business, you sell $1,000 worth of an item for $1,000 in cash. In the case of this transaction or economic event, two things occur from the perspective of your financial statements:

✔ Your cash increases by $1,000.

✔ Your sales revenue increases by $1,000.

Another way to say this same thing is that your $1,000 cash sale affects both your balance sheet (because cash increases) and your income statement (because sales revenue is earned).

See the duality? And just a paragraph ago, you were thinking this might be too complicated for you, weren’t you?

Here’s another common example: Suppose that you buy $1,000 worth of inventory for cash. In this case, you decrease your cash balance by $1,000, but you increase your inventory balance by $1,000. Note that in this case, both effects of the transaction appear in sort of the same area of your financial statement: the list of assets. Nevertheless, this transaction also affects two accounts.

When I use the word account, I simply mean some value that appears in your income statement or on your balance sheet. If you look at Tables 2-1 and 2-2, for example, any value that appears in those financial statements that isn’t simply a calculation represents an account. In essence, an account tracks some group of assets, liabilities, owner’s equity, contributions, revenues, or expenses. I talk more about accounts in the next section, where I get to the actual mechanics of double-entry bookkeeping.

Here’s another example that shows this duality of effects in an economic event: Suppose that you spend $1,000 in cash on advertising. In this case, this economic event reduces cash by $1,000 and increases the advertising expense amount by $1,000. This economic event affects both the assets portion of the balance sheet and the operating expenses portion of the income statement.

And now – believe it or not – you’re ready to see how the mechanics of double-entry bookkeeping work.

Talking mechanics

Roughly 500 years ago, an Italian monk named Pacioli devised a systematic approach to keeping track of the increases and decreases in account balances. He said that increases in asset and expense accounts should be called debits, whereas decreases in asset and expense accounts should be called credits. He also said that increases in liabilities, owner’s equity, and revenue accounts should be called credits, whereas decreases in liabilities, owner’s equity, and revenue accounts should be called debits.

Table 2-3 summarizes the information that I just shared. Unfortunately – and you can’t get around this fact – you need to memorize this table or dog-ear the page so you can refer to it easily.

Table 2-3 You Must Remember This

In Pacioli’s debits and credits system, any transaction can be described as a set of balancing debits and credits. This system not only works as financial shorthand, but also provides error checking. To get a better idea of how it works, look at some simple examples.

Take the case of a $1,000 cash sale, for example. By using Pacioli’s system or by using double-entry bookkeeping, you can record this transaction as shown here:

Cash $1,000 debit

Sales revenue $1,000 credit

See how that works? The $1,000 cash sale appears as both a debit to cash (which means an increase in cash) and a $1,000 credit to sales (which means a $1,000 increase in sales revenue). Debits equal credits, and that’s no accident. The accounting model and Pacioli’s assignment of debits and credits mean that any correctly recorded transaction balances. For a correctly recorded transaction, the transaction’s debits equal the transaction’s credits.

Although you can show transactions as I’ve just shown the $1,000 cash sale, you and I may just as well use the more orthodox nomenclature. By convention, accountants and bookkeepers show transactions, or what accountants and bookkeepers call journal entries, like the one shown in Table 2-4.

Table 2-4 Journal Entry 1: Recording the Cash Sale

See how that works? Each account that’s affected by a transaction appears on a separate line. Debits appear in the left column. Credits appear in the right column.

You actually already understand how this account business works. You have a checkbook. You use it to keep track of both the balance in your checking account and the transactions that change the checking account balance. The rules of double-entry bookkeeping essentially say that you‘re going to use a similar record-keeping system not only for your cash account, but for every other account you need to prepare your financial statements, too.

Here are a couple of other examples of how this transaction recording works. In the first part of this discussion of how double-entry bookkeeping works, I describe two other transactions: purchasing $1,000 of inventory for cash and spending $1,000 in cash on advertising. Table 2-5 shows how the purchase of $1,000 of inventory for cash appears. Table 2-6 shows how spending $1,000 of cash on advertising appears.

Table 2-5 Journal Entry 2: Recording the Inventory Purchase

Table 2-6 Journal Entry 3: Recording the Advertising Expense

By tallying the debits and credits to an account, you can calculate the account balance. Suppose that before Journal Entries 1, 2, and 3, the cash balance equals $2,000. Journal Entry 1 increases cash by $1,000 (this is the debit). Journal Entries 2 and 3 decrease cash by $1,000 each (these are the $2,000 credits). If you combine all these entries, you get the new account balance. The following formula shows the calculation:

Beginning balance of cash $2,000

Plus cash debit from Journal Entry 1 $1,000

Minus cash credit from Journal Entry 2 –$1,000

Minus cash credit from Journal Entry 3 –$1,000

Ending cash balance $1,000

That darn bank

When I learned about double-entry bookkeeping, I stumbled over the terms debit and credit. The way I’d heard the terms used before didn’t agree with the way that double-entry bookkeeping seemed to describe them. This conflict caused a certain amount of confusion for me. Because I don’t want you to suffer the same fate, let me quickly describe my initial confusion.

