QuickBooks makes it easy to manage your balance sheet with the infrastructure it has for setting up and tracking all types of liability accounts on your books. You can see a detailed review of How To Set Up and Track Credit Cards in QuickBooks in my previous blog post. In this post and video I will cover the other types of liability accounts. Liabilities are a necessary part of doing business. It wouldn’t be practical to pay cash for everything we ever bought right up front. Most businesses would fail right from the start. So it is especially important to understand liabilities and next it is important to understand how to work with and manage liabilities in QuickBooks. In this series I am focusing on using the Balance sheet as a management tool where our goal is to increase net worth. This is important if you want financing from a bank, if you are looking for investors, and especially if you are thinking about selling your company.
There are essentially 2 reasons why you incur debt (increase liabilities);
- You purchase something you are going to pay for later.
- Trade A/P
- Equipment Loans
- Purchase on a credit card
- You borrow money
As you will see in the video, the different types of liabilities need to be handled differently on the books. One mistake many bookkeepers make is that they enter a bill for everything. Bills go into Accounts Payable (A/P) and this account is really only appropriate for ongoing monthly billings that we pay off (hopefully) in full each month. You don’t want to put an equipment loan in as a bill because the liability will be included in A/P and while it may prove convenient to be able to record bill payments on this each month, it is not classified correctly. It should be in “Other Current Liabilities” and if you really want to get technical, only the portion of the loan that will be paid in the next 12 months should be in “current”. The rest belongs in long term.
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Download the Effective Interest / Loan Payoff Template right here.