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How to keep your books up to date, whitout losing your weekend!

How to keep your books up to date without missing out on your weekends!

 

Does this sound a little bit like a magic unicorn that doesn’t exist?  I know a lot of people who feel that way too.  I’m here to tell you that it is possible…but it’s not necessarily easy.  Well, there is an easy way to do it, which is to hand your books off to a third party, like Prentice-Schwab, that specializes in bookkeeping solutions.  If you’re at that point, feel free to stop reading and reach out, I’m happy to talk to you about how working with me would alleviate your stress and give you back your nights and weekends.

 

But for the do-it-yourselfers out there that don’t want to hand off their books I’ll explain some work flow tips that will help you get you books on track so that you’ll spend less time on them and more time recharging from a long week.

First and foremost, you need a system to help you navigate your books.  I am writing these tips as if you’re doing your bookkeeping in QuickBooks Online which has some pretty helpful tools for processing transactions if you are on a time crunch.  Other software systems may have something similar, but I’m not sure.  If you use a different software and need help with workflow, feel free to reach out and we can do a screen share session where we run through your program and I can help you streamline.

Tip # 1:

Use the QuickBooks Online Mobile app for receipt capture.  Many of my clients are in the construction industry.  They are typically making purchases in person on a company credit card.  For example, purchasing fuel for equipment.  The best thing to do is as soon as you make that purchase snap a photo of the receipt right then and there in the QuickBooks Mobile app using receipt capture.  This feature will usually add all of the pertinent information to an expense transaction in QuickBooks for you to review and post when you get back to the office.  

It is my experience that this process works best with actual receipts.  QuickBooks also has a feature where you can email your receipts (if you tell it what email you’re going to be sending your receipts from).  I have found that this tool works best for physical receipts from the store or PDF receipt attachments, not emails that have the transaction details in the body of the email.  QuickBooks tries to read the transaction information and it can’t scan the email the same way it can for a PDF attachment.  My preferred way to enter receipts for myself, is through the mobile app over emailing.  

I find that processing receipts this way helps for two reasons.  

First, it reduces lost receipts.  Be honest, how many times have you found an old receipt under the seat of your car that should have been added to your books but never made it because it got lost? 

Second, it saves you a step later on when you’re entering your transactions in QuickBooks because the receipt will automatically attach to your expense transaction.  QuickBooks also tries to auto populate some of the information so it does save some time on data entry.

One objection that I hear to this a lot is that to have the ability to upload the receipt to QuickBooks through the app you’d have to have a large number of users if you’ve got many employees who are authorized to purchase.  Additionally, having all employees using the app would give everyone access to financial data that owners don’t necessarily want out there.  In this situation, I think using the email function is best.  It keeps the number of users on the account low and keeps your financial data from being accessible to too many individuals.

In my opinion, direct uploading to the app only really works if the owner is doing all of the purchasing, or if the owner or his bookkeeper are the ones uploading the receipts.  The solution to giving everyone access, and not having to worry about collecting receipts would be to use the email feature mentioned above.  If you registered each employee’s email with QuickBooks, they could email the receipts as an attachment to QuickBooks Directly.  At the very least, this ensures that receipts aren’t lost or forgotten because a photo f them will be in the software!

Tip #2

Don’t save all of your transactions for one big batch of entry.  Instead, enter transactions daily or every other day.  This prevents things from piling up and becoming a monumental task that takes all weekend, or worse, all week, where you lose productivity.  By entering transactions in smaller batches you spend less time at once on entry and you don’t feel like you’ve been in the books “all day”.

I see this happen often.  I get a call from someone who is overwhelmed because they are months (or years) behind on their bookkeeping and now they’re up against a deadline (like filing taxes) and need all of their transactions entered and reconciled.  Not only is this time consuming, but it’s costly in one of two ways.  It’s either costly in terms of opportunity costs (lost revenue), or in accounting fees paid to get caught up.  

