welcome back to the small business
university in this video we're going to
talk about bookkeeping basics and
several of the videos inside the SBU the
small business university are designed
to cover bookkeeping we want to be able
to train you in such a way that you can
do most any bookkeeping or financial
work that you need to do in your
business yourself so to some degree this
video here is going to start getting
into some of the details about financial
record-keeping and we're going to be
talking about debits and credits we're
going to be talking about ledger
accounts so in order to be a decent
bookkeeper for your business you have to
be interested in getting into the
details of bookkeeping and learning how
to do some of this if you have
absolutely no interest in bookkeeping do
not try and attempt it yourself and you
should probably go out and hire someone
to do this work for you but let me say
this the best business owners that I
have ever worked for started out trying
to do most of their own bookkeeping and
there's a simple reason for that
accounting is the language of business
and understanding what was going on in
their business was impossible if they
did not try and learn how to do some
bookkeeping understand financial reports
and understand how all of this works so
if you're interested in giving yourself
the best opportunity for success I would
actually I would really encourage you to
try and watch these bookkeeping videos
and practice and learn this yourself you
will not be sorry if you take the time
to do it alright let's take a look at
the agenda here so I have five different
things that I want to go over today
first we're going to talk about the
financial statement and what is in it
what it means then we're going to go
into double-entry accounting I promise
you this is not an accounting level
college class I'm going to try and
explain it very simply
you will get it at the end of the video
I think
and then transaction workflows we'll
talk about some banking and then we're
going to do a software overview where
I'm going to show you around QuickBooks
Online the software that we recommend
and use in our practices each day I'm
going to take you on a little
introduction tour because in the next
videos you'll need to know your way
around around the software to some
degree so to get started with financial
statements what I've got on the screen
is the two statements that you need to
get familiar with and when we're doing
bookkeeping when we're doing financial
statement accounting for our businesses
it is in the pursuit of trying to create
these two statements so one is the
balance sheet and one is the income
statement now first off the income
statement is often called by some others
the profit and loss statement they are
one in the same however and I will
mostly use the word income statement
because I think it's more official and
it's what most of us accountants say
when we mean a profit and loss but even
in the quickbooks world they still call
that statement of profit and loss
so profit and loss income statement same
thing alright so when we're doing
bookkeeping we're trying to create these
two statements let's go over very
generally what is in them first in the
balance sheet the first thing to
understand about the balance sheet is
the balance sheet is taking a snapshot
in time so if it is ten o'clock on
Wednesday it is like a camera taking a
snapshot of your assets your liabilities
and your equity and what it's saying is
in that moment this is what you owned
asset wise what you owed in liabilities
and what your equity was in your
business now the first calculation to
kind of understand about the balance
sheet is is its assets minus liabilities
equals equity so if you think about that
if you had assets of $100 and you had
debts or liabilities of $50 100 minus 50
equals $50 that's the equity you have in
your business because if you were to
liquidate your business today you would
need to pay off your debts the you would
have to spend $50 of your cash to do
that and you'd be left with $50 so
assets minus liabilities equals equity
now up at the top of the balance sheet
are the assets and you'll have things
like current assets investments property
plant and equipment don't get too
worried about these quite yet we'll dive
into these in the in the deeper dives
into bookkeeping but just know that
these are usually things that are of
some value and are kind of good guys
you know assets are good to own in
general right you want assets so I try
and think of assets as these are the
things I'm glad I have liabilities on
the other hand are generally things
where we owe something to someone or
some other group and I try and think of
liabilities as they're not bad sometimes
you need to take on loans to grow your
business right but they aren't
necessarily something you want around
there they're kind of this thing of yes
sir
I'll have it but I don't want it so in
many ways very healthy businesses in a
very simplistic way would only have
assets they'd have no liabilities and
thus all their assets would also be
equity right because if you had a
hundred dollars in assets and zero
liabilities you'd have a hundred dollars
in equity stockholders equity is often
kind of confused with what your business
is worth don't think of it like that
