Svoboda's Home and Small Business Review
Jan J. van Leijenhorst
January 1999

Accounting for the Small Business: A QuickBooks Primer

By Jan J. van Leijenhorst

QuickBooks may well be the most widely used accounting software for small businesses. Intuit, its developer, claims that no accounting knowledge is needed to use QuickBooks. Unfortunately that's a bit like saying that you don't have to know anything about cars to drive one. If you take that statement to its logical conclusion, you would be calling the AAA every time you're out of gas because you don't have to know how to refuel your car. As a result, there are a lot of unused Quickbooks programs sitting idle on small-business PCs, while other QuickBooks users aren't getting the full benefit of the program. All is not lost, however. I can't teach you accounting in this article, but I can give you some practical advice on how to set up your system.

To use QuickBooks properly you have to understand at a minimum the basic concepts of accounting: You have to know that there are different types of accounts to record assets, liabilities, income and expense. It surprised me to see quite a few QuickBooks users who have little idea what those accounts represent. Consequently, their "accounting system" is nothing more than an electronic checkbook register. I recommend that you borrow and read a book on accounting from your local library before you consider installing QuickBooks.

Before you begin using any accounting system, electronic or manual, you have to ask yourself: What do I want the system to do for me? Do you want to use it only to bill customers and keep track of accounts receivable? Do you want it to record your income and expenses by categories that make sense for your particular business? Do you want to maintain a record of all financial transactions so that you can create reports that will help you make better decisions on how to run your business? Will you use QuickBooks for your payroll? And so on.

Computer or Pencil?

How you will want to use QuickBooks depends on the type of business you have and how you want to run it. Just because this software is used by more small businesses than any other is no reason to buy it. Some companies would be better off using a simple manual system, instead of spending time and effort to learn the intricacies of a computer based system they may not even need. For example: if you are a consultant with just a few clients, maintaining one bank account, you could record all your transactions in a checkbook register and maintain a paper-and-pencil record to keep track of billable hours.

Or you can computerize on a more basic level. A simple alternative to QuickBooks is Quicken (also developed by Intuit). This is an excellent program to record personal expenses and investments and is equally useful for simple business accounting.

Once you have decided to use QuickBooks and know what you want to use it for, the first step is to set up your chart of accounts. Although QuickBooks includes a number of charts of accounts for different types of businesses, they may not be what you want. I recommend that, unless you are comfortable with accounting, you get some help from an accountant or an other knowledgeable person in setting up your chart of accounts. You may also want to get assistance in setting up "items", which is the QuickBooks' term for the products and services that you sell, as well as in selecting the various "preferences" that let you use specific features of the software.

When to Start

The next step is to define a starting date and enter the beginning balances of the various accounts you will use. This is best done through journal entries (another accounting term!). In general, it is best to start your system at the beginning of your fiscal year and enter account balances as of the last day of the previous year. In other words, if your starting date is January 1, 1999, enter the December 31, 1998 balances. You can then produce a balance sheet and income statement, which will form the basis for comparing this year's results to those of last year (1999 versus 1998 in our example). You can start QuickBooks in the middle of a year, but this complicates things somewhat. For instance, if you have employees and want to produce accurate W-2 forms for the year end, you have to enter all salary and related details from January 1 to the date you started QuickBooks.

Before you start entering data, you may want to set some guidelines on how the system will be used. This is particularly important if the system is used by more than one person. These guidelines may pertain to such subjects as how to record inventory, how to order merchandise and supplies (will you use purchase orders or not?), what reports to produce and when. Also you'll want to decide on how often and in what manner to back up your system. I suggest that you back up your files at regular intervals on media other than hard drive-diskettes or zip disks. This will allow you to retrieve your data in case your hard drive crashes.

What Costs Are Involved?

How cost-effective is QuickBooks? The answer depends on how you use the system. Apart from the price of the software, you need time (which I consider a cost) to learn to use it. With a system as powerful as QuickBooks, many people only learn enough to meet their initial requirements; few master additional features that could help them use the system more effectively. Then there is the cost of training employees. Various college and computer learning centers offer courses in the basic use of QuickBooks. Although the software is widely used, it is not easy to find employees who are experienced QuickBooks users. Training new employees, then, is a hidden expense that should not be ignored.

Every year Intuit comes out with a new QuickBooks version. Each version always includes more bells and whistles than the previous one, but if you are happy with what you have you do not necessarily have to but the latest version. However, If you run your payroll on QuickBooks, you do have to buy tax tables from Intuit, which is an additional expense every time tax rates change.

QuickBooks is a powerful tool to help you run your business profitably and cost-effectively. It can generate a variety of reports that give you ample information on what is going on in your company. The key to using the software effectively, I believe, is in setting up the system in a way that makes sense for your business. Time and effort spent up front to determine how you will use QuickBooks will certainly pay off in the long run.

(Jan van Leijenhorst, owner of General Business Service (Evanston), provides business counseling, record- keeping and tax services. He can be reached at 847- 492-8103 or by email at gjvanleijenhorst@centurysmallbiz.com)