If, as the business owner, you are spending time you otherwise would be using to generate revenue to do bookkeeping tasks, it’s costly in terms of that lost revenue.  That opportunity cost is a steep price to pay.  In fact, some might argue that it is more expensive than paying a bookkeeper to get everything caught up for you.  I’d generally agree with that argument, not because I’m a Bookkeeper and catching up business’ books is one of the things I offer, but because I think every client we work with has a ripple effect.  A lot of small businesses rely on referrals, customer testimonials and word of mouth to generate business.  So I think of the opportunity cost of missing out an making a sale or two to get your books caught up, might also mean you miss out on both referral revenue, or at the very least, a referral that doesn’t convert but is still someone who knows about your business and may convert at a later date.

Alternatively, outsourcing to a bookkeeper to get caught up, is also costly in terms of amount paid in accounting fees.  Catch up fees can add up quickly, with each month behind adding to the total bill. Furthermore, if this is a “rush job” due to a deadline, that adds to the bill too.  Catch-up jobs are often in the thousands and even tens of thousands dollar range depending on how far behind things are.  But like we talked about above, at least this cost is a known total cost.  

Staying up to date on your books is paramount, beyond just being able to make sound financial decisions and having accurate information on how your business is doing.  It will save you and your wallet in the long run!

Tip # 3

Use QuickBooks Online automatic features as much as possible.  Do you bill a flat monthly rate on the same day every month?  Set up an auto billing that is created and emailed directly to your customer each month.  This will automatically record your revenue transaction and allows you to see when your customer has opened, viewed and paid (if you accept payments through QuickBooks directly) all without you having to do anything.  If you can’t fully automate your billing due to reimbursement expenses or some other reason, you can still partially automate the invoice by having a template create the basics on a specific day of the month and then adding the additional information that you need to.

There are other automatic transactions you can set up like Journal Entries for pre-paid expenses and adjustments for current portion of long term debt, but some of these transactions will still need monthly attention depending on the situation.  I always advise consulting an accountant before setting up automatic journal entries.  These transactions often don’t have backup attached to them and they can get off track really quickly making a mess of your books.

By utilizing these three tips you can cut down on the time you spend on your bookkeeping, or at least reduce your time block investment.  QuickBooks is very powerful and has some features that you can use to reduce your time investment, but I think the best thing you can do to break up your bookkeeping tasks into more manageable time segments.  Leaving all of the bookkeeping until month end is a recipe for burnout and frustration with the amount of time it takes.  Using the receipt capture feature to help with recording the physical receipts that you have and will reduce your data entry time.  By keeping this as a part of your daily work flow it will keep the tasks form piling up.  

Bookkeeping isn’t fun for everyone, but it can be manageable if it’s done in bite sized pieces.  This way you won’t be stuck at your computer all weekend once a month getting your books in order!

If you’re thinking you’re ready to hand your books over and not have to worry about them, contact us today!

Warning! are you keeping your receipts in a shoe box?

If you are like the millions of Americans who are keeping their business receipts in a shoe box, you’re only doing half of what you need to be doing.  First, I commend you, keeping your business receipts is incredibly important so by tossing them in that shoe box you are doing something right!  Sadly, it’s not enough.  I’ve heard it time and time again…it goes a little something like this: 

 “I have all of my receipts in a box, and if I ever get audited, I’ll hand that box over and let the auditor have at it.”

Unfortunately, it doesn’t really work that way when you get audited by the IRS.  To understand this flawed thinking we need to look at what the IRS is trying to accomplish by doing an audit of a business’ financial records.

 What the IRS is looking for

When the IRS comes in to perform an audit, they are looking to confirm that the business has reported the correct amounts for income and expenses, in accordance with the tax code.  This is probably why so many people dread tax season, tax code is arduous, changes frequently, and if you are one of the “lucky” ones selected for audit, the auditor might find an innocent mistake that lands you in trouble.  I truly believe that most business owners and individuals are trying to do what is right and they worry about those innocent mistakes that might come up that gets them in to trouble.  Innocent mistakes are minimized by proper bookkeeping and documentation.