keep keep that in a different kind of
conversation we'll talk about that in
the small business university but but
don't really think that's what your
business is worth your business is worth
usually a multiple of what it makes or
what it has but equity is really of the
place where we're saying this is what we
have accumulated so think of it that way
this is what we own outright and have
accumulated for arson
and our owners so going back to the
beginning here assets good guys
liabilities not good guys and then
equity is what we have accumulated for
ourselves
thus it is assets minus liabilities
equals my equity
now the other statement is the income
statement and this is one that most even
new business owners and most business
owners probably pay attention to the
most because this is kind of like a
scorecard of how your business is doing
whereas the balance sheet is a snapshot
of things that you own or oh this is
about how much you're making how much
you're spending and what your net income
is at any given time as opposed to the
balance sheet which was a snapshot in
time the income statement is is run for
a length of time so you may run it for
Monday through Friday you may run it for
January through June and most often
you'll run it for January through
December so you can see it's timeframes
it's not a snapshot in time and each
time you run this you're gonna have some
very common elements the first is going
to be revenues revenues are another way
of saying money you have earned income I
don't like to say income very much we in
accounting we typically say revenues a
lot more because income is is a word
that a lot of times we name these
different accounts so when we're trying
to talk about all of them together we'll
say something like revenues so at the
top of every income statement is a a
Grigore a totaling of all the revenues
that you've earned for that time period
so if you're running an income statement
for January your revenues are going to
be different that if you're running an
income statement for January and
February because that income statement
captures both months whereas the one run
for January just captures one the same
is true for expenses
now just like revenues expenses are the
money that is going out it's going out
the door so revenues in expenses money
going out and what we're trying to
figure out in an income statement is
revenue minus expenses equals net income
okay now something I try and point out
as quickly as I can is notice how
revenues are all positive numbers and
also how expenses are all positive
numbers don't ever think that an income
statement is supposed to be positive
here because this is income and then a
bunch of negative numbers down here
that's actually not how it works because
the net income is trying to subtract a
positive number and a positive number so
if you ever see on your income statement
any kind of negative values that should
be a quick indicator that something may
be wrong the same is true over on the
balance sheet all assets liabilities and
stockholders equity generally are
positive and if you see things that are
negative on your balance sheet although
there's a couple of things that can
normally be negative on a balance sheet
and we'll get into that but for the most
part everything's supposed to be
positive here if there's one thing you
leave with in this video today it should
be if I see negative amounts on my on my
financial statements at any point I
should ask myself is something wrong and
that will save you quite a bit of
headache in your life because trust me
it is it is a very quick thing that US
accountants do as well to try and figure
out if things are going right now let's
talk a little bit about double-entry
accounting and what I'm going to do here
in a moment is bring in copy like real
copies of a profit and loss in a balance
sheet but before I do that I want to
kind of just touch on this idea of what
is double entry accounting so double
entry accounting was invented hundreds
of years ago and basically what it says
is for every transaction two things
happen and those two things are called a
debit and a credit now in your life you
have heard these terms before and they
mean things to you usually a credit
means that you got a credit on a
statement or you increased value in
way it's a it's a credit I'm glad I got
that credit even on a tax return when
you get a credit on a tax return right
that's good it helps to offset you the
tax that you owe right and a debit by
the same token you may believe is a bad
thing a debit is where they're
subtracting money away from you that
kind of thing I get it but for
accounting purposes do not think that
way when we're talking about double
entry accounting because really and this
is what one of my professors want stop
being debit just means left side and
credit just means right side and what he
really means to say is and what it what
to get down to the essence of that debit
and credit are just ways to to say there
are two transactions or two entries in
every transaction and so debit in the
accounting world can mean increase or
decrease and credit can mean increase or
decrease so whenever we start talking
about these things just know that you
got to lose the connotations and say
debits and credits can be anything
