QuickBooks News
QuickBooks Features
QuickBooks Common Questions
QuickBooks Tips
QuickBooks Product Updates
Articles
Prior Issues

2003 "Voices of Small Business and Accountants" Study
Intuit, Inc., the maker of QuickBooks, announced the results of its second annual nationwide "Voices of Small Businesses and Accountants" study, conducted in conjunction with Decipher Inc., an independent market research firm. This study reinforces that accountants continue to play an integral role in the growth and success of their small business clients and remain trusted advisors for these businesses.

Coinciding with accountants' focus on maintaining success and growth, America's small business owners are continuing to express their satisfaction with the quality of service they receive from their accountants, even more so this year than in 2002. The study found that 80 percent of the small business owners polled this year are "very satisfied" with their accountant's service, as compared to 68 percent last year.

Additional positive findings from the study show that accountants and small business owners both see an improving future ahead for their industries and individual businesses, despite declining economic conditions and the effects of war on the Nation. Two-thirds of both groups say they remain "very optimistic" or "optimistic" about their prospects for future growth and success. In addition, 32 percent of small business owners express that their accountant has helped them significantly during the economic downturn. However, the study also reveals that an equal number of small businesses (34 percent) feel that their accountant has not helped them enough during this time, illustrating an opportunity for client service and growth, as small businesses continue to turn to their accountants for an increasing advisory role in their business.

In the area of services, small business owners express that they generally turn to their accountants for help with taxes (77 percent) and basic bookkeeping (56 percent). Accountants have also expressed that they are expanding their services, beyond basic tax and bookkeeping, into areas such as payroll (70 percent), financial statements (81 percent) financial planning and investment (56 percent), business consulting (67 percent), human resources (16 percent) and industry-specific consulting (44 percent). Despite the spectrum of these offerings, more than one out of three small business owners are not aware that their accountant performs expanded services. Similar to findings from last year's study, this lack of awareness by small business owners illustrates a continued need for accountants to better market their new service offerings to their clients.

One of the major findings of the "Voices of Small Businesses and Accountants" study shows that while almost half (49 percent) of small business owners do not recognize any big opportunities for improvement in running their business, a much larger percentage of accountants (97 percent) do feel that their clients have the opportunity to address certain areas. Accounting firms mainly see small business owners having an opportunity to strengthen their financial decisions (32 percent), as well as improve their understanding and investing in technology (10 percent). This insight into how small business owners are running their businesses demonstrates that accountants have the opportunity to play a much larger role as business advisors to their clients, working closely with them to help them grow their businesses.

The "Voices of Small Businesses and Accountants" study also addressed the day-to-day challenges facing small business owners and accountants running their own practices. Not surprisingly, both groups named many of the same challenges, including generating new clients and revenue streams, managing employees and worrying about their individual practice or business. In addition, 20 percent of accountants and 13 percent of small business owners expressed that they find it a challenge to keep up with technology trends. One thing both groups would like is more free time; 48 percent of accountants and 35 percent of business owners would enjoy some time off. Personal matters, including finances, family life and health, are equally pressing to both groups.

Additional findings include:

• 70% of accountants feel that dealing with clients if their most time consuming job, while 35% of small business owners feel the same way about dealing with customers.
• 10 percent of small business owners feel that accounting and managing finances is their most time consuming job.
• Over half of accounting firms (57 percent) have high-speed broadband Internet connections, compared to (41 percent) of small businesses.
• 56 percent of accountants and 24 percent of small business owners identify accounting software as the one technology that they can't live without.

Almost half of both groups are members of trade associations for their own industries - 63 percent of accountants and 42 percent of small business owners; both groups benefit from by keeping up with industry trends and learning about industry regulations.

For the complete study, go to http://www.intuit.com/company/press_releases/2003/07-22b.html.

Web-Based Accounting Gaining Momentum
Internet access among small businesses has increased by nearly 30 percent in the past two years, prompting more owners and managers to turn to the Web to manage their daily activities and managing their finances is no exception. According to Intuit, Inc., the makers of QuickBooks, QuickBooks Online Edition has seen its user base increase by more than 200 percent in the past year - expecting to reach 10,000 subscribers by the end of July 2003.

Intuit research shows the increase in subscriptions is due in part to strong word of mouth from current users. More than 90 percent of the QuickBooks Online Edition user base would recommend the service to accountants, business associates or friends.

