Your Back Office, LLC
Equity represents in dollars what you and your partners (if you have any) own of the business. If you think about it, if the assets are what the business owns, liabilities and equity define who owns the assets. If you subtract the total dollar amount of the liabilities from the total dollar amount of the assets, the result is the total dollar amount of the equity. To put it another way, the value of your ownership of the business is the value of the assets less the value of the liabilities. An account is set up in the Chart of Accounts to represent each investment in the business by each owner plus a separate account called Retained Earnings to represent the accumulated profit/surplus or loss.
The last two groups of accounts, Income and Expense reflect the current operation of the business. A for-profit business sells products or services, generating income. A-not-for-profit organization such as a charity or social organization generates income from donations or member dues. Both types of organizations have expenses for the actions required to generate income. Income less Expenses is either Profit or Loss. Income less Expenses is either Surplus or Loss for a non-profit business. Accounts are set up in the Chart of Accounts to represent each source of income and each expense.
The Chart of Accounts defines the names of each account. In actuality, each account consists of an overall total plus a listing of all the transactions that were used to calculate the total. In addition, an account can have a number of sub-accounts. For example, the Sales account would certainly have a sub-account for each major product or service line the company offers.
In the days before computers, each account was kept in a book called a ledger. All of the accounts together made up the General Ledger, a term still in use today.
While all businesses have similar characteristics, each business is different. The computer software has to be configured to fit the needs of your business. The software has to be flexible so that as the needs of your business change, the software changes.
Here are the major inputs for configuring the software:
Chart of Accounts
Overview: A major task in setting up Quickbooks is to define the Chart of Accounts. Quickbooks helps by offering sample versions. The appropriate sample has to be customized for the needs of your business.
The Chart of Accounts is a list of categories used to capture transactions. Think about how we are forced to categorize our personal transactions into those that can be deducted from taxes and those that are not deductible. Many of us further categorize these transactions for budgeting purposes or to just understand where we are getting and spending our money. The Chart of Accounts is a big list of categories for the business. Each category is called an account. The accounts are organized into five major groups:
Assets are the things the business owns. If you sold your business today, what would you give the buyer? You would probably give the cash in the bank accounts, the list of customers that owe money to the business, the inventory, equipment, buildings, etc. These are all assets. An account is set up in the Chart of Accounts for each asset.
Liabilities are what the business owes to others. This can be 30 day accounts with your vendors or longer term debt to banks and other credit sources. An account is set up in the Chart of Accounts for each liability.