Accounting terms in QuickBooks made simple: what you need to know to get started
So you just invested in QuickBooks online and you’re ready to go. But then you open it up for the first time, and you freeze. Your new software is speaking an accounting language that you don’t understand, and you feel done before you start.
You might be wondering if you needed to become an accountant to start a business!
I always say that QuickBooks is the best option for entrepreneurs and small business owners. But it doesn’t do you much good if you have no idea how to speak the language of accounting.
But never fear, I am here to help!
The good news is you don’t have to be an accountant to understand the most important accounting terms in QuickBooks.
Here I’ll share the top accounting terms you need to know, so you can start using your new software with more confidence.
Let’s start with the most basic QuickBooks question of all: what exactly is QuickBooks, anyway? It’s pretty simple, actually…
QuickBooks is a software solution. It’s designed to help you manage your business finances, all in one place. That means managing things like inventory, sales, cash flow, payroll, tax prep–basically all of your financial needs.
Now, one important thing to remember is that QuickBooks is a software. It’s not a set-it-and-forget-it solution. That means it’s only as smart as the one using it. AND you do have to get in there and USE it.
Luckily, you do NOT have to be an accountant to be smart enough!
Now, here’s a little run-down of the some basic accounting terminology you’ll find in QuickBooks, so you can get started with confidence.
First off, how do we define “accounting” itself?
Accounting is simply the keeping record of financial transactions. Nothing more complicated or mysterious than that! 🙂
Now, let’s over the most basic of ALL accounting terms: income and expenses. This one might sound totally obvious , but I want to start with the basic terms just to ensure we’re building a solid foundation. So let’s officially define these terms.
Income and Expenses
Income is simply money received. Revenue income is earned income, or the money you receive for your products or services. Interest income comes from things like bank accounts or cash back rewards.
Now, let’s talk about gross income vs. net income. Gross income is the amount of money you’ve collected. Net income is what is left over after you’ve paid all your expenses. Which brings us to…
Expenses. This is the money that you pay to run your business. It includes things like office supplies, business tools (including subscription fees for softwares), what you pay employees or contractors, etc.
Now that we’re clear on income and expenses, let’s move on to the next set of accounting terms you’ll find in QuickBooks.
Vendors and Customers
A vendor is a person or a company that sells products or services to others, and a customer is a person why buys products or services from you. QuickBooks allows you to track both.
Then there’s an optional tracking within QuickBooks known as Class/Location/Project. This tracking is to classify your income and expenses by department, office or location, separate properties you own, revenue streams, or any other meaningful breakdown of your business.
Employees, Contractors, and Professional Fees
Let’s break down how QuickBooks classifies people you might hire in your business.
Employees are people employed for wages or salary. They are paid through a payroll service (like Gusto, my personal favorite). When you hire employees, you provide the materials, training, and managing. You also set their hours, and they work exclusively for you.
Contractors and Subcontractors are businesses or individuals who provide a service, but unlike employees they are not on payroll. They work for multiple companies, set their own hours, and are responsible for their own taxes. The require a W9 form. Examples are cleaners, window washers, instructors, construction contractors, etc.
Professional Fees are another type of expense. It’s a similar situation to a contractor, but in this case more of a specific trade. Examples are accountants, lawyers, virtual assistants, coaches, etc. Also, as with a contractor, when you hire a company that provides services like this, you also need a W9.
Balance Sheets
A Balance Sheet is a statement of the assets, liabilities, and capital of a business. Basically, anything that is not an income or an expense will be on a balance sheet. You’ll find 4 sections on a balance sheet, and these are assets, liabilities, and owners equity and owners draws.
Balance sheet terms you need to know
Let’s go into a few terms that will help you understand balance sheets better!
First, there is Accounts Receivable, which is money that customers or clients owe to you. Then there is Accounts Payable, which is money that your company owes to a vendor (like bills or invoices).
Current liability refers to loans to be paid back to creditors within 12 months or less. Long-term liability refers to loans with repayment times of longer than 12 months.
Now, let’s talk about assets. Assets include things like furniture and equipment purchased that total over $2000 (anything smaller would be considered a general office expense), land, machinery, company vehicles, and buildings.
Then there is equity. This refers to ownership interest in a business. It’s sometimes this is referred to as “stockholders’ equity.” Owners’ equity is made up of the initial investment in the business, as well as any retained earnings that are reinvested in the business.
Profit and Loss (P&L) Reports
Now, let’s look at everyone’s favorite, the Profit and Loss, or P&L report! It’s simply a summary of how the business incurs its revenues and expenses for a specified period. It’s probably the one most of us are familiar with as the report that tells you how your business is really doing financially.
Here are a few common P&L terms for you:
Revenue/Income is the money earned for providing a service or selling a product. Then there is Cost of Goods sold. This refers to the cost of materials used in creating goods, along with the direct labor costs used to produce the good. Note that this only applies to tangible products.
Finally, the P&L includes expenses. This is the cost required for something, or the money spent on something. The chart of accounts represents the different types of expenses.
Now, of course there is a lot more to know, but these are the basics! I hope that this helps you begin to decipher the accounting terms in QuickBooks, so you can understand it better. AND, of course, make the most of this powerful software for your business!
So what do you think? What further accounting terms have you found in QuickBooks that were new to you? Leave me a comment below and I’ll give you my best answer. 🙂
Until next time,
Love, Light, and MONEY, Honey…
Kaylee
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