If you look at Table 2-3, you see that an increase in an asset account is a debit and a decrease in an asset account is a credit. This means that in the case of your cash account, increases to cash are debits and decreases to cash are credits.

However, you’ve undoubtedly talked at some time to the bank and heard someone refer to crediting your bank account – which meant increasing the account balance. And perhaps that someone talked about debiting your account – which meant decreasing the account balance. So what’s up with that? Am I wrong, and is the bank right?

Actually, both the bank and I are right. And here’s why. The bank is talking about debiting and crediting – not a cash account and not an asset account, but a liability account. To them, the money that you’ve placed in the bank is not cash (an asset) but a liability (money that the bank owes you). If you look at Table 2-3, you see that increases in a liability are credit amounts and decreases in a liability are debit amounts. Therefore, from the bank’s perspective, when the bank increases the balance in your account, that increase is a credit.

Your assets may represent another firm’s liabilities. Your liabilities will represent another firm’s assets. Therefore, whenever you hear some other business talking about crediting or debiting your account, what you do is exactly the opposite. If the business credits, you debit. If the business debits, you credit.

Do you see how that works? You start with $2,000 as the cash account balance. The first cash debit of $1,000 increases the cash balance to $3,000 and then the cash credit of $1,000 in Journal Entry 2 decreases the cash balance to $2,000. Finally, the cash credit of $1,000 in Journal Entry 3 decreases the cash balance to $1,000.

You can calculate the account balance for any account by taking the starting account balance and then adding the debits and credits that have occurred since then. By hand, this arithmetic is a little unwieldy. Your computer (with the help of QuickBooks) does this math easily.

Almost a Real-Life Example

To cement the concepts that I talk about in the preceding paragraphs of this chapter, I want to quickly step through the journal entries, or bookkeeping transactions, that you would record in the case of the hot dog stand business discussed in the preceding chapter. To start, you need to know that the balance sheet shown in Table 2-2 is the balance sheet at the start of the day. This means that the account balances in all the accounts appear as shown in Table 2-7. This list of account balances is actually called a trial balance. It shows the debit or credit balance for each account.

I’m assuming that no year-to-date revenues or expenses exist yet for the hot dog stand business. In other words, the operation is just at a starting period.

Table 2-7 A Trial Balance at the Start of the Day

You may want to take a quick peek at Table 2-1, shown earlier. It summarizes the business activities of the hot dog stand. The journal entries that follow show how the information necessary for this statement would be recorded.

Recording rent expense

Suppose that the first transaction to record is a $1,000 check written to pay rent. In this case, the journal entry appears as shown in Table 2-8. In this example, $1,000 is debited to rent expense, and $1,000 is credited to cash.

Table 2-8 Journal Entry 4: Recording the Rent Expense

Recording wages expense

If you need to record $4,000 of wages expense, you use the journal entry shown in Table 2-9. This journal entry debits wages expense for $4,000 and credits cash for $4,000. In other words, you use $4,000 of cash to pay wages for the hot dog stand business.

Table 2-9 Journal Entry 5: Recording the Wages Expense

Recording supplies expense

To record $1,000 of supplies expense paid for by writing a check, you record the journal entry shown in Table 2-10. This transaction debits supplies expense for $1,000 and credits cash for $1,000.

Table 2-10 Journal Entry 6: Recording the Supplies Expense

Note that for each of the preceding transactions, debits equal credits. As long as debits equal credits, you know that the transaction is in balance. This balance is one of the ways that double-entry bookkeeping prevents errors.

Recording sales revenue

Suppose that you sell $13,000 worth of hot dogs. To record this transaction in a journal entry, you debit cash for $13,000 and credit sales revenue for $13,000, as shown in Table 2-11. I should tell you, however, that in the case of the hot dog stand selling hot dogs for a dollar or two apiece, you wouldn’t necessarily use a single journal entry to record sales revenue amounts. Though you could use a single journal entry that tallied the entire day’s sales, if you’re selling hot dogs at a dollar a dog, you could also record 13,000 one-dollar transactions. Each of these one-dollar transactions debits cash for a dollar and credits sales revenue for a dollar.