really what matters is that they are the
separation of entries in a transaction
here in a moment I'm going to I'm going
to show you a example transaction where
a company makes a bank deposit and what
happens and when they write a check what
happens D R stands for debit see R
stands for credit so in a bank deposit
and we're going to get into this here in
a second cash is debited for $100 and
revenue is credited for $100 in fact
however this is a great explanation
this means your cash went up it was a
debit and your cash went up and on your
credit side your revenue went up and
we're gonna get into some of that when a
check is written on the debit side your
expenses really did go down and on the
credit side your cash really did go down
so here is an example where both things
went down both things went up here both
things went down here so see debit and
credit has nothing to do with what you
believe they are they're just a
separation of entries now before we get
into explaining this a little bit more
let me pull over
a PDF that I've got that shows a little
bit more about and I'll shrink this down
a little a little bit more about what a
profit and loss and balance sheet looks
like in a little more complex form so
this is the profit and loss ie the
income statement and you can see that it
says October 2016 what that means is
that this income statement is for
October 1st through October 31st 2016
and you can see at the top it's got
several income items income income
income all of these things now look
right here pest control services
negative 30 and that's an income that
could be a problem couldn't it same up
here this is discounts given so this
actually is is probably okay because
it's a discount to the to this amount
but right down here pest control
services be a negative 30 in the income
item you might want to look at that
because what that really means is that
in pest control services more money went
out then came in and it may be that it
needs to be down here in expenses but as
you can see we add all of these things
up to get total income right here and
then we start the expenses the first
expense we see is cost of goods sold
which is a way of expensing things that
we may maintain an inventory and then we
have a whole bunch of other expenses
advertising equipment all of this and as
we scroll down through all these
expenses noticing that they're all
positive - we come down to net operating
income and this is what the revenue
minus the expenses in total equal and
this means this is what you made this
was your profit for the month now it
looks like there's another miscellaneous
expense here that was not up here that
now has got the income all the way down
to 163 you know 163 dollar loss that
negative right there means you actually
lost money you had more expenses than
you had an income but it it illustrates
how this how this this report works
let's take a look at the balance sheet
I'll shrink this down just a little bit
- and the balance sheet at the top says
balance sheet as of October 31st 2016 so
what's this saying this isn't for
October 1st through October 31st
remember a balance sheet is a snapshot
and so this is a snapshot just on this
day October 31st 2016 and on that day we
had total assets of 24,000 336 and you
can see some of them are bank accounts
some of it is that people owe us money
some of it is inventory and undeposited
funds funds that we've received from
from customers but we haven't taken to
the bank yet and then this is a truck so
these are all assets now if I scroll
down these are all things that we owe
this is accounts payable the bills that
we have this is our MasterCard balance
right now
these are payroll and loans that we have
to pay out to two different boards of
tax due and a loan payable and then this
is a big note payable at 25 thousand
dollars so these are all liabilities
right here we have 31 thousand dollars
worth of liabilities we'll wait a minute
Chris if we've got $31,000 for the
liabilities but only 24,000 of assets
don't we owe more than we then we have
you're absolutely right look here the
equity is negative the equity is
negative negative seven thousand 641
when your liabilities exceed your assets
you you have negative equity that means
you owe more in your business than you
have now one thing to notice see how
total assets right here is 24 3 36 and
total liabilities and equities 24 3 36
those always will match so assets total
assets will always match total
liabilities plus equity and the other
equation that we use for the balance
sheet is assets minus liabilities equal
equity so that's why these two things
always balance out so that's that's kind
of what a real financial statement looks
like and if we were trying to figure out
if this looks good look there's mostly
positive numbers here positive positive
positive positive except for the equity
section and the equity section can be
negative if liabilities exceed assets
but for the bus
everything else at least on the first
review may be pretty good now let me
move this back out of the way and we
will move on to the next slide here so
in double entry accounting the first
example I want to kind of talk about is
this depositing 100 dollars to the bank
this first example and what's happening
is this is going to illustrate double
