Basic Bookkeeping Principles:  Assets, Liabilities, Equity, Income And Expenses 

Accounting requires "Accounts".  There are five standard "types" of accounts.  There are numerous accounts within each "type" and this manual will go into more detail later.  Most businesses have more "Expense" accounts than they do "Income" accounts.   This is merely the result of how we report our business transactions on a tax return.  There are more categories of expenses on a business tax return than categories of income.  The standard "types" of accounts are: 

1.  Assets:  are resources that the business owns (cash, bank accounts, petty cash, customer receivables, fixed assets)

2.  Liabilities:  are claims against the resources (credit cards, lines of credit, bills from suppliers, loans outstanding)

3.  Equity:  is the difference between the "Assets" and "Liabilities".  Equity is also called "Net Worth" 

The first three account types mentioned - Assets, Liabilities and Equity - make up what is called the "Balance Sheet".  It is the most important report that a bank uses when deciding whether or not to give your business a loan.  The Balance Sheet tells the bank whether the business has averaged a net profit (including prior years) and tells the bank if your business has any worth or resources which would allow you to repay the loan. 

Association skills can help you remember names and concepts: 

Assets (the Good)

Liabilities (the Bad)

Equity (the difference) 

Of the five standard "types" of accounts, most people are familiar with the last two of the five: 

4.  Income Accounts (the money earned)

5.  Expense Accounts (the money spent) 

Similar to you trying to juggle your own personal bank book every month, a business can only survive if its income is greater than its expenses.  The money "in" has to exceed the money "out".  Income and expense accounts are not part of the Balance Sheet.  Their job is to track where the money is coming from and where it is going to.  The NET difference between income and expenses, however, does become part of the Balance Sheet.   

The report is called a "Balance Sheet" because the sum of the DEBITS must equal - or balance to - the sum of the CREDITS.  The Balance Sheet and other reports will be covered in this manual. 

The Accounting Equation 

Change is inevitable, and people often mistrust - and even fear - things they don't understand.  Over time, average people became somewhat mistrustful of accountants and bookkeepers.  The first attempt to put accounting into a statement that the layman could understand was undertaken in 1880 by a writer named Charles Sprague³.  He wanted to show that the accounting and bookkeeping (then called "book-keeping") are based on the science of mathematics.  Charles Sprague's thesis proposed that: 

"all the operations of double-entry book-keeping are  transformations of the following equation:

What I have + what I trust = what I owe + what I am worth or symbolically written H + T = O + X" 

"Trust" is subject to interpretation and not something that can be empirically measured.  In other words, it is a "variable".  If we remove the variable of "trust" from Charles Sprague's equation, we end up with: 

            What I have = What I owe + What I am worth 

We learned in this Chapter that "Assets" are the resources which an organization owns.  "Liabilities" are the claims against those resource.  And "Equity" is the difference between the Assets and Liabilities.  Using our version of Charles Sprague's thesis: 

"what I have" would reasonably be the "Assets"

"what I owe" would reasonably be the "Liabilities"

"what I am worth" would reasonably be the "Equity" 

Let's take Charles Sprague's equation and replace his words with modern terminology.  The result is the "Accounting Equation": 

What I have = what I owe + what I am worth

translates to

Assets = Liabilities +Equity 

The Accounting Equation is a mathematical equation for double-entry accounting used to "prove" the fiscal state of an organization.  The Accounting Equation is written:  Assets = Liabilities + Equity.

 EXCERPT FROM:  Chapter 7 

Vendor Centre And Opening Balances For Vendors 

See also Chapter 5 “Preferences”. 

See also Chapter 5 “Item List”. 

See also Chapter 5 “Sales Tax Code List”. 

See also Chapter 9 “Inventory & Inventory Items”. 

See also Chapter 14 "After Posting Customer & Vendor Opening Balances". 