Table 2-11 Journal Entry 7: Recording the Sales Revenue

Recording cost of goods sold

You must record the expense of the hot dogs and buns that you sell. You must also record the fact that if you use up your inventory of hot dogs and buns, your inventory balance has decreased. Table 2-12 shows how you record this. Cost of goods sold gets debited for $3,000, and inventory gets credited for $3,000.

Table 2-12 Journal Entry 8: Recording the Cost of Goods Sold

If you’re confused about this cost-of-goods-sold transaction – it represents the first transaction that doesn’t use cash – flip back to Book I, Chapter 1, where I describe the two accounting principles. In short, these two principles go like this:

✔ Expense principle: This principle says that an expense gets counted when the item gets sold. This means that the inventory isn’t counted as cost of goods sold or as an expense when it’s purchased. Rather, the expense of the hot dog and bun that you sell gets counted when the item is actually sold to somebody.

✔ Matching principle: This principle says that expenses or cost of a sale get matched with the revenue of the sale. This means that you recognize the cost of goods sold at the same time that you recognize the sale. Typically, in fact, you can combine Journal Entry 7 and Journal Entry 8.

Another way to think about the information recorded in Journal Entry 8 is this: Rather than “spend” cash to provide customers hot dogs and buns, you spend inventory.

Recording the payoff of accounts payable

Suppose that one of the things you do at the end of the day is write a check to pay off the accounts payable. The accounts payable are the amounts that you owe vendors – probably the suppliers from which you purchased the hot dogs and buns. To record the payoff of accounts payable, you debit accounts payable for $2,000 and credit cash for $2,000, as shown in Table 2-13.

Table 2-13 Journal Entry 9: Recording the Payoff of Accounts Payable

Recording the payoff of a loan

Suppose also that you use cash profits from the day to pay off the $1,000 loan that the balance sheet shows (see Table 2-2). To record this transaction, you debit loan payable for $1,000 and credit cash for $1,000, as shown in Table 2-14.

Table 2-14 Journal Entry 10: Recording the Payoff of the Loan

Calculating account balance

You may already be able to guess this: If you know an account’s starting balance and have a way to add up the debits and the credits to the account, you can easily calculate the ending account balance.

For example, take the case of the cash account balance of the hot dog stand business. If you look at the balance sheet shown in Table 2-2, you see that the beginning balance for cash is $1,000. You can easily construct a little schedule of how the account balance changes – this is called a T-account – that calculates the ending balance. In fact, Table 2-15 does just this. If you look closely at Table 2-15, you see that the cash beginning balance is $1,000. Then, on the following lines of the T-account, you see the effects of Journal Entries 4, 5, 6, 7, 9, and 10. Some of these journal entries credit cash. Some of them debit cash. You can calculate the ending cash balance by combining the debit and credit amounts.

The information shown in Table 2-15 should make sense to you. But just in case you’re still trying to memorize what debits and credits mean, I’m going to give you a bit more detail. To calculate the ending balance shown in Table 2-15, you add up the debits, add up the credits, and combine the two sums. The net amount in the cash account equals the $5,000 debit. If you recall from the preceding paragraphs, a debit balance in an asset account, such as cash, represents a positive amount. A $5,000 debit balance in the cash account, therefore, indicates that you have $5,000 of cash in the account.

Table 2-15 A T-Account of the Cash Account

Cash is usually the trickiest account to analyze with a T-account because so many journal entries affect cash. In many cases, however, a T-account analysis of an account balance is much more straightforward. For example, if you look at Table 2-16, you see a T-account analysis of the inventory account. This T-account analysis shows that the beginning inventory account balance equals $3,000. However, when Journal Entry 8 credits inventory for $3,000 – this is the journal entry that records the cost of goods sold – the inventory balance is wiped out.

Table 2-16 A T-Account of the Inventory Account

Paying off the accounts payable and loan payable accounts is similarly straightforward. Table 2-17 shows the T-account analysis of the accounts payable account. Table 2-18 shows the T-account analysis of the loan payable account. In both cases, the T-account analysis shows that the liability accounts start with a credit beginning balance. (Remember that a liability account would have a credit balance if the firm really owed money.) Then, when the payments are recorded to pay off the accounts payable and loan payable in Journal Entries 9 and 10, the liability account is debited. The result, in the case of both accounts, is that the liability account balance is reduced to zero.