entry accounting because there's two
things happening even though it seems
like maybe just one transaction that is
you're just taking $100 to the bank well
on the balance sheet okay this is where
your checking account lives and when you
took that hundred dollars to the bank
what happened on the balance sheet
that's right cash went up by a hundred
dollars so just like when you think of
your checkbook on the balance sheet when
you take a deposit to the bank your cash
went up a hundred dollars so that's one
entry of double entry accounting at the
same time this hundred dollars that you
got was from a customer okay they paid
you a hundred dollars for a service that
you provided so there's an entry on the
income statement on revenue that went up
a hundred dollars because your income
statement needs to reflect that you've
earned $100 at this point so in very
simple terms your revenue went up a
hundred dollars and the check you
receive was for the work you did do you
is this starting to make sense
see how there's two things always happen
balance sheet account went up income
statement account went up now there can
be times where an income statement
account went up and an income statement
account went down those are the two
entries or there can be times when a
balance sheet account went down and
another balance sheet account went down
that can happen and I'll show you some
of those here in a little bit but no
matter what there are two things that
happen doesn't mean they have to be one
on each is my point does it have to be
one on balance sheet and one on income
statement it can be both of them here
both of them here or one here and one
here as this transaction was alright now
let's look at another one this is now I
am cutting a check to pay my electric
bill
okay and in this case right on just the
opposite of what happened with revenue
on the balance sheet whenever I sent
that check out the door and essentially
it got cashed fifty dollars went out of
my account so my balance sheet account
went down now my balance sheet account
looked down by fifty dollars of this
check also on the income statement I
need to record the expense and the
expense went up fifty dollars now here's
where people sometimes get confused and
that's why I emphasize on the income
statement there's never a negative
number because you may be looking at
this going well this went down fifty why
didn't this go down fifty well because
when we're increasing expenses it's a
positive thing we're increasing the
expense now later the income statements
going to subtract this from revenue but
never put a negative amount in an
expense account it's always positive but
it's still the same transaction you
increase your expenses thus you spent
money and so on the income statement
you're showing an expense and your cash
went down let's take a look at it in the
aggregate now so on the balance sheet as
a summary both transactions on the
balance sheet in our cash account we
increased it by hundred dollars but we
also decreased it by fifty dollars women
paid that out so the ending balance and
in our balance sheet is fifty dollars
the income statement had something
similar go on we've booked revenue for a
hundred dollars we had the electric
expense go up by fifty dollars and that
means our profit is just fifty dollars
this transaction in this transaction are
double entry accounting and then this
entry in this entry is double entry
accounting so you had two transactions
each with two entries and they affected
both the balance sheet and the income
statement so that is a very high level
look at double entry accounting as we go
through bookkeeping we're not gonna stay
in this double entry accounting mode of
things we're gonna get into the actually
what you would do in the software when
you're doing each of these but getting
some kind of basis of what all of this
is doing in the background is is always
a good idea so let's let's move on now
and we'll we'll jump into some more
topics here the
transaction workflows is really what
we're going to talk about from almost
here on out because understanding all
the different kinds of transactions and
things that can go on in your business
and what to do inside your bookkeeping
software is the best training you can
have when it comes to accounting in this
video I'm going to show you a few
different workflows namely receiving
money paying expenses these are similar
to what we just went over in the
simplified examples and then withdrawing
profits from your business so let's say
you made some money it's the end of the
month and now you want to pull those
profits and and give them to the owners
I'm going to show you how to do that
later in the in the future videos we're
gonna go over more complex things such
as purchasing inventory and such as
paying employees we will get into how to
do checks that have bounced we'll get
into how to do larger transactions with
multiple accounts going on so we're
going to show you how to do everything I
think that you would need to do for your
business but let me let me show you
these three here real quick so first off
is gonna be money from a customer and
I've got I've got kind of a workflow
here you can see how we start here right
and we kind of work our way to the right