"We've always known that QuickBooks Online Edition was a great solution for small businesses wanting to take advantage of the Internet's flexibility. It was just a matter of time before word of mouth started to spread," said Allison Mnookin, vice president, QuickBooks, Intuit, Inc. "Our success is due in large part to our focus on providing small businesses with a simple, easy to use solution with the functionality they need most, vs. overwhelming them with a suite of applications they have no use for and can't afford."

Surprisingly, interest in QuickBooks Online Edition is not limited to early technology adopters. Recent Intuit research found that the average QuickBooks Online Edition user is an average small business - ranging from realtors and painters to consultants. Most turned to the Web because they wanted to access their books from multiple locations (75 percent) or needed more than one person to access their books (50 percent).

"The strategic importance of the Internet to small businesses nearly doubled from 44 percent in 1999 to 81 percent in 2002," said Helen Chan, senior analyst, Yankee Group. "As broadband penetration grows, small businesses are learning how to leverage the Internet to adapt to their business work style. Because of this, a growing number of businesses are becoming more amenable to solutions like Web-based accounting, as they can more readily accommodate changing organizational dynamics in the business."

This is also benefits the small business and their accountant. The accountant can set a client up on QuickBooks Online Edition so the accountant can remotely access the client's financial data "behind the scenes" at any anytime, without having to disrupt the client's business. This helps the client avoid getting bogged down with accounting issues, and it also saves the accountant time from having to travel to and from the client's office or transferring files back and forth.

QuickBooks Online Edition subscriptions start at $19.95 per month for up to three users. Access for subscriber's accountant is free (registration required). Support is provided at no additional charge. For more detailed product information or to access the 30-day free trial, call us or visit http://www.qboe.com.

Buying or Transferring Fixed Assets to Your Business
If you personally own assets that you want to transfer to your business, or if you purchase a fixed asset for your business with personal funds, you'll need to set up fixed asset accounts. If you plan to track depreciation, you'll need to set up separate subaccounts for original costs and for accumulated depreciation.

For new asset purchases - After you have entered all the asset account information, you'll need to add an entry to your "Company Owes Me" account.

To enter a fixed asset bought with personal funds

1. From the Lists menu, choose Chart of Accounts.
2. Double-click your Company Owes Me account to display the account's register.
3. (Optional) Enter the name of the payee.
4. In the Increase column, enter the price you paid and tab to the next line.
5. From the Account drop-down list, choose the appropriate Asset account.
6. (Optional) Enter a memo.
7. Click Record.

For personal assets you want to transfer to your business - After you have entered all the asset account information into QuickBooks, you'll need to add an entry to an equity account. The transfer of a personal asset is an investment in your business, so you'll use an equity account, rather than the "Company Owes Me" liability account.

To transfer a fixed asset from your personal holdings to your business

1. From the Lists menu, choose Chart of Accounts.
2. Select the equity account you use to track owner investments and double-click to display the account's register.
3. (Optional) Enter your name.
4. In the Increase column, enter the depreciated value of the asset and tab to the next line.
5. From the Account drop-down list, choose the appropriate asset account.
6. (Optional) Enter a memo.
7. Click Record.

Taking Out a loan to Pay for an Asset

1. If you've made a down payment on an asset, record the down payment as an ordinary check or withdrawal from a bank account.
   1. In the Account field, enter the name of the asset account.
   2. Record the transaction.
2. Display the register of the asset account.
3. In the down payment transaction, change the name in the Payee field of the register to the name of the asset.
4. Add the name to your Other Names list.
5. Click Record.
6. Enter a new transaction in the asset's cost subaccount register.
   1. In the Payee field, enter the name of the asset.
   2. In the Increase field, enter the amount of the loan.
   3. In the Account field, enter the name of the liability account you've created to track the loan.
7. Click Record.

Setting Up a Liability Account for a Loan
You can use QuickBooks liability accounts to track the loans your company has with lending institutions and lenders.

1. From the Lists menu, choose Chart of Accounts.
2. From the Account menu button, choose New.
3. In the New Account Window, click the Down Arrow to display the list of account types:
   1. For short-term loans (one year or less), choose "Other current liability" as the account type. For long-term loans, choose "Long term liability."
   2. Enter the name of the lender and a description of the loan.
4. Leave the opening balance at 0.00.
5. Click OK.

Recording a Payment on a Loan
When it's time to make a payment on a loan, use the Write Checks window to record a check to your lender.