I’m not going to show T-account analyses of the other accounts that the preceding journal entries use. In every other case, the only debit or credit to the account comes from the journal entry. This means that the journal entry amount is the account balance. For example, only one journal entry affects the sales revenue account: Journal Entry 7, which credits sales revenue for $13,000. Because the sales revenue account has no beginning balance, that $13,000 credit equals the sales revenue account balance. The expense accounts work the same way.

Table 2-17 A T-Account of Accounts Payable

Table 2-18 A T-Account of the Loan Payable Account

Using T-account analysis results

If you or your accounting program construct T-accounts for each balance sheet and income statement account, you can easily calculate account balances at a particular point in time by using the T-account analysis results. Table 2-19 shows a trial balance at the end of the day for the hot dog stand business. You can calculate each of these account balances by using T-account analysis.

The first line shown in the trial balance in Table 2-19 is the cash account, with a debit balance of $5,000. This debit account balance comes from the T-account analysis shown in Table 2-15. The account balances for inventory, accounts payable, and loan payable also come from the T-account analyses shown previously in this chapter (Table 2-16, Table 2-17, and Table 2-18).

As I note in the preceding section, you don’t need to perform T-account analyses for the other accounts shown in the trial balance provided in Table 2-19. These other accounts show a single debit or credit.

I need to make one final and perhaps already-obvious point: The information provided in Table 2-19 is the information necessary to construct an income statement for the day and a balance sheet as of the end of the day. For example, if you take sales revenue, cost of goods sold, rent, wages expense, and supplies expense from the trial balance, you have all the information that you need to construct an income statement for the day. In fact, the information shown in Table 2-19 is the information used to construct the income statement shown in Table 2-1.

Table 2-19 A Trial Balance at End of Day

Similarly, the asset, liability, and owner’s equity balance information shown in the trial balance provided in Table 2-19 supplies the information necessary to construct a balance sheet as of the end of the day.

The end-of-day balance sheet won’t actually balance unless you also include the profits of the day. These profits, called retained earnings or lumped into the owner’s capital account, equal $4,000. You can see what this end-of-day balance sheet looks like by turning back to Book I, Chapter 1. In that chapter, Table 1-7 shows the end-of-day balance sheet for the hot dog stand business.

A Few Words about How QuickBooks Works

Before I end this chapter, I want to make just a few comments about how QuickBooks helps you. First of all – and this may be the most important point – QuickBooks makes most of these journal entries for you. In Journal Entry 6, for example, I show you how to record a $1,000 check written to pay supplies, but you would never have to make this journal entry in QuickBooks. When you use QuickBooks to record a $1,000 check that pays Acme Supplies for some paper products that you purchased, QuickBooks automatically debits supplies expense (as long as you indicate that the check is for supplies) and then credits cash.

Similarly, in the case of journal entries 7 and 8, when you produce an invoice that records a sale, QuickBooks makes these journal entries for you. For example, if you sold $13,000 worth of hot dogs and buns, and those hot dogs and buns actually cost you $3,000, QuickBooks debits cash for $13,000, credits sales revenue for $13,000, debits cost of goods sold for $3,000, and credits inventory for $3,000. In other words, for most of your routine transactions, QuickBooks handles the journal entries for you behind the scenes.

This doesn’t mean, however, that you can always avoid working with journal entries. Any transaction that can’t be handled through a standard QuickBooks form – such as the Invoice form or the Write Checks form – must be recorded by using a journal entry. For example, if you purchase some fixed asset by writing a check, the purchase of the fixed asset gets recorded automatically by QuickBooks. However, the depreciation that will be used to expense the asset over its estimated economic life – something I talk a bit about in the next chapter – must be recorded with journal entries that you construct yourself and enter a different way.

One other really important point: I note in the preceding paragraphs that the trial balance information shown in Table 2-19 provides the raw data that you need to prepare your financial statement. I don’t want to leave you with a misunderstanding, however. You don’t actually have to take this sort of raw data and prepare your financial statements. Predictably, QuickBooks easily, quickly, and effortlessly builds your financial statements by using this trial balance information.

Just to put these comments together, then, QuickBooks automatically creates most journal entries for you, builds a trial balance by using journal entry information, and – when asked – produces financial statements. Most of the work of double-entry bookkeeping, then, goes on behind the scenes. You don’t worry about many journal entries on a day-to-day basis. And if you don’t want to ever see a trial balance, you don’t have to. In fact, if you just use QuickBooks to produce invoices and to write checks that pay the bills, almost all the information that you need to prepare your financial statements gets collected automatically. So that’s really neat.

However, not all the information that’s necessary for producing good, accurate financial statements gets collected automatically. You’ll encounter a handful of important cases that should be handled on a special basis through journal entries that either you or your CPA construct and enter.