Stephen L. Nelson - QuickBooks 2022 All-in-One For Dummies

Cash is usually the trickiest account to analyze with a T-account because so many journal entries affect cash. In many cases, however, a T-account analysis of an account balance is much more straightforward. If you look at Table 2-16, you see a T-account analysis of the inventory account. This T-account analysis shows that the beginning inventory account balance equals $3,000. But when Journal Entry 8 credits inventory for $3,000 — this is the journal entry that records the cost of goods sold — the inventory balance is wiped out.

TABLE 2-16A T-Account of the Inventory Account

Paying off the accounts payable and loan payable accounts is similarly straightforward. Table 2-17shows the T-account analysis of the accounts payable account. Table 2-18shows the T-account analysis of the loan payable account. In both cases, the T-account analysis shows that the liability accounts start with a credit beginning balance. (Remember that a liability account would have a credit balance if the firm really owed money.) Then, when the payments are recorded to pay off the accounts payable and loan payable in journal entries 9 and 10, the liability account is debited. The result, in the case of both accounts, is that the liability account balance is reduced to zero.

TABLE 2-17A T-Account of Accounts Payable

TABLE 2-18A T-Account of the Loan Payable Account

I’m not going to show T-account analyses of the other accounts that the preceding journal entries use. In every other case, the only debit or credit to the account comes from the journal entry, which means that the journal entry amount is the account balance. Only one journal entry affects the sales revenue account: Journal Entry 7, which credits sales revenue for $13,000. Because the sales revenue account has no beginning balance, that $13,000 credit equals the sales revenue account balance. The expense accounts work the same way.

If you construct (or your accounting program constructs) T-accounts for each balance sheet and income statement account, you can easily calculate account balances at a particular point in time by using the T-account analysis results. Table 2-19shows a trial balance at the end of the day for the hot dog stand. You can calculate each of these account balances by using T-account analysis.

TABLE 2-19A Trial Balance at End of Day

The first line shown in the trial balance in Table 2-19is the cash account, with a debit balance of $5,000. This debit account balance comes from the T-account analysis shown in Table 2-15. The account balances for inventory, accounts payable, and loan payable also come from the T-account analyses shown previously in this chapter ( Tables 2-16, 2-17, and 2-18).

As I note in the preceding section, you don’t need to perform T-account analyses for the other accounts shown in the trial balance provided in Table 2-19. These other accounts show a single debit or credit.

I need to make one final and perhaps already-obvious point: The information provided in Table 2-19is the information necessary to construct an income statement for the day and a balance sheet as of the end of the day. If you take sales revenue, cost of goods sold, rent, wages expense, and supplies expense from the trial balance, you have all the information that you need to construct an income statement for the day. In fact, the information shown in Table 2-19is the information used to construct the income statement shown in Table 2-1.

Similarly, the asset, liability, and owner’s equity balance information shown in the trial balance provided in Table 2-19supplies the information necessary to construct a balance sheet as of the end of the day.

The end-of-day balance sheet won’t balance unless you also include the profits of the day. These profits, called retained earnings or lumped into the owner’s capital account, equal $4,000. You can see what this end-of-day balance sheet looks like by reading Book 1, Chapter 1. In that chapter, Table 1-9shows the end-of-day balance sheet for the hot-dog-stand business.

Before I end this chapter, I want to make a few comments about how QuickBooks helps you. First — and this point may be the most important one — QuickBooks makes most of these journal entries for you. In Journal Entry 6, for example, I show you how to record a $1,000 check written to pay supplies, but you’d never have to make this journal entry in QuickBooks. When you use QuickBooks to record a $1,000 check that pays Acme Supplies for some paper products that you purchased, QuickBooks automatically debits supplies expense (as long as you indicate that the check is for supplies) and then credits cash.

Similarly, in the case of journal entries 7 and 8, when you produce an invoice that records a sale, QuickBooks makes these journal entries for you. If you sold $13,000 worth of hot dogs and buns, and those hot dogs and buns actually cost you $3,000, QuickBooks debits cash for $13,000, credits sales revenue for $13,000, debits cost of goods sold for $3,000, and credits inventory for $3,000. In other words, for most of your routine transactions, QuickBooks handles the journal entries for you behind the scenes.

This doesn’t mean, however, that you can always avoid working with journal entries. Any transaction that can’t be handled through a standard QuickBooks form — such as the Invoice form or the Write Checks form — must be recorded by using a journal entry. If you purchase some fixed asset by writing a check, for example, the purchase of the fixed asset gets recorded automatically by QuickBooks. But the depreciation that will be used to expense the asset over its estimated economic life — something I talk a bit about in the next chapter — must be recorded with journal entries that you construct yourself and enter a different way.

One other really important point: I note in the preceding paragraphs that the trial balance information shown in Table 2-19provides the raw data that you need to prepare your financial statement. I don’t want to leave you with a misunderstanding, however: You don’t have to use this sort of raw data to prepare your financial statements. Predictably, QuickBooks easily, quickly, and effortlessly builds your financial statements by using this trial balance information.