1. From the Banking menu, choose Write Checks.
2. Make a check out to your bank for the amount of the payment.
3. In the detail area of the check, assign the amount for interest to an interest expense account, and the amount for principal to the liability account you created to track the loan.
4. Save the payment.

Recording Capital Investments

1. From the Banking menu, choose Make Deposits.
2. If QuickBooks displays the Payments to Deposit window, do one of the following:
   1. Select the payments you want to deposit along with your investment check, and then click OK.
   2. Click Cancel to deposit the investment check by itself.
3. In the Make Deposits window, choose the bank account into which you're depositing the money.
4. In the detail area, enter the name of the person whom you received the money from and the amount of the investment.
5. From the "From account" drop-down list, choose the appropriate equity account.
6. Save the transaction.

Recording an Owner's Draw

1. From the Banking menu, choose Write Checks.
2. Make the check out to the owner.
3. In the detail area of the check, assign the amount of the check to the equity account you use to record owner's draws.
4. Save the check.

What are Fixed Assets?
QuickBooks distinguishes between two types of assets current and fixed assets.

Current assets - These are the assets you are likely to convert to cash within one year. They include the cash you have on hand, the money in your checking and savings accounts, and the money your customers owe your business.

Fixed assets - These are the assets you do not expect to convert to cash during one year of normal operations. A fixed asset is usually something that is necessary for the operation of your business-like a truck, cash register, or computer. You can also use this account to track the depreciation of your company's fixed assets. QuickBooks automatically sets up this account if you select a preset chart of accounts when you create your QuickBooks company. The account includes a subaccount named "Accumulated Depreciation."

What is Depreciation?
Depreciation is the process of deducting the purchase price of a fixed asset over several accounting periods.

Most businesses need to purchase some kind of durable equipment in order to operate. Equipment that lasts longer than one year is called a fixed asset. These assets assist in the generation of revenue over time. For instance, an oven that lasts several years may be used to bake many loaves of bread each day. The oven is integral to the sale of each loaf of bread.

Property such as ovens, furniture, computers, vehicles, and buildings contribute to the operating capacity of a company over many years. Because of this long-term contribution, fixed assets are treated differently than many other business expenses.

The purchase price of these fixed assets is typically expensed over a period of years, rather than in the year the purchase was made. This business expense is known as depreciation.

Depreciation can be understood in three ways:

• Popular definition - A decline in the market value of an asset due to wear and tear or obsolescence. A new automobile "depreciates" when you drive it off the lot.
• Tax definition - A way to recover the cost of a fixed asset through tax deductions. Like other business expenses, depreciation expenses reduce your taxable income.
• Accounting definition - A means of allocating a portion of a fixed asset's cost to each period that the asset helps generate revenue.

What is Equity?
Equity is the net worth of a company. If you sold all your assets today, and you paid off your liabilities with the money received from the sale of your assets, the money you would have left would be equity.

Equity comes from two sources:

• Money invested in your company
• Profits or losses from your business

Of course, an owner can also take money out of the company. Such withdrawals, called owner's draws, reduce the company equity.

You can create additional equity accounts as you need them. You can use equity accounts to track the following:

• Owner's equity
• Owner's draws
• Capital investment
• Capital stock

If you own your company, we recommend that you add at least one equity account to track your personal investment and owner's draws.

What Equity Accounts Do You Start With?
When you set up your QuickBooks company, QuickBooks automatically sets up these two equity accounts for you:

Opening Bal Equity - QuickBooks automatically creates this account when you enter the starting balance of your first balance sheet account. QuickBooks uses Open Bal Equity to ensure that you get a correct balance sheet even before you've entered all your company's assets and liabilities. QuickBooks records the opening balance of each account in Opening Bal Equity.

You can transfer some, or all, of the money in Opening Bal Equity to other equity accounts.

Retained Earnings - This account tracks your company's net income from previous fiscal years. QuickBooks automatically transfers your profit (or loss) to Retained Earnings at the end of each fiscal year.

What is Retained Earnings?
Retained earnings are profits from earlier accounting periods that have not been distributed to the company's owners. At the end of your fiscal year, QuickBooks computes your profit (or loss) into an equity account named Retained Earnings.

1. From the Reports menu, choose Company & Financial.
2. Choose Balance Sheet Standard. Your Retained Earnings Account appears in the Equity section of the balance sheet.

