Excerpt of Chapter 4, and Table of Contents from the book:

Radical Accounting
A Way Out of the Dark and into the Profit

With a few QuickBooks™ Accounting Software Tips & Tricks

By Madeline Bailey

www.radicalaccounting.com

“Devoured your eBook over several
sittings yesterday, finished up this
morning. I was actually voluntarily
sitting at my desk at 6:45 a.m. on a
Sunday morning, reading about
BOOKKEEPING, of all things!! Am
taking a break from setting up my first
Chart of Accounts to send you this
email. A quick read of your eBook has
tremendously raised my comfort
level with managing our family and
small business bookkeeping tasks, and
I wanted to share my appreciation."
Stephanie Roberts, Lotus Pond Press,
www.FastFengShui.com
"I am so excited about Madeline's book, Radical Accounting. I've
read it cover to cover twice, marking it up with stickies and margin
notes, and had it open on my lap when I sat down in front of a brand
new QB account to create my Chart of Accounts from scratch. The
day it all clicked - when I finally got it - when the P&L became
clear and it all made sense - I was jumping up and down. I've
been self employed for 8 years and until I read her book I thought my
Chart of Accounts was just something I kept for my tax preparer so
she'd know how much to deduct from my Schedule C. I wanted to
understand more about how the finances affect my businesses, but I
didn't know where to go to learn. Now I recommend it to everyone
who runs his or her own business. It's concise, to the point, and
puts all the pieces together. THANK YOU for such an awesome
resource and for explaining it so clearly.”
Lara Eve Feltin, Partner, Biznik, www.biznik.com

“Of all the accounting textbooks. or educational literature I've read, or been subject to, this one may be the
easiest to understand and apply in the real world. I think this book should be required reading for all
entrepreneurs thinking of starting their own business, or those who continuously have trouble
communicating effectively with that highly paid accountant they use."

Scott D. Hayes, Controller, Oregon Dept. of Fish & Wildlife. Previously: Business Manager, OR State Data
Center, Internal Auditor, OR Dept. of Transportation, Controller, Oregon Dept. of Commerce
 4: Accounting Basics Made
Fun (Of)
“Money frees you from doing things you dislike. Since I dislike doing nearly
everything, money is handy.”
Groucho Marx, Comedian1

There is only one business bookkeeping system—the double-entry system. Luca Pacioli
published the first textbook of double-entry bookkeeping in 1494. Believe it or not, there
has been virtually no change since then. His system of debits and credits is so confusing
that no one can figure it out, let alone improve upon it, so it remains intact. (Just
kidding, Pacioli.) The real reason that we’re still using double-entry bookkeeping is
because it works, produces balanced books, and has become an ingrained standard.
Double-entry bookkeeping is what they teach in accounting school. Fledgling
accountants learn to enter a bookkeeping transaction using a journal entry. A journal
entry has two or more line items (entries) that balance debits and credits.
 One entry is considered primary; the other offsetting.
 One entry will be a debit; the other a credit.
 One entry shows what account the money is going to; the other what account the
money is coming from.

Luckily for you, popular accounting software insulates you from having to learn the
rules of double-entry bookkeeping. However, you might not want to use your software
as directed. If you get stuck or want to do something tricky, a journal entry is the way to
go. You can do anything, change anything, or manipulate anything with a journal entry.
One trick to making a journal entry is learning when to use a debit and when to
use a credit. Here’s a Journal Entry Debit / Credit Chart to help. Post this “cheat sheet”
near your computer, so that it’ll always be handy.

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 Journal Entry Debit / Credit Chart
Account Type Debits Credits
Income Decrease Increase
Expense Increase Decrease
Equity Decrease Increase
Asset Increase Decrease
Liability Decrease Increase

With time, you’ll memorize some basics…like your bank account is an asset account so
when you want to increase it, you debit it. Here’s a journal entry for a bank deposit from
the sale of a product:

Account Name Account Type Debit Credit

Bank Account Asset $99.95
Product Sales Income $99.95

See how the credits and debits balance? See how you’re becoming empowered? Don’t
see it yet? Just for fun, let’s say you remember that when your bank account is
increased, it’s debited. The first time you hear about a “debit card” your empowered
mind will go “red flag—possible money trick.” You know that using your debit card
decreases your bank account. So why is it called a debit card? (The answer comes later
in the book.)
Not certain of debits and credits? There’s always the trial-and-error method: try it
one way, check your financial report to see if you’re correct, and if not, change it to the
opposite way. If you make a mistake, relax. Depending on your software, you can either
correct your mistake by reversing the entry or make an adjusting entry. Trust me, your
accounting software package offers you a way to fix mistakes. Accounting really is one
part doing the work and one part auditing it.

Which Accounting Software?

Business accounting software, such as QuickBooks® and
Peachtree®, are designed as double-entry systems.
Underneath the seemingly innocent check is a journal
entry. Personal accounting software, such as Quicken®
and Money®, are called single-entry systems. Underneath
the check is a checkbook entry.

