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Introduction to Bookkeeping Basics: What’s a Journal Entry?

Journal entries and general ledger skills for bank reconciliation training courses in MYOB, QuickBooks and Xero

In our educational guide, Bookkeeping Beginner Basics, which you can download from the EzyLearn website for free, you’ll learn how to record journal entries in your accounting software, whether you’re using MYOB, Xero or QuickBooks. Most bookkeeping newbies don’t know what a journal entry is, though, which is what this blog post – the latest in our Bookkeeping Beginner Basics guide companion series – is going to help you to understand.

The journal vs. the general ledger

An accounting journal is the record that keeps accounting transactions in chronological order (i.e., as they occur), while the general ledger is a record that keeps accounting transactions by the account – see our previous post on the chart of accounts [Bookkeeping Beginner Basics: The Chart of Accounts] if you need help understanding what the term ‘account’ means in this context. Before computers, bookkeepers used to log all the financial transactions of a business in paper journals, and then at the end of the month transfer these journal entries into the general ledger, which was divided into various accounts that is now called the chart of accounts, and all the transactions were posted to these accounts using a method called double-entry bookkeeping.

Journal entries using accounting software

Today, however, accounting systems, such as MYOB, Xero, QuickBooks and the like, will automatically record most business transactions into the ledger immediately after the software prepares sales invoices, issues cheques to creditors, or processes receipts from customers, and as such you don’t have to create journal entries for most of your business’s transactions.

That being said, some journal entries still need to be processed, in order to record transfers between bank accounts and to record adjusting entries. You would need to make a journal entry, for example, at the end of each month to record depreciation or to record interest accrued on a bank loan.

Double-entry bookkeeping

If journal entries and general ledgers and the double entry bookkeeping method sound a bit too much, and you think you’d rather stick to the cash-based accounting method instead, prepare yourself for bad news: all businesses, whether they use the cash-based accounting method or the accrual accounting method, use double-entry bookkeeping to keep their books, and all accounting software applications, by default, are set up to adhere to the double-entry method, too. The double-entry bookkeeping method reduces errors and also ensures that your books balance, so as complicated as it may seem, it’s much easier in the long run.

If you still feel a little out of your depth, however, you can hire a reliable bookkeeper to manage your bookkeeping system and deal with all the journal entries and double-entry business for you, instead. Visit the National Bookkeeping website for to find a highly qualified bookkeeper whose experience and skills suit your business needs.

This blog post is part of our Bookkeeping Basics series, which are being published to complement our new educational guide, also titled Bookkeeping Beginner Basics, which you can download for free from the EzyLearn website.

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Introduction to Bookkeeping Beginner Basics: The Chart of Accounts

We created a free educational guide, called Introduction to Bookkeeping Beginner Basics, which is available to download from the EzyLearn website, and to complement that guide, we’ve been publishing a series of blog posts, also titled Bookkeeping Basics. We’re now three posts in, and we’re going to be look at the chart of accounts, which is the foundational element of every business’s accounting system. The Bookkeeping Basics guide will take you through how to set up a chart of accounts in your accounting software, whether you’re using Xero, MYOB or QuickBooks, while this blog post is going to explain why it’s important.

What is a chart of accounts?

The chart of accounts (COA) is an organisational tool that lists every account in a business’s account system. In the context of bookkeeping, ‘account’ is used to refer to a unique record for each type of asset, liability, equity, revenue and expense. So a chart of accounts, then, is just a system that organises your finances so that your reports make more sense and you can easily see the financial health of your business.

A well-designed COA helps the business to comply with financial reporting standards, and should be flexible enough so that a business can tailor its chart of accounts to best suit its needs. Within the categories of operating revenues and operating expenses, for instance, the accounts might be further organised by business function or by company divisions. As such, a COA can be as large and as complex as the business itself.