What is a Capital Investment?
A capital investment is personal money that you or a business partner invests in your business. You use an equity account to track capital investments.

Fixed Assets
You can set up accounts for fixed assets on hand as of the QuickBooks start date during the "Opening Balances" portion of the "EasyStep Interview." Alternatively, you can set up opening fixed asset account balances by adding new accounts in the chart of accounts.
The setup procedures are similar for either method. When setting up fixed asset accounts, consider whether you want to set up separate accounts for each fixed asset or for groups of related assets (such as furniture, equipment, buildings, land, etc.). Alternatively, you may want to set up a single "Fixed Assets" parent account with subaccounts for fixed asset groups and a single subaccount for accumulated depreciation. This option may be particularly appealing if you track fixed asset details and depreciation using fixed asset software or Excel rather than QuickBooks. In that case, it is not necessary to set up account balances for individual fixed assets in QuickBooks. You can enter the balances for fixed asset groups as subaccounts when setting up and maintaining fixed assets in QuickBooks. In addition, you may choose to set up and maintain a single accumulated depreciation subaccount for all their fixed assets since depreciation is tracked outside of QuickBooks.

The following procedures for setting up fixed asset accounts in the "Accounts" tab of the "Opening Balances" portion of the "EasyStep Interview" apply to individual fixed assets as well as to groups of related fixed assets:

1. Click "Yes" to the question, "Would you like to set up an asset account?" in the "Asset accounts" window.
2. Enter the name of the fixed asset or fixed asset group and select "Fixed Asset" as the "Type" in the "Adding an asset account" window.
3. Click "Yes" or "No" as applicable to the question, "Do you track depreciation for this fixed asset?" in the "Adding another asset" window.
4. If "Yes" was answered to the previous question and the fixed asset was purchased before the QuickBooks start date, enter its original cost in the "Original Cost" field of the "Fixed asset cost and depreciation" window. (Enter "0.00" if the fixed asset was purchased after the QuickBooks start date.) Be sure to enter the asset's original cost as of the purchase date rather than its undepreciated cost as of the QuickBooks start date. (For fixed asset groups, enter the total original cost of fixed assets purchased before the QuickBooks start date in the "Original Cost" field.) Enter the accumulated depreciation as of the QuickBooks start date in the "Depreciation" field.
5. If "No" was answered to the question "Do you track depreciation for this fixed asset?" enter the asset value as of the start date.

If you use a "Fixed Assets" parent account with subaccounts for fixed asset groups can follow the preceding procedures to set up the parent account in the "EasyStep Interview." Regardless of how fixed asset accounts are set up, QuickBooks automatically creates a "Depreciation Expense" account when users accept the preset chart of accounts for their industry in the "EasyStep Interview."

If you do not set up fixed asset accounts in the "EasyStep Interview" but that maintain parent accounts for individual fixed assets or fixed asset groups should:

1. Select "Chart of Accounts" from the "Lists" menu.
2. Set up a parent account for each fixed asset or group of related fixed assets.
   1. Click the "Account" button in the "Chart of Accounts" window and select "New."
   2. Select "Fixed Asset" from the "Type" drop-down list in the "New Account" window.
   3. Enter the name of the fixed asset or fixed asset group.
   4. Leave the "Opening Balance" field blank.
   5. Click "OK."
3. Set up a cost subaccount for each fixed asset or group of related fixed assets.
   1. Click the "Account" button in the "Chart of Accounts" window and select "New."
   2. Select "Fixed Asset" from the "Type" drop-down list in the "New Account" window.
   3. Enter "Original Cost" in the "Name" field.
   4. Check the "Subaccount of" box and enter the name of the parent account.
   5. Enter the original cost of the fixed asset as of the QuickBooks start date in the "Opening Balance" field. Leave the field blank if the asset was purchased after the QuickBooks start date. (For fixed asset groups, enter the total original cost of fixed assets purchased before the QuickBooks start date in the "Opening Balance" field.)
   6. Enter the date the fixed asset was purchased in the "As of" field. (For fixed asset groups, enter the QuickBooks start date.)
   7. Click "OK."
4. Set up an accumulated depreciation subaccount for each fixed asset or group of related fixed assets.
   1. Click the "Account" button in the "Chart of Accounts" window and select "New."
   2. Select "Fixed Asset" from the "Type" drop-down list in the "New Account" window.
   3. Enter "Depreciation" or "Accumulated Depreciation" in the "Name" field.
   4. Check the "Subaccount of" box and enter the name of the parent account.
   5. Enter the accumulated depreciation for the fixed asset as of the QuickBooks start date in the "Opening Balance" field. The amount should be entered as a negative number. Leave the field blank if the asset was purchased after the QuickBooks start date. (For fixed asset groups, enter the accumulated depreciation amount as of the QuickBooks start date.)
   6. Enter the QuickBooks start date in the "As of" field.
   7. Click "OK."
5. Set up a "Depreciation Expense" account if the user did not accept the QuickBooks preset chart of accounts for their industry in the "EasyStep Interview."