and then down and then work our way back
over to the left and I'll kind of
explain just this is up just high-level
but kind of an idea of what's really
happening in our bookkeeping software so
when we have a customer that we've done
work for okay and we're about to
kick-off the customer needs to pay us
process the first thing we're going to
do is we're gonna create an invoice or a
sales receipt will define what some of
these are in in future videos but we're
gonna create an invoice or a sales
receipt in our software and we send that
to the customer the customer then is
gonna pay us either by a cheque credit
card or cash write that payment is then
matched to this invoice to where now
that invoice or sales receipt no longer
shows us outstanding it shows that it
has been paid and basically almost you
can think of it like it cancels itself
out
when the payment is matched to the
invoice or sales receipt the cheque or
the cash then goes to the bank right and
the credit-card deposit will go to your
bank in like three days so while checks
and cash go to the bank today right
because you drive it there the
credit-card deposit you don't get
anything you just get kind of a receipt
that it's happened and then two or three
days later that cash will fall into your
bank account what is then happening is
revenue and cash right revenue on the
income statement and cash on the balance
sheet both of those accounts increase
boom boom just like we had in our
previous example and then the receipt is
provided and the transaction is complete
now as you know or maybe have instincts
of there's other things that are going
on there but this is the essence of it
this is the essence of it and getting
that that foundation right is critical
to knowing what to do inside the
bookkeeping software later as we're
going through specific examples and how
to do things let's take a look at an
expense type of item and this is paying
vendors so the process is very similar
it it's money going out the door rather
than coming in the door but this is one
of the things you'll notice about
accounting once you get the hang of it
things are very similar regardless of
which direction money is flowing so in
this case the vendor sends us a bill and
we enter it into our bookkeeping
software that we owe this person kind of
like when we entered an invoice that
someone owed us in this case we're
entering a bill to say we owe someone we
then pay the vendor with a check of
credit card or cash the payment just
like in when we were talking about an
invoice the payment is matched to the
bill meaning that ok now this bill is no
longer outstanding the cheque or the
cash if you paid if you paid the vendor
via checker cash that that cash leaves
the bank doesn't it so now when he
cashes the check or gets your cash it
has left the bank and a credit card if
you pay by credit card shows us a charge
on your credit card bill what happens
then is expenses on your income
statement increase
because we just paid somebody so
expenses increase and the cash that you
paid them with decreases on the balance
sheet little weird thing is if you have
a credit card your your cash may not
decrease in fact your liabilities go up
because you have a you have a loan
essentially now right so that's a
liability not an asset but in either
case the balance sheet account it
accounts are affected depending on
whether you use cash or check versus
credit card but they're both very simple
and we'll show you how to do all that
finally after all of that has happened
the verification of the payment
transaction or the verification of
payment is sent to you ie like a like a
receipt from the vendor and then the
transactions complete again so these are
very similar right I mean if you're
looking at money from customer versus
paying vendors it's a very similar type
of transaction and that's why it's gonna
be so easy for you to get the hang of
doing your own bookkeeping cuz trust me
once you once you start to see all this
you say oh this is this is pretty simple
now the last one I want to show you is
how do you withdraw profits and this is
really easy so let's say that you've
operated for the month and it's the end
of the month and you've made $5,000
profit so you're you can think of your
revenue as maybe ten grand ten thousand
and your expenses were five thousand and
so you made five thousand right ten
thousand minus five thousand in expenses
equals five thousand profit well if the
income statement shows profit you can
then via check or cash just transfer
that money out so you literally goat
into the corporate checking account and
you transfer five thousand dollars from
the corporate checking account to your
personal account and what happens is the
cash on the balance sheet goes down
right because you transferred five
thousand away from it but here's an
example of where both entries are on the
balance sheet because this is not an
expense when you withdraw profits and
this kind of a point of this slide when
you withdraw profits it is not an
expense like you paid your utility bill
this is an equity transaction meaning
whenever you earn that five thousand
dollars profit
usually on the balance sheet right
remember the balance sheet right here on
your balance sheet under equity you
would have five thousand because that's