Understanding your ‘accounts’

When you set up your chart of accounts, it will be organised the same way every other company does – your banks accounts come first, then all assets, liabilities, equity, income, and expenses in that order. Here’s what each of those accounts mean:

Assets:

Your accounts receivables are considered an asset, as is your income, but the two are completely different things. Accounts receivables are business claims against the property of a customer that’s occurred following the sale of goods and/or services, and income is what you have collected from the sale of those goods or services.

In other words, if you invoice a customer and give them time to pay, then that’s ‘accounts receivable’. When you collect the money and deposit it into your account, it’s ‘income’.

Learn about Accounts Receivables tasks in the Daily Data Entry Transactions courses for MYOB, Xero or QuickBooks Online.

Liabilities:

Liabilities are notes owed by the business. If you lease anything or you’re buying anything on credit – this includes suppliers who extend a line of credit to you – then it’s considered a liability.

Equity:

An equity account would be any equipment the company has paid for, or would receive money for if it is sold. Cars, machinery, and certain office equipment are all considered equity. If you had a loan on a business vehicle, the payments you make would be considered a liability, but the vehicle itself would be equity. Each time you make a payment, the liability goes down, while the amount of the equity account would increase. To keep your balance sheet accurate, you need to track both.

Expenses:

Finally, expenses are just that: the money paid by the business for the operation and production of goods and services that are paid for immediately. This includes things like stationery or fuel for a business vehicle, which are paid for at the point of sale, is an expense, where a telephone bill that allows you 14 days to pay, on the other hand, is a liability.

Why a chart of accounts is important

Whether you’re using an old fashioned pencil and paper, an excel spreadsheet, or more sophisticated accounting software, such as MYOB or Xero, it’s important to know where your money is coming from and where it’s going to. A chart of accounts is the organisational tool that allows you to do that. And it’s important to keep it up-to-date, so that, if for any reason, you want a picture of how your business is performing financially, your reports will be accurate.

This blog post is part of our Bookkeeping Basics series, which are being published to complement our new educational guide, also titled Bookkeeping Basics, which you can download for free from the EzyLearn website.

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Bookkeepers Need to Know All Cloud-Accounting Systems

GONE ARE THE DAYS when a bookkeeper only needed to know their way around MYOB. Since the internet democratised the accounting software market, abundant MYOB rivals have appeared.

But while there are close to a dozen cloud accounting systems on the market, most bookkeepers — thankfully — will only need to know their way around three: Xero, MYOB and QuickBooks. If you’re looking for a course or training resource on these programs we have a combo offer.

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Bookkeeping Basics: Cash vs. Accrual Systems

Bookkeeping Basics apply to every cloud accounting platform: MYOB, Xero or Quickbooks (QBO)

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BOOKKEEPING IS THE PROCESS of keeping accurate records of the financial affairs of a business, and every business operating in Australia, whether it employs staff or whether it’s owned and operated by a single sole trader, must keep their bookkeeping up to date.

Bookkeeping plays a key role in the lodgement of your tax returns and business activity statements. It can also provide valuable information on the financial health and performance of your business.

The bookkeeping process for a business starts the very moment you begin trading, so it’s extremely important that you set up a system for managing your bookkeeping early in the life of your business — ideally, at the same time that you’re setting up your other operational systems (email accounts, websites, invoicing, etc). We’ve included bookkeeping basics videos in our MYOB training course for several years already but now these basics are part of a separate guide!

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If you’ve never been self-employed before, just the idea of setting up a bookkeeping system is probably enough to strike fear in your heart, which is why we put together a free guide to setting up your own bookkeeping system, called Bookkeeping Basics, which you can download, for free, from the EzyLearn website.

The Bookkeeping Basics guide is an instruction manual on basic features and terminology used in every bookkeeping system, and will provide you with some good foundation knowledge of how your accounting software works, which you can use before you enrol in one of our cloud accounting training courses or find a good bookkeeper to take care of your bookkeeping for you.