If you maintain a single "Fixed Assets" parent account with subaccounts for fixed asset groups should set up a parent "Fixed Assets" account if it was not set up in the "EasyStep Interview." You should set up subaccounts for each fixed assets group, as well as a single subaccount for total accumulated depreciation.

You should verify that fixed asset purchases are charged to the applicable fixed asset accounts rather than expense accounts. In addition, you should verify that the entire cost of a fixed asset is recorded. When a fixed asset purchase is financed, many users erroneously record the cost of the asset only as cash is paid. Consequently, the fixed asset account balance is understated until the final payment is made. If you determine that the entire cost of a fixed asset purchase is not recorded, you should record a journal entry that debits the unrecorded cost of the fixed asset and credits the applicable liability account. Alternatively, you can post the transaction directly to the fixed asset account register as follows:

1. Select "Chart of Accounts" from the "Lists" menu and double-click on the "Original
   1. Cost" subaccount for the applicable fixed asset account.
2. Enter a new transaction in the fixed asset account register.
   1. Enter the name of the asset in the "Payee" field (or leave the field blank).
   2. Enter the unrecorded cost of the fixed asset in the "Increase" field.
   3. Select the applicable liability account from the "Account" field (or create a new liability account if necessary.

If a fixed asset purchase is financed, you should verify that subsequent payments are charged to the applicable liability account rather than the fixed asset account and make any necessary adjusting entries for those payments.

In addition to verifying that fixed asset purchases are recorded correctly, you should verify that fixed asset sales are recorded correctly. If you record fixed asset sales such sales should be recorded via a journal entry as follows:

1. Select "Make Journal Entry" from the "Banking" menu.
2. In the first line of the journal entry, select the "Original Cost" subaccount for the applicable fixed asset account from the drop-down list in the "Account" field and enter the original cost of the asset in the "Credit" field.
3. In the next line of the journal entry, select the "Accumulated Depreciation" subaccount for the applicable fixed asset account and enter the balance in that account as of the sale date in the "Debit" field.
4. In the next line of the journal entry, select the applicable bank account used to deposit the cash proceeds from the sale and enter the amount of cash received in the "Debit" field. (If the cash proceeds have not been deposited, select the "Undeposited Funds" account.)
5. In the next line of the journal entry, select the applicable receivable account (if the seller is providing financing) and enter the amount of financing provided in the "Debit" field. (Loans receivable generally should be set up using "Other Asset" as the account type.)
6. In the next line of the journal entry, select the applicable gain or loss account and enter a loss amount in the "Debit" field or a gain amount in the "Credit" field. YOu may need to create new accounts for gain or loss on sale of fixed assets if such accounts are not set up already. Gain and loss accounts should be set up using "Other Income" and "Other Expense" as the account types. The gain or loss amount is the difference between (a) cash proceeds plus seller financing and (b) the original asset cost less accumulated depreciation.

If you already have recorded the cash proceeds from the sale as a deposit, you should determine the account to which you posted the deposit and correct that account if necessary when posting the journal entry for the sale.

After calculating the depreciation amount, you should record a journal entry that debits the "Depreciation Expense" account and credits the "Accumulated Depreciation" subaccount for the applicable fixed asset. Alternatively, you can record depreciation directly in the account register for the applicable accumulated depreciation subaccount. In that case, the depreciation amount should be entered in the "Decrease" column and the "Depreciation Expense" account should be selected from the "Account" drop-down list. You may want to set up depreciation journal entries as memorized transactions. In determining which depreciation method best meets your needs, you may want to access the QuickBooks depreciation "decision tool." The decision tool does not actually calculate depreciation, but it provides useful information that you may use to help you better understand the decisions that need to be made concerning such items as depreciation methods, useful lives of assets, partial-year depreciation, and GAAP vs. tax depreciation. You can access the depreciation decision tool by selecting "Planning and Budgeting," "Decision Tools," and then "Depreciate Your Assets" from the "Company" menu.