When the auditor comes in they will be looking at your bookkeeping records to ensure that the expenses that you have claimed are valid, allowable business expenses.  They will do this by reviewing your financial statements and inquiring for the source documentation for specific (or all transactions) depending on what they see in your bookkeeping records.  Unfortunately, they’re not going to fish through your box of receipts…they’re going to expect you to do that.  

This is why I advise against keeping your receipts in a shoe box.  In the event that you are audited, you want to be able to provide the source documentation quickly and easily, as it will be your time used to find the requested documents, not theirs.  This is time that is better used performing revenue generating activities, instead of chasing documents.  

The Solution to the Shoe Box Method

The solution to using the shoe box method is to attach your source documents in your bookkeeping software.  My clients use QuickBooks Online; one feature QuickBooks Online offers is to attach documents to each transaction you enter.  By attaching the document to each transaction you will have all of the backup documentations available when asked for it.  No more hunting through a pile of bills and receipts to find the few that the auditor would like to look at.  Additionally, it will cut down on your office clutter!  There is no reason to keep the paper copies if you are saving electronic copies.  

Attaching documents is relatively easy, especially since you’re already using the document to enter the transaction in QuickBooks Online.  It’s best to enter the transaction and then attach the document all at once, that way you don’t end up with any transactions missing their supporting documentation.  You simply need to drag and drop your document to the document window at the bottom of the transaction page.  For my own business bookkeeping I do this on all transactions.  This includes attaching receipts to expense transactions (when I use my credit card) or attaching invoices to expense transactions when I write a check.  You can also use the receipt capture feature in QuickBooks Online, though I’ve found that this sometimes leads to duplicate or inaccurate transactions depending on the receipt, so I prefer to enter and attach myself.  I also attach copies of the checks I write to invoices I pay via check, and copies of checks I receive as payment for services to my deposits.  This gives me the ability to look about at the documents should there be questions about the transaction without having to dig through my electronic files or a paper file to find the receipt.

I know that this system seems like it’s extra work.  I’ll be honest, it is.  It will be extra work when you’re setting up your workflow and getting your processes sorted out.  But in the long run, it will save you time, money and headaches, even if you aren’t audited!  For example, has your tax accountant ever asked you questions about a transaction and you needed to search for the transaction documents?  Or have you ever had a transaction come through the bank feed for a different amount and you’re not sure why?  Having the documents all in one place and organized per transaction will save you time when those questions come up.  Especially if the questions come up weeks or months after the transaction has occurred.

But I don’t have the time to follow this process!

I hear this from a lot of business owners.  They’re already swamped with their day to day work that generates income, whether that be providing services or being out in the filed building homes or other structures.  This is where I fit in.  I’ve already got workflows established to get, and keep, your books in tiptop shape with minimal input from you!  I can take care of all of the transaction entry, source document attachment, and bank reconciliations so that you don’t have to!  Additionally, I can provide you with financial insight into your business through financial statement presentation and analysis.  Keeping your books up to date every month gives you better control over your business and the information needed for sound decision making.  Plus, it saves you money at tax time!  Should you choose to work with an outsourced bookkeeper, you receive all of these benefits, without having to invest the time!  


Let’s Stop Adding Transactions from the Bank Feed!

I see this all the time and it exposes your business to numerous risks!  The bank feed is an amazing bookkeeping tool that QuickBooks has, but it does not replace transaction entry from your source documents!

Let’s take a look at how entering transactions directly form the bank feed opens your business up to risks.

 

The pitfalls of adding transactions directly from the bank feed

 

The bank feed is a great resource when working within QuickBooks, but it is not without limitations.  These limitations stem not from QuickBooks necessarily, but from the potential of errors originating at the bank, or transaction entry on the vendor’s side.  