Bookkeeping Basics Topic: Understanding cash vs. accrual accounting

The main difference between cash and accrual accounting is the timing of when when revenue and expenses are recognised. Although, the two methods are distinctly different from each other, there are many businesses that use a combination of both.

Cash-based accounting

A cash-based accounting system records transactions at the time the cash was paid or received, regardless of when the transaction occurred. With this method, if you get an invoice from a supplier, for instance, you won’t record the cost in your books until you’ve paid the invoice. By the same token, you won’t record a sale in your books until you receive the money from your customer.

Cash accounting is common among small businesses, especially contractors who work on small projects or are on weekly retainers with their clients, as it’s the simplest way to manage cash flow.

Accrual-based accounting

An accrual accounting system, on the other hand, recognises both income and expenses when the sale takes place, rather than when cash changes hands. When a web designer, for example, raises an invoice for a website they’ve completed, the sale would be recorded in their books, even though they haven’t received payment yet.

With accrual accounting, debtors and creditors are created in your accounting software, which shows what is owing to you and when, as well as what you owe others and when. This helps to give you a truer picture of your financial situation, in particular it helps you keep track of money you do and don’t have in real-time, rather than after the fact as is the case with cash-based accounting.

Which system should you use?

Before cloud accounting software, like MYOB, Xero and QuickBooks came along, a lot of small businesses used a cash-based accounting system simply because the alternative required a lot of grunt work, a lot of the time. Cloud accounting has made it significantly easier to set up and maintain an accrual-based accounting system — in fact, many small businesses that use a cloud accounting system often use this method by default, without even realising.

That being said, there are some things to consider when selecting a system for your business, such as:

  • The size of your business — i.e., will you be employing staff or using lots of contractors?
  • How complicated your business transactions will be
  • Whether you will have the resources to manage an accrual system.

Accrual accounting and GST

There is one last thing to consider, and it relates to GST. For small businesses whose annual turnover is less than $2 million, but greater than $75,000 per annum, they must register for GST and they may choose whether or not to register on a cash or accrual basis. (Businesses with an annual turnover of less than $75,000 are not required to register for GST, but may do so if they wish to.)

How you choose to register for GST will greatly affect your business’s cash flow. If you choose to register for GST on an accrual basis, GST will be payable on sales for which payment hasn’t been received yet, and could leave you out of pocket until your client pays you. That being said, GST can be claimed on unpaid expenses if you hold a tax invoice. If your business has a lot of expenses, this may balance out in the wash. If you run a leaner operation, however, it most probably will not, so this is something you should give careful consideration to.

This blog post is part of our Bookkeeping Basics series, which are being published to complement our new educational guide, also titled Bookkeeping Basics, which you can download for free from the EzyLearn website.

[box type=”info”] This blog post is part of our Bookkeeping Basics series, which are being published to complement our new educational guide, also titled Bookkeeping Basics, which you can download for free from the EzyLearn website.[/box]

Featured Mandurah (WA) Bookkeeper

deb-crompton-bookkeeper-from-mandurah-wa-local-myob-and-xero-portrait-smlIf you’re looking for a reliable bookkeeper to manage your daily or weekly bookkeeping and accounts, either remotely or in-person, Deb from Mandurah WA is a qualified bookkeeper with tertiary qualifications and the practical experience of having operated her own business in the past. Deb has a lot of experience in the day-to-day accounting functions of a small business and you can contact her directly as a fully licensed member from her profile page.

Our National Bookkeeping website has recently gone through a significant upgrade so watch out for more stories about featured bookkeepers in forthcoming blogs! Join and we can feature YOU in our articles too.

Start a bookkeeping business in your local area

Start a bookkeeping business not a franchiseMany bookkeepers starting a bookkeeping business for the first time also find it quite daunting; after all, they have moved from the corporate world where various and multifaceted aspects of running the business are managed by other people.

We put these bookkeepers through our EzyStartUp Course to help them define their goals, pricing strategies, marketing message and professional profile. They also get support from a business mentor and brand building from our digital marketing team.