Many small to medium-sized companies use depreciation methods and useful lives prescribed by tax laws even if they maintain their general ledgers on the GAAP basis of accounting. They do so because (a) it avoids the need to maintain separate depreciation schedules for book and tax purposes and (b) the results often are not significantly different than those achieved using GAAP depreciation methods and lives. However, if the tax depreciation amount differs significantly from the GAAP depreciation amount, you should adjust the amount when preparing GAAP financial statements.

You should allocate annual depreciation expense to interim periods. The allocation to interim periods generally is made on a straight-line basis. Thus, if a one-month period were being processed, one twelfth of the annual depreciation expense would be recorded. Similarly, if processing were done on a quarterly basis, one fourth of the annual expense would be recorded. You should adjust the monthly or quarterly depreciation expense calculation for fixed asset additions, disposals, and other changes during the year. However, as a time-saver, some users do not adjust for those items until year-end. While it may save time, waiting until year-end to adjust depreciation expense for asset additions and disposals is appropriate only if the effect of the adjustment is immaterial.

Loans and Notes Payable
You can set up liability accounts for loans and notes payable as of the QuickBooks start date during the "Opening Balances" portion of the "EasyStep Interview." Alternatively, you can setup opening loans and notes payable account balances by adding new accounts in the chart of accounts. The setup procedures are similar for either method. When setting up loans and notes payable accounts in the "Accounts" tab of the "Opening Balances" portion of the "EasyStep Interview," you should:

1. Click "Yes" to the question, "Would you like to set up an account to track a loan or note payable?" in the "Loans and Notes Payable" window.
2. Enter the lender's name in the "Adding a loan (liability) account" window.
3. Enter the unpaid balance of the loan (not the original loan amount) as of the QuickBooks start date. Enter "0.00" if the loan was obtained after the QuickBooks start date.
4. Click the "Long Term Liability" box if the loan will not be paid off in a year. (QuickBooks classifies the loan as a current or long-term liability based on whether the box is checked.)

You should set up a separate loan or note payable account for each loan or note. QuickBooks automatically creates an "Interest Expense" account (as well as "Finance Charge," "Loan Interest," and "Mortgage" subaccounts) when users accept the preset chart of accounts for their industry in the "EasyStep Interview."

If you do not set up loans or notes payable accounts in the "EasyStep Interview", you should:

1. Select "Chart of Accounts" from the "Lists" menu.
2. Click the "Account" button in the "Chart of Accounts" window and select "New."
3. For long-term loans, select "Long Term Liability" from the "Type" drop-down list in the "New Account" window. Select "Other Current Liability" for short-term loans (i.e., loans that will be paid off in one year or less).
4. Enter the lender's name in the "Name" field.
5. Enter optional loan information in the "Description" and "Bank Account No." fields.
6. Enter the unpaid balance of the loan as of the QuickBooks start date in the "Opening Balance" field. (Leave the field blank if the loan was obtained after the QuickBooks start date.)
7. Enter the date the loan was obtained in the "As of" field.
8. Click "OK."
9. Set up an "Interest Expense" account if you did not accept the QuickBooks preset chart of accounts for their industry in the "EasyStep Interview."

When setting up a new loan or note obtained after the QuickBooks start date, create the liability account as discussed in the preceding paragraph. You then record the loan proceeds by selecting "Make Deposits" from the "Banking" menu. The name of the applicable loan or note payable account should be selected from the drop-down list in the "From Account" field. You record subsequent loan payments by selecting "Write Checks" from the "Banking" menu. Select the applicable loan or note payable account from the "Account" drop-down list in the "Expenses" portion of the "Write Checks" window and charge the principal portion of the loan payment to that account. In the next line of "Expenses," select the applicable "Interest Expense" account (or subaccount) and charge the interest portion of the loan payment to that account. You may charge the entire loan payment to the liability account. In that case, record a journal entry to debit interest expense and credit the liability account. To save time when recording interest expense in interim periods, some users determine the interest expense on loans for the entire year (from the loan amortization schedules) and allocate the annual interest expense to interim periods on a straight-line basis. Thus, if a one-month period were being processed, one twelfth of the annual interest expense would be recorded. Similarly, if processing were done on a quarterly basis, one fourth of the annual expense would be recorded. However, you should not use that allocation method if it materially distorts periodic interest expense.

