In most businesses, in order to generate revenue, we have to spend money. We need an office (although that is less true now with all of the cloud technology that allows us to accomplish everything from home if we choose). We’ll need some supplies, and equipment. Probably a computer.

At the core, the expense cycle looks like this:

  1. We purchase a product or service
  2. Either we pay for it now, or later
  3. We make the payment.

It’s about that simple. What gets complicated is where we code things. There are generally many more expense accounts, than income accounts on any set of books. The objective is to describe in sufficient detail, what we spent money on. Give too much detail in the expense section of the chart of accounts, and you can overwhelm the reader of your financial statements. At a certain point, it also loses value. My goal is to keep the chart of accounts simple but meaningful. QuickBooks Online will allow me to easily drill in to the accounts to get the details, when I want them.

When we pay for something now, we enter an expense, or a check. The “Expense” is what you’ll use for anything other than a check, such as a credit card charge. The trick here is to think about what drives the debit, and what drives the credit in the journal entry that sits behind the form. When enter an expense or a check, I am crediting the source account, such as the bank or credit card account. Once I understand that, then if follows that any account that I use in the details is getting a debit.

When you enter a bill, everything is the same, except that, instead of the credit going to a bank, or credit card account, it goes to Accounts Payable. Then when we are ready to pay the bill, we have to create that transaction. Now we close the loop on the expense cycle. We debit accounts payable, and we credit a bank or credit card account. Of course in the latter case, it means we paid the bill, with a credit card.

In the video you will see the T-Accounts so that it will be super clear, how you’re impacting the profit and loss, and the balance sheet when you post these transactions. You’ll see what this all looks like in QuickBooks Online, and you’ll see what it looks like on the back end, so you’ll understand how the financial statements work.