Recently, I was talking with a client about creating a budget. We started from the idea that when creating a personal budget, you start with large liability payments (mortgage, car payment, credit cards) and then factor in expenses (groceries, utilities, etc).
In business accounting, however, things are a little different, because of the way accounting works.
When you look at your profit and loss, you’ll notice that credit cards, car notes, and mortgages are not there. That’s because, rather than being expenses like so many people believe, these are actually liabilities. They show up on the balance sheet. Expenses are created when you make a credit card purchase, not when you pay the card off. Let’s say you purchased office supplies on your credit card in January, and you paid off your credit card in February. The office supplies you purchased are accounted for in January, when you made the purchase, rather than in February, when you paid the card.
To look at it another way, you spent the money in your credit card account, and then you transferred money to cover your expenses. Same thing with loans – the funds are accounted for as liabilities, purchases are included as expenses at the time of purchase, and then you pay back your loan.
To see what you owe, take a look at your balance sheet. Your loans and credit cards outstanding will be in the liabilities section. And to see how payments on your loans affect your cash flow, see your cash flow statement.
If you’re ready to create a spending plan for your business that includes your liability payments, be aware that this can’t be done in QuickBooks. We can help! You can book time with us here or you can give us a call at 801-692-0032 to find out more!
Donna Harris, BSci Accounting, MBA student, founded Bookkeeping Made Simple with the understanding that small businesses is the heart of the American economy. After offering to do books for a friend who said he didn't have enough work to keep someone in the office 20 hours a week, she recognized the need for an efficient, online system. She has 20 years of bookkeeping and accounting experience and is excited to help small business owners achieve their goals. She enjoys spending time with her family and traveling whenever possible. She also loves reading, hiking, camping, cooking, yoga, and fitness. A huge believer in lifelong education, she is currently working on her MBA.