Now that we have created a way to enter in the sales we need to enter in all of the expenses. Remember in previous post we went over accruals. Expenses are not only when we spend money, but also when we know we are going to have to spend money in the future.

There are different types of expenses and they have different impacts on different accounts in our accounting software. Let’s look at the simplest first.

We have stamps on hand so that when people want to purchase them we have them available. We have purchased these stamps previously. When we purchased the stamps it was NOT an expense. Technically we have just changed one asset (Cash) for another (Stamps). The stamps are part of our inventory. So we need a new account in our accounting software for these stamps.

I am going to first create an account called inventory since there will be different categories of inventory and then I will make stamps a sub category of inventory.

I choose to use “Other Current Asset” to stop Quickbooks from helping me in ways that confuse me.

Here I make Postage Stamps a Sub Account of Inventory. I could have just called it stamps, but then it would have been really easy to mix up the Stamps – Income account with the Stamps – Inventory account. When I buy stamps I debit the inventory and credit the cash. Accounting is flexible and I could accidentally debit the income account and credit cash. Quickbooks wouldn’t know that it was a mistake. Debiting the income instead of the inventory would be as if someone returned stamps and I gave them cash in return. The inventory would be off. The sales would be off. The cash would be correct and I might not notice for awhile.

If expenses do not come out of inventory then there is either no associated expense with the sale, which happens with sales of services, or the sale affects a payable account.

An example of a sale that affects a payable account is a FedEx sale. In a FedEx sale I charge the customer and collect the money. I will have to pay FedEx after they deliver the package. I technically owe them the money the minute I take the customer’s money. However I won’t pay FedEx (even after they deliver it) until they bill me. That is what makes it a payable. The expense is immediate, the cash transfer is delayed.

So let’s take a look at the new accounts I will setup. I have two new categories under which I put sub categories, Inventory and Sales Expense Payables. One is a current asset the other is a current liability. I grouped these together in a way that will make sense to me. I could put all of the payables together, but I want to see the sales expense payables separate. I stay away from the Quickbook account types like accounts payable because I don’t understand all of the things that come with that. It might be very useful, but I don’t know what those things are and I have seen things get screwy when I use the non-generic account types.

Notice also that I tried real hard to stay away from similar account names of different types. My answer to UPS is United Parcel Service. There might be a better naming convention, but I am sure that not having a UPS income and a UPS current liability is a good thing. I have seen large companies give every account a number. That is an extreme way of keeping track of things.

I have a couple more accounts to add before I create the General Journal entry that I will have QuickBooks memorize. I am going to accrue employee expenses, credit card charges, franchise fees, and travel expenses on a daily basis. These are expenses that occur before I have to pay them. I also have to setup the associated expense accounts. Before I had one expense account and that was Cost of Goods. I am going to leave that account and create sub accounts underneath the Cost of Goods accounts.

Expenses work this way. I buy stamps. There is no expense. There is a change in Inventory and cash. Someone buys the stamps. There is a change in sales and cash AND a change in expense and inventory. Double accounting means that two accounts are always affected.

Now a side note. Someone will pay us for a full year of mailbox service. Technically I cannot count that as revenue until I deliver the service. I have gone round and round on how to manage that and I have finally decided that the payment patterns are close enough to actual service patterns that I am going to call it immaterial. In other words I may collect $200 from one customer and $0 from another but I provide the service equally and I will count the revenue when I receive the cash. It could be argued that this is misleading, but I am going to call it immaterial.

Some expenses that I am not going to accrue are the monthly utility expenses. So there will be days where I will pay the water bill and it will make that day look less profitable. I have thought of accruing utility and other expenses, but for now I am not going to. I might do that in the future. I do not want to make the accounting so complicated that it becomes less useful. Since the expenses are once a month and every month the information is going to be comparable across months.

Here are all the accounts setup. (There are more, but that comes later) I did change the name of Cost of Goods to Cost of Sales.

Here is the general journal entry that I memorize. I can recall the memorized entry and just change the date and the values and entering in the accounting information is quick.

That is it for daily sales and expenses.