Your Back Office, LLC
Accounts for assets purchased in the past have to be set up with the cost of each asset. Records of the purchase can make this job easy. If the records are lost, estimates of costs may be required.
If the business sells products, an asset account is set up for each item in inventory. This can be just the dollar value of the items or it can include quantities. These accounts are set up best by taking a physical count and using product item cost to value the inventory.
Short and long term loans have to be recorded as liabilities. An analysis of outstanding invoices from vendors can be used to create the Accounts Payable account. Generally, longer term liability accounts can be set up using the documents related to the loans.
Once the value of all the assets of the business are placed in the appropriate accounts and the value of each loan that is owed by the business have been placed in the appropriate account the value of the owner’s equity can be determined. Subtracting the liability value from the asset value gives a result that is the value of the total of the equity accounts. The business owner’s actual investment is recorded as owner equity. The result of the total of the equity accounts less the value of total owner equity, define the Retained Earnings account. If result is positive, it provides a positive retained earnings value. If the result is negative, it provides a negative retained earnings value.
Real World Setup
Generally, the need for something like Quickbooks becomes apparent after the company is in operation. It is much more likely that we key on getting the business going first, recording information certainly in the checkbook then maybe on paper or in a spreadsheet. So the scenario outlined in the previous paragraphs needs to be expanded.
A dilemma exists as to how much past information needs to be entered into Quickbooks at the start. It is a cost versus time of the year versus volume decision. Entering every transaction since the beginning of the year plus the data required to set up asset (bank, buildings, equipment, inventory, etc.) accounts provides reports that can be used both for management decisions and government reporting. However, if you are setting Quickbooks up in December and there is a high volume of transactions, it could take significant time to enter transactions. If it’s December, the smart decision might be to start at the beginning of the next year. The decision is harder in September or even June.
It is possible to create starting balances when setting Quickbooks up any time of the year. This could take much less time. The tradeoff is possibly having incomplete reports in the first year. Whichever decision you make, here are most of the sources of data you will need to create starting balances and enter historical transactions:
If your books are currently being done by a service, you should be able to get what you need from the service.
Your checkbook and vendor invoices are a prime source. Banks do a good job of keeping track of a business’s balance and history of banking transactions. Using your checkbook and bank transaction history, it can be straight forward to create the banking accounts in the chart of accounts. In addition, your checkbook can provide expense information.
The list of those who owe money to the business has to be entered into the computer. Short term (30 days or less) receivables are entered in Accounts Receivable. This has to be created from the business’s records, however they have been kept.