 

For example, you write a check for $140 for some supplies on account and mail it to your supplier.  You don’t enter the expense from the invoice or the check in to QuickBooks because you will add it when it comes through the bank feed.  The supplier cashes the check and there is a keystroke error when depositing and instead of $140 clearing the bank, $170 does.  $170 is what comes through on the bank feed.  You write quite a few checks so you don’t remember the exact amount, but $170 doesn’t seem unreasonable for this supplier so it’s not a red flag for a mistake.  The company has now paid $30 more than it should have and doesn’t have supporting documents to back up the charges if you’re ever audited.  Or worse, you’ve got to either chase down a refund from your supplier well after the fact, or write off the extra $30 of the expense that wasn’t accurate and possibly pay a tax penalty if it’s discovered during an audit.  While this type of error might seem like an infrequent scenario, I’ve seen it happen before and seen it happen several times in a year.  So the dollar amount could add up!

 

Beyond the potential for over paying due to keystroke errors, there’s the potential for duplicate or fraudulent transactions that won’t be caught, because there is no counter-balance or double check.  Entering transactions directly from the bank feed, especially for entities have high transaction volume – where the temptation for accepting direct from the bank feed is even higher – opens companies up to accepting fraudulent transactions that look legitimate.  Once a fraudster realizes that they can get away with charging fraudulent charges to your bank or credit card account, the charges are likely to continue and the dollar amount will surely increase.  We see this a lot in personal credit card fraud where the fraudster starts small to see if the person being defrauded will notices, and if they don’t, then larger charges will go through.  Therefore, it is a possibility that your business credit card or bank account could be vulnerable too.  

 

In my years of processing credit cards and AP for contractors I’ve seen all sorts of strange fraud type things happen, especially on credit cards.  The one that sticks out to me the most was when someone got the CFO’s card info and went to Burger King…they bought something small and the charge went through.  So then they went BIG…They went to 4 or 5 more Burger Kings and ran up hundreds of dollars in charges.  We caught it on the month end statement, and the credit card company did its thing with the fraud investigation/no liability deal.   Obviously, this situation is one that we’re not worried about missing, and we probably would have caught it earlier if we’d had a bank feed set up like QuickBooks has.  It just makes me laugh, like what on earth would someone need to spend so much on Burger King for?  They were probably buying gift cards, not tons of food but I just have this vision of someone ordering hundreds of burgers.

 

Best practices for utilizing the bank feed

 

The bank feed as a great tool, don’t get me wrong.  But, it is best used as a double check to ensure that transactions are being processed correctly.  It is not a substitution for entering receipts for credit and debit card transactions, or invoice expenses and check payments.  

 

Instead of accepting transactions directly in the bank feed, my advice is to always enter off of the source document – your receipt, or invoice & check payment – and then match the transactions in the bank feed.  That way if there are any transactions in the feed that do not have a match, you know it is either incorrect, or needs further research for the appropriate documentation.  This allows you to correct the error or report fraud quickly.  Usually, if a transaction is processed through the bank for the wrong amount a call to the bank will result in them making the correction, no need to chase a supplier for a refund.   

 

Additionally, matching in the bank feed reduces your bank reconciliation time because typically matching transactions to the bank feed results in a 99% reconciled statement.  So you’re investing more time up front on transaction entry, and less time investigating and troubleshooting on the bank reconciliation.  This will allow you to close your books and have internal financial statements more quickly so you can evaluate your business profitability and make business decisions based on accurate numbers rather than estimates.  

 

Even though it is more work up front to enter every transaction at the source, it will save you time and money in the long run.  Additionally, entering transactions from the source documents allows you to attach the document to the transaction in QuickBooks.  This is a great way to track and compile your documents  so that they are at your fingertips is you ever need to review the transaction, or if you’re audited and need to provide documentation that the charge is a valid business expense.   

 

So, let’s stop adding transactions through the bank feed, and start adding transactions from source documents, attaching them to the transaction and then matching them in the bank feed.  

 

If you don’t have the time to enter transactions in this way, please reach out for assistance.  Outsourcing these tasks can be a great solution to keeping your books clean and up to date while also freeing up your time to perform revenue generating tasks, spend more time with family or on hobbies, while saving you money due to banking errors or fraud!