In addition to loans and note payable, you should determine whether you have any lines of credit. A line of credit that exists as of the QuickBooks start date can be set up in the "EasyStep Interview" as follows:

1. Click "Yes" to the question, "Do you have any lines of credit?" in the "Adding lines of credit" window.
2. Enter the lender's name in the "Adding a line of credit" window.
3. Enter the date of the last line of credit statement received on or before the QuickBooks start date and the ending balance from that statement in the "Last statement date and balance" window. (Do not enter a balance for a line of credit obtained after the QuickBooks start date.)

Opening Balance Equity
The "Opening Balance Equity" account probably is one of the most misunderstood accounts in QuickBooks. QuickBooks automatically creates this account the first time you enter an opening balance for a balance sheet account. QuickBooks then automatically posts the offsetting entry to the opening balance for each asset and liability account to the "Opening Balance Equity" account. Since the only purpose of the "Opening Balance Equity" account is to offset beginning balance sheet balances as of the QuickBooks start date, you should:

1. Verify that the only amounts posted to "Opening Balance Equity" relate to the setup of balance sheet accounts as of the QuickBooks start date. Reclassify any amounts resulting from other transactions.
2. Verify that the adjusted balance in the "Opening Balance Equity" account equals the total equity amount in the client's balance sheet immediately preceding the QuickBooks start date.
3. Transfer the balance in the "Opening Balance Equity" account to the applicable equity accounts (such as retained earnings, proprietor's capital, or partners' capital).
4. You can transfer the balance in the "Opening Balance Equity" account to the applicable equity accounts via a journal entry or by double-clicking on the "Opening Balance Equity" account in the chart of accounts to record the transfer directly in the "Opening Balance Equity" account register.

You should not post transactions to the "Opening Balance Equity" account. However, QuickBooks automatically posts unresolved bank statement and credit card reconciliation differences to the "Opening Balance Equity" account. In addition, many users post other transactions to the "Opening Balance Equity" account since they do not understand that the only purpose of that account is to offset beginning balance sheet balances as of the QuickBooks start date. Consequently, you should not post any transaction to "Opening Balance Equity." In addition, practitioners should review that account each accounting period to verify that its balance is zero. If the balance is not zero, practitioners should review the detail transactions posted to the account and transfer the transaction amounts to the appropriate accounts.

QuickBooks Online Edition
Small service businesses with simple accounting needs may consider using QuickBooks Online Edition. The Web-based accounting program runs on Intuit's web servers and can be accessed from any location that has an Internet connection and a web browser. QuickBooks Online Edition is not the same program as the desktop-based QuickBooks, however. The programs offer different features and capabilities. Thus, some may find the program more appealing than others.

Advantages of QuickBooks Online Edition
Online accounting services such as QuickBooks Online offer several advantages over traditional desktop-based accounting software. For example:

• The software is easy to set up. Companies can subscribe to the service by completing an online interview that takes approximately 10 minutes.
• Users need nothing more than an Internet connection and a web browser to access the service. Because QuickBooks Online is hosted and managed by Intuit on its servers, users do not need special internal information technology resources.
• Users can access the service from anywhere and at any time. Users also can grant access to accountants or trusted employees at remote locations. (The monthly subscription fee to QuickBooks Online is based on the number of users. Each time a user logs into the company's file, an entry is added to the Access Log, which describes who logged into the system and what he or she did.)
• Users enter data directly into the accounting system, thus eliminating the delays and inaccuracies caused by sending data back to the client for entry.
• Users do not have to be concerned with upgrades or system backups. Because the software resides on Intuit's servers, it is always the latest version available. Also, Intuit's server files are backed up daily, and the backups are moved to a remote location. Thus, client data is safeguarded in the event of a fire or other disaster.
• Intuit has implemented several measures to ensure the security of client data. Passwords must be used to gain access to client data, and data transmitted over the Internet is encrypted using 128-bit encryption and Secure Socket Layer technology.

Accountants may benefit from a client's use of QuickBooks Online, as well. The service can help practitioners perform write-up work "on demand" since the client's information can be accessed at any time and from any location. The traditional process of transferring disks back and forth while making sure both the client and the accountant are using the same software release is replaced with "real time, anytime" involvement. That can better suit the schedules of both the accountant and client. Furthermore, because the practitioner will be relieved of some of the manual operations required in performing traditional write-up services, some accountants believe the use of online accounting services such as QuickBooks Online will make them more efficient and better able to fulfill a more value-added advisory role to their clients.