NOTE TO USER:  An account in the Chart of Accounts and a name, code or item in a list can all be made “Inactive” when no longer useful.  Refer to this chapter section “Chart Of Accounts:  Making An Account Inactive Or Active” for details on “Inactive” and “Active”. 

NOTE TO USER:  If the federal, provincial or territorial taxes change in the jurisdiction where a business is located, the QuickBooks data entry procedures (including the “Tax Code” for all items in the “Item List”; “Sales Tax” in “Preferences” and the “Tax Codes” for each customer in the “Customer Centre”) need to be changed accordingly. 

CAUTION:  For classroom purposes, all dates are keyed using the current calendar “Year”. 

Accounting requires a CREDIT and a DEBIT for each transaction.   Vendor Opening Balances are no exception.  The CREDIT posts to Accounts Payable.  The DEBIT posts to an expense account called "Uncategorized Expenses".  QuickBooks creates this expense account when you record the first vendor Opening Balance. 

In QuickBooks, the transaction to post a charge from a Vendor in Accounts Payable is created as a "Bill". 

NOTE:  The account "Uncategorized Expenses" is only intended for use when starting a new company file.  Once opening balances are entered, make this account "inactive" as it is not intended for regular data entry. 

If your company owes money to vendors as of the Start Date, you will need to record each vendor's Opening Balance.    This is done when each vendor is added to the Vendor Centre. 

ACTION:  Click on the "Vendor Centre" icon on the Icon Bar. 

ACTION:  Right-click in the area at the left side of the screen (below the word “Name”) and click on “New Vendor” OR click on the “New Vendor” button at the top-left of the Vendor Centre”.  

  There are a few things to note regarding the "New Vendor" (the Vendor Template) window: 

- the most important is the "Address Info".  If you wish to print and mail cheques to your vendors this first tab must be completed

- the "Vendor Name" field is the first field that needs to be completed.  If your vendor is doing business under their personal name, this field must list the LAST NAME first, followed by the first name.  If the vendor is a company, type in the business name

- it is important to complete the "Vendor Name", "Company Name" and "Name and Address" fields

- there are 4 fields you need not complete:  "Mr./Mrs/…", "First Name", "M.I.", and "Last Name".  Instead, where the vendor is a "person", simply include their name in each of the "Vendor Name", "Company Name" and "Address" fields

- if your vendor is a person, include their FIRST name first in the "Company Name" and "Address" fields

- the "Address" field automatically displays the name the same way it is typed in the "Company Name" field

- to keep in touch with your vendors by phone complete the "Contact" and "Phone" fields

- it is not imperative to include "Terms" in vendor templates because the due date for Bills will revert to the default setting in "Preferences"

- if we have more than one vendor to add, we can click on the "Next" button after keying in all the information for the first vendor.  This allows us to add multiple vendors

- if you want to email purchase orders to your vendors, you must complete the "E-mail" field 

Remember to use the "Tab" key on your keyboard to move through QuickBooks activities or windows.  This ensures that you record data in the order that QuickBooks requires it.  In some fields, the information you typed in a previous field will automatically show in another field if you use your "Tab" key! 

NOTE TO USER:  Where a field displays with more than one line (such as the "Address" field in a vendor template), use the "Enter" key on your keyboard to complete all lines of the field. 

NOTE TO USER:  Where a business name begins with "The" such as "The Shoe Box", the "Vendor Name" field must be typed as "Shoe Box, The".  Always place "The" at the end of the vendor name in this field. 

NOTE:  If you right-click on an existing name, QuickBooks gives you additional report options specific to that name.  You can still add a new vendor by right-clicking anywhere in the “Vendors” section. 

TIMEBUSTER:  Where the vendor is a business, start typing the vendor name in the “Company Name” field.  Pressing tab to exit this field will cause the name to appear in the “Vendor Name” field AND the “Name and Address” field. 

ACTION:   Complete the “Address Info” area of the “New Vendor” window as shown here.  Use the “Tab” key to move through the window.  In the “Name and Address” field, the “Enter” key is required.