Installing QuickBooks

You install QuickBooks in the same way that you install any program. And how you install a program depends on which version of Microsoft Windows you're using. In general, however, recent versions of Microsoft Windows require that you place the QuickBooks CD into your CD-ROM or DVD drive. When you do this, Windows looks at the QuickBooks CD and recognizes it as a CD that includes a new, to-be-installed software program and starts the process for installing the QuickBooks software.

You don't need to do anything special to install QuickBooks. Simply follow the on-screen instructions. You typically are prompted to enter the installation key or installation code. This code is available within the QuickBooks packaging — usually on the back of the envelope that the disc comes in.

The QuickBooks installation process may ask you to answer questions about how you want QuickBooks installed. Almost always, you want to accept the default suggestions. In other words, QuickBooks may ask you whether it can create a new folder in which to install the QuickBooks program files. And in this case, choose yes.

If your version of Microsoft Windows doesn't recognize that you've stuffed the QuickBooks CD into the machine's CD or DVD drive, you have a couple of choices:

• You can wait. Probably, if you wait, Windows will recognize that you've placed the QuickBooks CD into the CD or DVD drive and, after a short wait (even though it may seem like an eternity), Windows starts the process of installing the QuickBooks program.

• You can manually force the installation of the QuickBooks program. Windows includes a tool that you can use to add or remove new programs (unsurprisingly named the Add/Remove Programs tool). I don't describe how this Control Panel tool works here, but you can refer to a book such as Windows XP For Dummies or Windows Vista For Dummies, by Andy Rathbone (Wiley Publishing, Inc.), or Windows online Help to get this information. In a nutshell, you simply open the Control Panel window, click the Add/Remove Programs tool, and follow the on-screen instructions for telling Windows to install a program stored on the CD or DVD in the computer's CD or DVD drive.

Warning

QuickBooks can work as a multi-user accounting system. This means that several people can use QuickBooks. The QuickBooks data file — the repository of all the QuickBooks information — typically resides on a centrally available computer or server. People who want to work with the QuickBooks data file simply install the QuickBooks program on their computers and then use the program to access centrally located QuickBooks data files. This multi-user system isn't complicated to run; Note that you need to own a separate copy of QuickBooks for each computer on which you install QuickBooks. You can also buy multi-user copies of QuickBooks that let you install the QuickBooks program on up to five computers. I mention this because you don't want to get involved in software piracy — which is a felony — as part of inadvertently setting up QuickBooks in the wrong way. The bottom line: You need a legal copy of QuickBooks for every machine on which you install QuickBooks.

Setting up QuickBooks

To use QuickBooks, you need to do two things: install the QuickBooks software and run the setup interview, which is called the EasyStep Interview. This post gives a bird's-eye view of both of these tasks. I also spend just a few paragraphs talking about some of the planning that you should do before you set up QuickBooks, and some of the missing setup steps in the EasyStep Interview — things it should do but doesn't.

Planning Your New QuickBooks System

I start with a couple of big picture discussions: what accounting does and what accounting systems do. If you understand this big picture stuff from the very start, you'll find that the QuickBooks setup process makes a whole lot more sense.

What Accounting Does

First you need to know what accounting does. People may argue about the little details, but most would agree that accounting does the following four important things:

• Measures profits and losses

• Reports on a financial condition of a firm (its assets, liabilities, and net worth)

• Provides detailed records of the assets, liabilities, and owner's equity accounts

• Supplies financial information to stakeholders, especially to management

What Accounting Systems Do

Now take a brief look at what accounting systems — or at least at what small business accounting systems — typically do:

• Produce financial statements, including income statements, balance sheets, and other accounting reports.

• Generate business forms, including checks, paychecks, invoices, customer statements, and so forth.

• Keep detailed records of key accounts, including cash, accounts receivable (amounts that customers owe a firm), accounts payable (amounts that a firm owes its vendors), inventory items, fixed assets, and so on.

• Perform specialized information management functions. For example, in the publishing industry, book publishers often pay authors royalties. So royalty accounting is a task that book publisher accounting systems must typically do.