What you should know about Quickbooks cash

QuickBooks has been adding to their offerings to try to be a full service ecosystem for business owners.  Their latest release is a QuickBooks Cash.  Is it worth it to make the switch and integrate into the QB ecosystem further?  Let’s take a look at what QuickBooks cash has to offer.


What Is QuickBooks Cash?


QuickBooks Cash is a bank account that is provided through QuickBooks Online.  The Bank is actually Green Dot Bank, which is FDIC Insured.  To use QuickBooks cash you’ll need to have a QuickBooks Online Account.  


Who Is Green Dot Bank?


I did a little bit of research on Green Dot. According to thebalance.com, they're not new on the banking scene, having been in business since 1999. They've been publicly traded since 2010 and have "millions of customers" (Justin Pritchard, 2020). So they're not exactly the new kids on the block.


QuickBooks Cash standard features:


Other Features:


I’ll be honest, most of the features they describe are just basic banking features, not groundbreaking features that would make me want to take the time to switch my whole financial set up.  But, if you’re interested in switching, let’s looks at some of the more interesting features in greater depth.  


Looking into some of the "best" features


Let’s start with instant deposit.  I think that this feature isn’t nearly as unique as they make it sound.  I’ve found that at the banks I have worked with, deposits are typically available instantly. And if not instantly, pretty darn close to it.  I use a different bank for my personal finances than I do for my business, but that’s only because USAA doesn’t have business banking.  But both at USAA and BECU (where Prentice-Schwab does its banking) deposits are available instantly, for free.  Maybe I’m just lucky, but I doubt it.


Second, integration with QuickBooks Payments and QuickBooks Payroll is a nice feature, but also seems to be pretty standard.  If you’re using either platform, your bank is likely already connected, so I’m not sure if this is really much different.  Admittedly, I don’t use QuickBooks payments or QuickBooks payroll, and neither do my clients, so perhaps this is a bigger deal than I realize. If you use either of these features, and feel that integration would be helpful, please drop a note in the comments, I'm eager to lean about how you think that this would be useful.

Cash Flow projections…This topic seems, to me, to be a business buzz word.  Absolutely Cash Flow Projections are important in running your business.  I think savvy business owners are projecting their cash constantly and making decisions based off of these projections.  But I think that this is more of a bookkeeping function than a banking function.  I also think cash flow is seen as a mysterious difficult task.  But in reality, once you start using cash flow on a regular basis, it’s not hard.  And it’s even easier if you’ve got a good bookkeeper who speaks your industry’s language that  you’re working with.  So while I think that this is a good feature, I’m not sure it’s really a selling point when cash flow projection and analysis should already be a part of your bookkeeping processes.


And finally, QuickBooks Envelopes.  This, I think is the best bonus feature of QuickBooks Cash.  Many business owners have read and utilize Profit First.  I am not a certified Profit First advisor, and I have not read the book.  My very basic understanding of this plan is basically budgeting, using your bank account (or many bank accounts) to accumulate cash for each intended purpose.  I think that envelopes in QuickBooks cash could be utilized for businesses that follow Profit First, without having to open additional bank accounts for each purpose.  This should cut down on your administration of this budgeting system since it’s all still in one bank account.  This is probably the only feature that would prompt me to entertain the idea of opening a QuickBooks Cash account.  And even then, I’d only do it if I was set on using Profit First.


Is it worth it to open, or switch to a QuickBooks Cash account?


Probably not.  The only reason I’d consider recommending a switch is for the envelopes feature, and that’s only if you’re using or planning on using Profit First.  If you’re already using Profit First, you probably are already implementing it through your current bank account set up.  

Switching bank accounts or even opening a new account at a new institution is a lot of work, and often comes with unforeseen hiccups or fees.  Therefore, I don’t think there is much benefit to switching to QuickBooks Cash (or any other bank account for that matter, if you're already set up somewhere).  Additionally, I’ve been told that if you’re dissatisfied with QuickBooks Cash, closing the account is nearly impossible.