Disadvantages of QuickBooks Online
Of course, QuickBooks Online is not for everybody. There are several drawbacks or risks to using the service, many of which are inherent to any online accounting software program. For example:

• Many of the features available in QuickBooks are not available in QuickBooks Online. QuickBooks Online currently does not provide online banking, online bill payment, or purchase orders. Reports and graphs are available, but not as many as in QuickBooks. Report customization also is somewhat limited in QuickBooks Online.
• Heavy Internet traffic may slow down service response time, and servers may be down, preventing access to company data. (However, Intuit tries to notify users in advance for scheduled maintenance downtime. Also, Intuit's servers are connected to backup generators to protect against power failures.)
• Company data cannot be accessed if the user's Internet connection is down.
• Users may not have fast enough Internet connections to efficiently use the service for their basic accounting system. (Intuit recommends a persistent, high-speed Internet connection such as DSL, a cable modem, or T1 line.)
• While every reasonable precaution has been taken to protect the privacy of company data, there is always the possibility that a malicious hacker could break through Intuit's security configuration and access accounting data.

Who Should Consider Using QuickBooks Online?
Because it lacks many of the features of QuickBooks, QuickBooks Online works best for service companies with relatively simple accounting needs (i.e., those who do not need estimates, online banking, or inventory tracking). Even then, those companies may not see significant benefits from the software unless they wish to give accountants or employees in remote locations access to their accounting records. Generally, users who want a more full-featured accounting program to create estimates, perform job costing, track inventory and purchase orders, or integrate with Microsoft Word and Outlook should use QuickBooks rather than QuickBooks Online.

Those who are unsure about using QuickBooks Online can try the software for free for 30 days. During the free-trial period, users can view a sample company, try various features, and change and view reports. Alternatively, users can enter their own company information and begin using QuickBooks Online.

System Requirements
The system requirements for QuickBooks Online are fairly basic since the application program itself resides on Intuit's remote servers. To use the current version of QuickBooks Online, Intuit recommends:

• IBM-compatible 200MHz computer with 64MB of RAM.
• Windows 95, 98, ME, NT 4.0, XP, or 2000 (Mac OS is not supported).
• Microsoft Internet Explorer 5.0 or above (6.0 is recommended).
• Internet access (a persistent connection such as DSL, a cable modem, or T1 line is recommended).

Tax vs. Book Depreciation
The game of accounting uses a very thick rule book. In fact, sometimes it uses two. Tax laws often differ from the generally accepted accounting principles that govern the preparation of financial statements. Why is this?

The purpose of financial accounting is to provide accurate financial data on which to base business decisions. Income tax laws serve a different purpose: they provide revenue for governmental goods and services. Some deductions that are allowable to arrive at taxable income are not allowed under generally accepted accounting principles (GAAP). Because the goals of financial accounting and income tax accounting differ, sometimes their rules differ, too.

This article focuses on book depreciation for several reasons:

• GAAP helps you generate accurate data for better business decision making.
• Lenders, investors, and other third parties often prefer or even require financial statements based on GAAP.
• Tax laws are amended yearly, whereas accounting principles remain constant.
• Book depreciation methods are acceptable for tax use, but tax methods are not accepted under GAAP.

Under the rules of financial accounting, fixed asset costs are allocated to the time periods that they benefit. Your financial statements should reflect how your assets contribute to the generation of revenue over time. The depreciation methods presented here allocate a portion of an asset's cost to each year that the asset helps produce income.

Many small businesses enter depreciation expenses only once a year, at tax time. If depreciation figures are off throughout the year, your business planning and decision-making may be adversely affected.

Dividing the purchase price of a fixed asset over several periods (month, quarter, year) makes your financial picture more accurate. Depreciation should match the cost of a fixed asset with the revenues that it helps generate over time. This accomplishes one of the primary aims of accounting - to illuminate the costs of doing business by tying expenses to associated revenues (matching principle).

At this point, you might rightly be wondering how to adjust for the variance between tax and book depreciation. The answer depends on your form of organization. For sole proprietorships, partnerships, and S corporations, the adjustment is already included on ordinary tax forms. C corporations must report the difference on their financial statements in a liability account called Deferred Taxes. Call us for more information about making these adjustments.