It’s very easy to start learning business accounting and think you’re in a whole new world. “It’s so complicated!”, you say. Well, one approach is to bridge your knowledge of your personal finances to your business finances and that, believe it or not, is not a bridge too far.
Let’s take the Chart of Accounts as a perfect example. Just that terminology leads to confusion. The Chart of Accounts doesn’t really have “accounts” at all. When you think about your personal finances, your “accounts” are at a bank or an investment firm. You deposit and withdraw money from these accounts. The truth is, the Chart of Accounts in business accounting is really just a chart of categories. They are the means by which you classify your transactions. But don’t we do that in our personal finances also? Of course we do. Let’s look at an example in three software programs.
Personal Finances in Quicken
Below, we see two transactions entered in Quicken Premiere.
We see two payments to Prudential which have been categorized as “Insurance”. This enables us to run reports in Quicken which tell us how much we have spent on insurance in any given time.
Business Finances in QuickBooks Online
Now let’s look at a similar screenshot from QBO.
Here, our company subscribes to a business book club “Books by Bernie”. We have categorized the payment to “Dues & Subscriptions”. As in the personal finance example, QBO lets us run a report (the Income Statement) that tells us how much we’ve spent on dues and subscriptions.
Business Finances in Xero
Finally, let’s look at a similar transaction in Xero.
Here we have a payment made to Smart Agency for an advertising campaign. We have chosen “Advertising” as our category for this payment.
So What’s the Difference?
In our personal finances, we pick a category to classify a transaction. In our business finances, we pick “an account” from the Chart of Accounts to classify our transaction. Interestingly, the only real difference between the two is what goes on behind the scenes – shielded from us by the software program.
In personal finance, we categorize and then we are done. In business finance, behind the scenes, the software is sorting out debits and credits. So in both the QBO and Xero examples, we credit the cash account (which may be a bank account) and we debit the expense account (Dues and Subscriptions, or Advertising). The debits and credits match (as they must) and our balance sheet shows we are in balance.
Thanks to modern business accounting software, the journal entry of debits and credits that we might have had to do by hand are done for us behind the scenes in the software. So, for all intents and purposes, assigning a transaction to an “account” in the Chart of Accounts is no different from categorizing an expense as we would in our personal software.
I am convinced that throughout the ages, the accounting Gods have gone out of their way to confuse us. Maybe it’s a way of keeping the average Joe out of an elite club that uses its own obscure jargon? In any case, I believe accounting and bookkeeping professionals should use every opportunity to make business finance understandable for everyday folks who are just trying to make their businesses succeed.
Have you been able to bridge business accounting principles to your everyday experiences? If so, please share your thoughts in the comments below.