QuickBooks Online has a lot of great features.  And generally, I think that QuickBooks products are easy to work with.  In this case, I think that waiting to implement this product is the best course of action.  I think there are some bugs that need to be worked out before jumping in.


Bookkeeper vs. accountant - which does my business need?

People often ask me what is the difference between a bookkeeper and an accountant, and which does my business need?  I’d love to say the answer is cut and dry but like most things, it isn’t.

 

A bookkeeper records and categorizes the business’ daily transactions.  They ensure that the record keeping of the business are accurate and up to date on a timely basis.  The information a bookkeeper needs will include items like invoices, receipts, bank statements, etc.  The bookkeeper’s work is vital for both financial analysis and tax preparation.

 

An accountant typically has a 4 year accounting degree, and might also have a certification like the CPA license that demonstrates their ability to analyze financial information.  The accountant reviews and translates the information input by the bookkeeper to help the business owner make decisions about the business. Accountants also use the information input by the bookkeeper to do business forecasting and budgeting or prepare the business’ taxes. 

 

It is important to note that these are not steadfast rules, some bookkeepers do more than just the transaction entry and provide analysis or other services.  And some accountants don’t provide services like tax preparation.  The most important part of knowing whether to hire a bookkeeper or an accountant is to know what your goals and needs are.  

 

Here at Prentice-Schwab, you don’t have to choose.  We are happy to take the day to day bookkeeping off of your hands so that you have both pristine books and more time in your day to generate revenue.  I am also a licensed CPA so I have a proven track record of being able to translate financial information to help you grow your business.

 

Have you made the decision between a bookkeeper and an accountant for your small business?  Comment below with your thought process for the decision.  Still deciding?  Comment with your needs, wants or goals that are going into your decision making process.

Cash vs. accrual accounting

Let’s talk methods of accounting.  If you are working in QuickBooks Online you probably had to choose what method you wanted to use when you set up.  If you’re just setting up your account, you’re probably researching what method is best for your business.  Here at Prentice-Schwab, we have our opinion about what method is generally the better choice.  However, that does not mean that it is the best choice for your individual situation.  If you have any doubt, please contact us today.

There are two main methods of accounting to choose from, cash accounting and accrual accounting.

 

Cash Accounting

 

The cash method of accounting records revenues and expenses when the cash changes hands.  It is a simple method of accounting in that there are no extra journal entries that must be done, and makes life at tax time simple because there are no adjustments to be made to file taxes.  When using cash accounting you avoid having to do additional adjusting entries each month to match your revenues with expenses. 

 

It’s simple, and less work, so you’re probably asking yourself, “why would anyone choose to do their books another way?”  Unfortunately, even though it is the more straightforward method of the two, and is less time consuming, it does have its drawbacks.

 

Primarily, cash accounting is not in accordance with Generally Accepted Accounting Principles (GAAP).  Following GAAP is required for all publicly traded companies.  Even if your company is privately held, we recommend following GAAP as most banks, bonding companies and other users want to see GAAP financial statements.  This is something to be aware of, because as a small business owner, you may have to provide additional information, including audited financial statements if you decide to apply for a mortgage to buy a home or use other types of financing for your business.  

 

That being said, there may be instances when the cash method of accounting would be advantageous for a business when compared to the accrual basis of accounting.  A company that has little revenue, or is a side-hustle business may find that cash accounting is just fine for them.  We agree, since this isn’t intended to be your primary source of income, cash accounting is likely ok.  We most often this type of company is a mom and pop operation that is too small to have an accountant on staff, or to hire an outside bookkeeper.  It is important to keep in mind that if this business is ever intended to be more than a small side business, it is advisable to set up on accrual accounting from the beginning.  This will save both you and your accountant the headache of changing over later on.