what you made you you had your earned
cash and you made five thousand dollars
well when you pull that out your equity
account goes down by five thousand
dollars so your cash account went down
which was an asset and your equity
account went down which was part of the
liabilities and equity section in your
balance sheet so that is a that is a
transaction where it just it's the
balance sheet never ever ever ever ever
I'm being very literal right make
distributions to yourself where you are
taking profits out of the business or a
loan or anything else never let that hit
the income statement because that is not
an actual expense your expenses are the
things you pay other people who are not
owners sometimes you may pay yourself
payroll and that would be an expense but
only if you're running it through a
payroll system and paying withholding
tax on it and everything else otherwise
if you're just moving money out of your
bank account to yourself 99 times out of
a hundred that is an equity transaction
just like I'm showing you here so those
are a few workflows we're gonna get into
the nitty-gritty with it in bookkeeping
deep dive one and bookkeeping deep dive
two which are later videos here in the
series so let's move on to the next
slide here
yes banking so banking is one of these
things where you have to understand a
little bit I'm just gonna kind of drop a
an idea on you and I'm gonna show you
something in QuickBooks Online here in
just a second but something to
understand if you've got a bookkeeping
piece of software which is like
QuickBooks that's the QuickBooks logo
and every day every morning usually
QuickBooks will go and log in to your
bank account in this example Wells Fargo
and read the transactions and bring them
over okay now one of the things to
realize about that about that interface
is that it is always only
yesterday's transactions it has no idea
what is going on today so every time
your software syncs just always remember
that this is pulling the past yesterday
and so if you're entering transactions
in QuickBooks
today the the system may be a little bit
different than what you see in your bank
account because in your bank account it
only knows what happened yesterday in
Prior so this is a this is a concept
we'll go into whenever we show you how
banking works but I want to pull over a
quickbooks online real quicken
QuickBooks Online has this sample
company that we're gonna play around
with most of the time this is QuickBooks
Online and these are my bank accounts
over here and I'm gonna click into the
checking account right here what's gonna
pull up is it's gonna pull up all these
transactions that it has seen from
yesterday or something like that and
what it's look what it's looking like is
we had a lot of different transactions
and some of it was already in our
bookkeeping system and see how it says
match that's because it says hey I
pulled this transaction from Wells Fargo
but it matches a transaction that you
had already entered in here so I think
we just want to match it we don't want
to add it and double it double it count
it because this is already in here and
we just didn't know that it was in here
until we saw the transaction come
through later on however there's also
transactions here where you can add
transactions and this is basically
saying if you want me to add this I have
no idea I have there's no transactions
that match this at least that I can find
if your QuickBooks and you just want to
add this transaction and so this concept
of its downloading yesterday's
transactions is going to be important
when I start teaching you how to use
this screen because you have to always
remember hey it doesn't know what
happened today all it knows is what
happened yesterday so that was a that's
a little introduction don't worry we're
gonna get into every facet of this and
how this works and how to set it up and
what to do but I just wanted to drop a
little bit of
hint on how some of this banking works
and emphasize that it only has
yesterday's information in it finally
that's really the end of what I wanted
to you know chat about today it we're at
about thirty three minutes so that's the
kind of link that I wanted to have to
but do this for me
if you if anything didn't make sense to
you
as you watch this video just go back and
watch it one more time one of the best
ways to gain knowledge in accounting
because a lot of it can seem confusing
on first pass just go back and watch it
again and maybe three times if after
three times
you're still not understanding it reach
out to us at SBU and we'll we'll help
guide you through any kind of questions
that you've got but it is the rewatching
of accounting concepts and what we're
doing that will make all of this sink in
and what you're waiting for is kind of
this aha moment where you go oh I see
what you're talking about I get it and
the more you watch it over and over
again eventually you'll have that aha
moment every accountant does and and you
will too so from all of us here at SBU
thanks for watching the next videos our
bookkeeping deep dive one and
bookkeeping deep dive two if you want to
you can skip forward to those now
because you are you are ready to watch
those now that you've watched the the
intro here so I will see you in those
videos all the best