What QuickBooks Does

Okay, after you understand what accounting does and what accounting systems typically do, you can see with some perspective what QuickBooks does:

• Produces financial statements

• Generates many common business forms, including checks, paychecks, customer invoices, customer statements, credit memos, and purchase orders

• Keeps detailed records of a handful of key accounts: cash, accounts receivable, accounts payable, and inventory in simple settings

Allow me to make an important observation here: QuickBooks does three of the four things that you would expect an accounting system to do. Compare the list that I just provided with the previous list ("What accounting systems do"). However, I'll save you the time of finding the fourth thing; QuickBooks doesn't supply the specialized accounting stuff. For example, QuickBooks doesn't do royalty accounting discussed in the earlier example.

And Now for the Bad News

So QuickBooks does three of the four things that accounting systems do, but it doesn't do everything. QuickBooks is often an incomplete accounting solution. Be careful, therefore, about setting your expectations. You also, typically, need to figure out workarounds for some of your special accounting requirements.

QuickBooks gives users and businesses a lot of flexibility. So, returning to the previous example, a book publisher can do much of what it needs to do for royalty accounting in QuickBooks. This royalty accounting work simply requires a certain amount of fiddling as the business is setting up QuickBooks.

However, QuickBooks does suffer from a couple of significant weaknesses:

• QuickBooks Pro doesn't supply a good way to handle the manufacture of inventory. However, QuickBooks Premier and QuickBooks Enterprise Solutions do support simple manufacturing accounting. (These versions of QuickBooks help you account for the process of turning raw materials into finished goods.)

• QuickBooks doesn't handle the situation of storing inventory in multiple locations. It just shows, for example, that you have 3,000 widgets. It doesn't let you keep track of the fact that you have 1,000 widgets at the warehouse, 500 widgets at store A, and 1,500 widgets at store B.

In spite of the fact that QuickBooks may be an incomplete solution and may not handle inventory the way you want or need, QuickBooks is still a very good solution. What QuickBooks does, it does very well. Furthermore, I don't want to suggest that you shouldn't ever use a smaller software company's accounting solution, but consider the fact that QuickBooks will be around for a long, long time.

It's far more likely that an accounting software product with 600 users, for example, will be discontinued rather than a product like QuickBooks, which has 2,000,000 customers.

Accounting for Fixed Assets

Fixed assets are those items that you can't immediately count as an expense when purchased. Fixed assets include such things as vehicles, furniture, equipment, and so forth. Fixed assets are tricky for two reasons: Typically, you must depreciate fixed assets (more on that in a bit), and you need to record the disposal of the fixed asset at some point in the future—for either a gain or a loss.

Purchasing a Fixed Asset

Accounting for the purchase of a fixed asset is pretty straightforward. Table 1 shows how a fixed asset purchase typically looks:

Account	Debit	Credit
Delivery truck	12,000
Cash		12,000

Table 1 - Journal Entry 10: Recording Fixed Asset Purchase

If you purchase a $12,000 delivery truck with cash, for example, the journal entry that you use to record this purchase debits delivery truck for $12,000 and credits cash for $12,000.

Within QuickBooks, this journal entry actually gets made when you write the check to pay for the purchase. The one thing that you absolutely must do is set up a fixed asset account for the specific asset. In other words, you don't want to debit a general catch-all fixed asset account. If you buy a delivery truck, you set up a fixed asset account for that specific delivery truck. If you buy a computer system, you set up a fixed asset account for that particular computer system. In fact, the general rule is that any fixed asset that you buy individually or dispose of later individually needs its own asset account. The reason for this is that if you don't have individual fixed asset accounts, later on the job of calculating gains and losses on the disposal of the fixed asset turns into a Herculean task.

Dealing with Depreciation

Depreciation is an accounting gimmick to recognize the expense of using a fixed asset over a period of time. Although you may not be all that familiar with the mechanics of depreciation, you probably do understand the logic. For the sake of illustration, suppose that you bought a $12,000 delivery truck. Suppose also that because you know how to do your own repair work and take excellent care of your vehicles, you will be able to use this truck for ten years. Further suppose that at the end of the ten years, the truck will probably have a $2,000 salvage value (your best guess). Depreciation says that if you buy something for $12,000 and that you can later sell it for $2,000, that decrease in value can be apportioned to expense. In this case, the $10,000 decrease in value is counted as expense over ten years. That expense is called depreciation.

Accountants and tax accounting laws use a variety of methods to apportion the cost of using an asset over the years in which it's used. A common method is called straight-line depreciation. Straight-line depreciation divides the decrease in value by the number of years that an asset is used. An asset that decreases $10,000 over ten years, for example, produces $1,000 a year of depreciation expense.

To record depreciation, you use a journal entry like the one shown in Table 2.