 

Accrual Accounting

 

The accrual method of accounting records transcations when the revenue is earned and expenses are incurred.  Simply, it does not matter when the cash changes hands, it matters when the business transaction itself takes place.  For example, if one were to purchase job supplies on account on July 13 and the invoice was not paid until August 8th, the transaction must be recorded in the books in the month of July.  This method of accounting is based on the matching principle, where you match your revenues to the expenses that you incurred generating those revenues.  Accrual accounting is advantageous beyond the fact that it’s GAAP.  It is advantageous because it gives you, as the business owner greater insight into each month’s revenue, expenses, and income levels.  If you’re using cash accounting it might look like some months you are not doing well because you have not received payment yet.  Alternatively, you would have months that look stellar because you received several payments, but in reality those revenues were all from prior months.  Using accrual accounting gives you a more accurate look at the profitability, and viability of your company.  It is for this reason that we recommend using accrual accounting over cash accounting.  As accountants, it is our job to record the history of the dealings of the business.  To do this properly, we need to use accrual accounting and make adjusting entries each period for any accruals or deferrals.  This will give you the best information for making business decisions.  

 

It is our goal as accounting professionals to be able to give you the information that you need to make sound business decisions.  Often, business owners find themselves worried that they will go bankrupt, or be unable to afford an unexpected business expense.  Having sound bookkeeping and accounting practices and a firm understanding of your financial statements will alleviate those fears.  

 

We believe partnering with us will bridge those gaps and help you sleep better at night knowing your exact financial position.  As an added bonus, we take the burden of accrual accounting off of you so that you can focus your time elsewhere!


debits and Credits demystified

When thinking about debts and credits it’s easy to get frustrated.  It’s also easy in the effort to remember or find a pattern to debits and credits to get trapped into thinking of debits as being “good” and credits as being “bad”, after all a debit increases assets, which is good and credits decrease them, making it bad right?  Because everyone wants more assets, right?!  This type of thinking, however, is detrimental to fully understanding and remembering what a debit or a credit does to a specific account.  Let’s dive into debits and credits and how we can remember how each affects an account.

Debits are used to increase asset, expense, and dividend accounts.  They decrease liability, common stock, retained earnings, and revenue accounts.  Debits are always on the left.   

Credits are used to increase liability, common stock, retained earnings, and revenue accounts.   They decrease asset, expense, and dividend accounts. Credits are on the right.  

Let’s dive back into the trap that one is inherently good while the other is bad.  Although debits increase assets which most would consider to be good, they also increase expense accounts, which isn’t necessarily a positive thing.  Additionally, credits increase retained earnings which could also be considered good.  By thinking that a debit or credit is good while the other is bad could lead one to debit an account that should be credited and vice versa.  This is a problem because it presents the opportunity to debit and account that should be credited resulting in errors in the journal.  These errors could go unnoticed if the journal entry still balances, for example, if the debits and credits are simply flipped.  This error would likely flow in to the financial statements unnoticed.

To help remember which accounts should be debited vs which should be credited, it helps to think about how the transaction affects the accounting equation.  

The accounting equation is:

Assets = Liabilities + Equity

The equation must always stay in balance.  If you know debits increase assets, and you’ve got a transaction that affects an asset account, you will be able to deduce whether you are crediting or debiting the other account by keeping this equation in mind.  For example, your journal entry is to adjust pre-paid insurance expense.  This entry will affect the asset account “Prepaid Expenses” and the expense account “Insurance Expense”.  You are moving the expense from the pre-paid account (reducing it) and adding it to the expense account (increasing it).  You know that to reduce an asset you must credit it.  That means you need a debit to offset this credit.  That means you must debit your insurance expense account so that the entry balances.

By keeping in mind that the entry always has to balance, and memorizing a few of the ways debits and credits affect certain accounts, you will be able to deduce which account you need to be debiting and which you need to be crediting as you prepare your journal entry.

Don’t let debits and credits intimidate you!  Keeping the accounting equation in mind when preparing journal entries will help you to get them posted correctly and accurately!