Everything you need to know about double-entry accounting in the FreshBooks!
Interested in implementing double-entry accounting, but want to know more about the eight industry standard functions? You’ve come to the right place! We’re breaking down each element that make up this robust system of accounting reports and tools.
Once you understand the purpose of each of them, Plus and Premium users can head over to their FreshBooks accounts and find these easy-to-use tools. They function a lot like our other reports. If you need help, our Customer Service Support Team is standing by.
FreshBooks has always made it easy for you to share your financial information with your accountant or bookkeeper. Our original accounting reports can be printed or exported for Excel.
Double-entry accounting goes one step further. You can invite your accounting professional to create a personal profile so they have direct access—to your FreshBooks double-entry accounting tools only. This allows you both to see everything the same way and collaborate with ease.
Chart of Accounts
The mother of all financial record-keeping functions, the Chart of Accounts is an organizational tool that is a complete listing of every account in your accounting system. This includes assets, liabilities, equity, revenue and expenses. It helps you keep all your financial information organized in an accountant-friendly way.
The Chart of Accounts lists all the accounts your small business records in your General Ledger and allows you to organize each of them with sub-categories and add/remove accounts as necessary. For example, within the categories you create in each account (i.e. an income statement account may include operating revenues, operating expenses, etc.), you can organize by business function (i.e. administration, sales, production). The more detailed you are in your Chart of Accounts, the more accurate and insightful your data will be.
Want a big-picture snapshot of your business’s financial position at any moment in time? The Balance Sheet is where you’ll find it. Factoring in your company’s assets, liability and equity, you’ll know definitively if you’re in the red or black.
You’ll know how much you’re owed (accounts receivable) and how much you have in inventory, cash on hand or investments. At the same time you’ll have a complete view of how much owe (accounts payable) and how much you’ve committed to but haven’t paid yet (rent, service plans, contractor payments). And with a look at the sum of all earnings over the lifetime of your business, you’ll be able to see a holistic view of the health of your business.
You may already know easy it is to connect a business bank account and/or credit card to your FreshBooks account so expenses are tracked and recorded. Double-entry accounting allows you to automatically connect payments and income into your FreshBooks account too.
When you access the Bank Reconciliation feature, you’ll see any new expenses, payments or income that need to be reconciled in your FreshBooks account. It’s like a checklist that helps you make sure your records and reports are up to date.
If you want to impress your accountant or bookkeeper, casually slip “general ledger” into your next meeting. This document is like a business’s bible. It tells the story of where you’ve been, where you are and offers insights into where you’re headed.
The General Ledger is a master accounting document that provides a complete record of all the accounts a company uses (also found in the Chart of Accounts) divided into three types: assets, liabilities and equity. This view offers a clear understanding of all of your accounts and allows you to create financial statements.
Cost of Goods Sold (COGS)
Most small business owners need to occasionally buy equipment and supplies to help them run their business. Those are basic expenses. But sometimes you need to buy a specialized type of good that’s essential to completing a service for a specific customer. For example, a contractor may need to purchase a particular tool to carry out the detailed woodwork a client wants done. Or a graphic designer could have to hire an illustrator to complete one aspect of a client’s logo.
When you purchase supplies, equipment or a service that will be used exclusively for one client, those are COGS. It’s important that you categorize COGS differently than expenses, so you aren’t taxed on them and so they don’t misrepresent your margins. On tax forms and financial statements, COGS appear on a separate line and appear to reduce your income.
Do you earn income outside the services for which you invoice? Tradespeople sometimes pick up small cash jobs, bloggers may have affiliate income and photographers may sell their photos to stock photography websites. This income isn’t technically considered regular income, but it’s important to track it.
Here’s where the Other Income tool comes in. You can record the extra ways you make money outside your usual services, so tax time is smooth and you have a complete picture of what you bring in each year.
Want to double check your accounting to make sure your list of debits and credits match up? You’ll find that information in your Trial Balance. This report lists the balances found in each the accounts in your General Ledger. Debit balances are listed in one column; credit balances in another. The total of each should be identical.
Most businesses use a Trial Balance at month end, quarterly or annually to easily ensure their list of debits and credits align. If you spot an error, you can easily fix it right in the report.
When you employ the functions of double-entry accounting, you’re opening up a new world of business insights, easy collaboration with accounting professionals and the kind of precision that can’t be beat at tax time.
For a more robust explanation about who it’s for and how it works together, read Introducing: Industry Standard Double-Entry Accounting.
about the author
Heather Hudson is an accomplished freelance writer and journalist based in Toronto. She writes for a number of publishing, corporate and agency clients who depend on her to deliver high-quality, on-brand content and journalism with a fresh perspective. Learn more about her work at heatherhudson.ca.