Accounting Basics: What Are Liabilities?
Since I covered “What Are Assets?” already, the next logical step in my “Accounting Basics” series is to cover liabilities. They are kind of like the exact opposite of assets.
While assets are what you own, liabilities are what you owe. Common examples are bank loans, credit card balances, accounts payable (money you owe your vendors), and pretty much any other type of loan or note that you owe to someone else.
Liability accounts are presented on the Balance Sheet and normally have a credit (negative) balance. A debit to a liability account decreases it while a credit will increase it.
Liabilities are further broken down into current and long-term. A current liability is one that is expected to be paid off within one year. Conversely, a long-term liability is expected to not be fully paid off within one year (like a 5 year bank loan, for example). It is common practice to take the portion of a long-term liability that will be paid off within the next 12 months and include that in the current liabilities section of the Balance Sheet and leave the remainder in the long-term liabilities section.
Now, it’s example time!
Let’s say that your company took out a bank loan on January 1 of $60,000.00 with repayment terms of 60 months (5 years). To keep our example simple, we’ll assume that the interest rate is 0% (a pretty sweet deal!).
QuickBooks Training: Bank Reconciliations
One of the easiest ways to check the accuracy of your bookkeeping is to do a bank reconciliation. This simply means comparing the items that show up on your bank statement against the transactions that appear in your QuickBooks account register. Any differences should be investigated and corrected, if necessary.
Bank reconciliations used to be difficult and confusing when we had to do them on paper, but doing them in QuickBooks is super easy. You’ll see everything in the QuickBooks training video below, but all you have to do is type in the statement ending date, the statement ending balance and then click on each item that you see on the bank statement. It’s literally that easy!
But there are still people who struggle with it each and every month and they always need help getting their accounts reconciled. If you’re struggling with your bank reconciliation it usually means that you haven’t done a good job recording transactions in the first place. You want to do everything you can to make your transactions in QuickBooks mirror how they are going to show up on the bank statement. If you keep that goal in mind, everything will work out to be much cleaner and more accurate.
Some of the things that often lead to troublesome bank reconciliations are:
- improper use of undeposited funds (or not using it at all)
- data entry errors (recording transactions for the wrong amount or entering the wrong date)
- merchant account fees being deducted from each sale
- bounced checks
- messing with (or even deleting!) transactions that have already been reconciled in the past
Each of these topics will eventually be covered in their own QuickBooks training video, since there’s a lot to say about each one.
Damn! I switched to a different Wordpress theme and it doesn’t have the same column widths as the one I was using, so the videos don’t fit neatly into the left column. Not the worst thing in the world, but it’s something I need to fix. Looks like I get to play around with some more CSS! At least I got the volume at a decent level this time! 
edit (7/24/08): I decided to have the videos open in a new window so I can have them be a larger size. I think in the future they will be 800×600 so you can really see what I’m doing with even more clarity. I have changed this video so it will open in a new window.
Video Length:14:42
Accounting Basics: What are assets?
A big part of my job in public accounting is working with my clients’ bookkeepers to review their work and make any necessary corrections or adjustments. Many of them don’t have any formal training in accounting and really don’t have a deep understanding of what they are doing or why they are doing it. The small business owner usually doesn’t place a lot of emphasis on the bookkeeping function, so they don’t want to pay top dollar for a more experienced bookkeeper. This drives me crazy!!!
I really wish these small business owners would realize the value of proper bookkeeping and reporting. Most of them are so busy working in the business that they can’t put in any time to work on the business. It’s a common problem, especially among small companies where the owner is also the main employee. If the owner would step out of the “employee” role and spend some time in the “manager” role, they could make good business decisions that would benefit everyone in the company. Of course, they would then need a set of accurate, up to date financial reports which their current bookkeepers probably aren’t capable of giving them.
In an effort to help educate bookkeepers and anyone else who is interested (and who isn’t interested in this stuff?), I am starting a series of posts under the title “Accounting Basics”. Each post will tackle one specific topic or accounting concept. I will be approaching each topic from a small business bookkeeping point of view, with some necessary accounting theory thrown in.
The first topic is “What are assets?”:
About the “Marketplace” ads on the site
I wanted to clarify something about the ads that are displayed under the “Marketplace” heading over on the right sidebar. These are affiliate links to various products which means that if you click on the link and buy the product, I get paid a commission. I want to be totally up front and honest with you guys so I want to make it clear that I only put links to products that I personally use and that I really like. For example, I use Host Gator to host all of my websites. I think they are a great web host and I’ve never had a problem with them. They have really good packages at a pretty low cost. I like them and have no problem recommending them to anyone. The same goes for RoboForm. It’s a password manager and auto form-filler, but it is so useful and so well thought out that I couldn’t imagine being without it.
These are products and services that I use and highly recommend to others. I have no paid advertising on the site and I will always give you my honest opinion about any product or service that I use. In fact, you’ll hear me complain about QuickBooks quite often, but I still think it’s the best small business accounting software available for a lot of people. I do have Google ads on the site, but other than that I only have links to products and services that I believe in. I want you guys to know that integrity is very important to me and that’s why I wanted to let you all know exactly what’s going on here.
That being said, if you were planning on buying RoboForm anyway, I would really appreciate it if you would purchase it through my link!