Account	Debit	Credit
Depreciation expense	1,000
Acc.dep.—delivery truck		1,000

Table 2 - Journal Entry 11: Recording Fixed Asset Depreciation

Journal Entry 11 debits an expense account called "depreciation expense" for $1,000. Journal Entry 11 also credits a contra-asset account called "accumulated depreciation—delivery truck" for $1,000. (By convention, because the phrase "accumulated depreciation" is so long, accountants and bookkeepers usually abbreviate it as "acc. dep.") Note also that you need specific individual accumulated depreciation contra-asset accounts for each specific individual fixed asset account. You don't want to lump all your accumulated depreciation together into a single catch-all account. That way lies madness and ruin.

Disposing of a Fixed Asset

The final wrinkle of fixed asset accounting concerns disposal of a fixed asset for a gain or for a loss. When you ultimately sell a fixed asset or trade it in or discard it because it's now junk, you record any gain or loss on the disposal of the asset. You also remove the fixed asset from your accounting records.

Choosing a depreciation method

Straight-line depreciation, which I illustrate here, makes for a good example in a book. It's easy to understand and to illustrate. However, most accountants and business owners use more complicated depreciation methods for a variety of reasons. One of the most important reasons is that tax accounting laws generally allow for depreciation methods that accelerate tax deductions.

You can figure out the annual depreciation according to one of these tax-based depreciation methods with your tax advisor's help. Different rules apply to different types of assets. The rules that you use for a particular asset depend on when you originally purchase the asset. I recommend that you use the same asset depreciation method in QuickBooks that you use for your tax accounting. Depreciation is complicated enough as it is. You don't want to be using one method of depreciation within QuickBooks for your own internal financial management and another method for your tax returns.

While I'm on the subject of depreciation, I should also mention that many small firms havethe option of using something called a Section 179 election. (Section 179 is a chunk of law inthe Internal Revenue Code.) A Section 179 election allows many businesses to immedi-ately depreciate 100%of the cost of many of their fixed assets at the time of purchase. Despite the fact that a Section 179 election means that you can immediately write off thepurchase of, for example, a $24,000 vehicle at the time of purchase, you still want to treatfixed assets expensed via a Section 179 election the way I describe here. The difference isthat you'll immediately show the asset as fully depreciated —which means depreciated down to its salvage value or down to zero.

To show you how this works, consider again the example of the $12,000 delivery truck. Suppose that you've owned and operated this truck for two years. Over that time, you've depreciated $2,000 of the truck's original purchase price. Further suppose that you're going to sell the truck for $11,000 in cash. Table 3 shows the journal entry that you would make in order to record this disposal.

Account	Debit	Credit
Delivery truck		12,000
Cash	11,000
Acc. dep.—delivery truck	2,000
Gain on sale		1,000

Table 3 - Journal Entry 12: Recording Fixed Asset Sale for Gain

The first component of Journal Entry 12 shows the $12,000 credit of the delivery truck asset. This makes sense, right? You remove the delivery truck from your fixed asset amounts by crediting the account for the same amount that you originally debited the account when you purchased the asset.

The next component of the journal entry shows the $11,000 debit to cash. This component, again, is pretty straightforward. It shows the cash that you receive by selling the asset.

The third component of the journal entry backs out the accumulated depreciation. If you depreciated the truck $1,000 a year for two years, the accumulated depreciation contra-asset account for the truck should equal $2,000. To remove this accumulated depreciation from your balance sheet, you debit the accumulated depreciation account for $2,000.

The final piece of the disposal journal entry is a plug, a calculated amount. You know the amount and whether that amount is a debit or credit by looking at the other accounts affected. For example, in the case of Journal Entry 12, you know that a $1,000 credit is necessary to balance the journal entry. Debits must equal credits.

Remember

A credit is a gain. A credit is essentially revenue.

If the plug was a debit amount, the disposal produces a loss. This makes sense; a loss is like an expense, and expenses are debits.

If you're confused about the gain component of Journal Entry 12, let me make this observation. Over the two years of use, the business depreciated the truck by $2,000. In other words, the business, through the depreciation expense, said that the truck lost $2,000 of value. If, however, the $12,000 delivery truck is sold two years later for $11,000, the loss in value doesn't equal $2,000. The loss in value equals $1,000. The $1,000 gain, essentially, recaptures the unnecessary, extra depreciation that was incorrectly charged.