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Calendar or Fiscal Year?

The tax period for most small businesses is the calendar year. You close out your books
on December 31st and open them for the new tax year on January 1st.
On one hand, does it really make sense to do your biggest bookkeeping chore of
the year when you’re high on sugar cookies and hung over from eggnog? The U.S.
government doesn’t think so, so their fiscal year starts Oct 1st. The State of California
doesn’t think so either, so their fiscal year starts on July 1st. A fiscal year is any 12-month
accounting period.
On the other hand, payroll requires the calendar year. So unless you have a good
reason to buck the herd, keep it simple and use the calendar year, eggnog or not.
On yet a third hand, you might consider switching to another fiscal year if you
have a seasonal business. No matter how many hands you have, don’t stack up your
paperwork for the slow season. By then you’ll have a real mess on your collective
hands. Do the bookkeeping as you go along and cycle other tasks for the slow season.

Cash or Accrual Basis?

Despite opinions to the contrary the “cash vs. accrual” basis does not refer to something
that happens after dark in the privacy of your own home. Sure, cash vs. accrual is for
adults only but it’s not as confusing as it may seem at first.
For cash accounting your income consists of what you actually received during the tax
period, and your expenses consist of what you actually paid out.
If you use the accrual basis your income is made up of all the invoices your business
issued during the year, even if you have not received payment. You also deduct your bills even if
you have not paid them yet. So if bills exceed invoices, or if you have an agreement with
your vendors whereby they’re financing you with trade credit, consider using the
accrual basis. If your business stocks inventory then the IRS requires the accrual basis.
Corporations tend to use the accrual basis; private business owners tend to use the cash
basis.
To decide whether cash or accrual would be best for your business, ask you tax
advisor. You can also run your P&L Report, first using the cash basis and then the
accrual basis, to see which is to your advantage tax-wise. Whatever decision you
make…you won’t be groping in the dark.

What are Account Types?

Accounting is structured around account types. You’re already familiar with account
types but you probably don’t use that terminology and may not be familiar with their

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nuances of use. “Bank Account” is one account type you’re familiar with; “Credit Card”
is another. While all account types are found in the chart of accounts, some end up on
the P&L Report and some end up on the Balance Sheet.
Account types maintain standards in accounting. Financial reports are
universally formatted with a standard “look and feel” that doesn’t deviate from
software to software, or business to business. Once you understand how to read your
own financial reports, it’ll be that much easier to read financial reports from another
business. Each account type has a specific location on the financial report. The locations
are set in stone! Check out the tablets:

Profit and Loss Report Format

The Profit and Loss Report is a report of money coming in, money going out, and how much
your business made (profit) or lost, for any given time period.

Income
- Cost of Goods
= Gross Profit
- Expenses
= Net Profit (also called Income for Operations)
+ Other Income
- Other Expense
= Profit

Profit and Loss Report Account Types Chart

Account Type Functionality
Income Money received from primary
business activities.
Cost of Goods Money spent to purchase goods or
Sold services that will be directly resold to
customers.
Expense Money spent for primary business
activities.
Other Income Money received from secondary
income.
Other Expense Money spent for secondary expenses.

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Balance Sheet Statement Format

The Balance Sheet is a report of how much your business owns, owes, and how much it’s worth,
as of a specific date.

Assets
+ Bank Account
+ Accounts Receivable
+ Inventory
+ Fixed Assets
+ Other Assets
= Total Assets

Liabilities & Equities

Accounts Payable
+ Credit Card
+ Other Current Liabilities
+ Long Term Liabilities
= Total Liabilities
+ Equity
+ Retained Earnings
= Total Liabilities & Equity

The formula is: Assets = Liabilities + Equities.

The two sides of the equation balance. Get it? It’s a Balance Sheet.

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 Balance Sheet Statement Account Types Chart
Account Type Functionality
Bank Account Checking, money market, petty cash,
etc. Also called a Current Asset account
type.
Accounts Invoices, or other money owed by
Receivable customers. A/R for short. Also called
an Other Current Asset.
Inventory Raw materials, work in progress, and
stock of goods on hand.2 Also called an
Other Current Asset.
Fixed Asset Property used in the production of
goods and services, such as machines
and oil wells.
Other Asset Something of value that could be sold
for cash, like a stock portfolio or gold.
Accounts Bills or other money owed to vendors.
Payable Abbreviated as A/P. Also called a
Current Liability.
Credit Card Plastic card with a credit limit. Also
called a Current Liability.
Other A loan you’ll pay back in one year or
Current less, like a loan from a friend.
Liability
Long Term A loan you’ll pay back over a long
Liability period of time, like a loan from a
parent, or bank.
Equity Owners, partners, and investors
money.

Setup Account Names By Account Types

You’ll design your chart of accounts by choosing account names that are meaningful to
you, account type by account type. Before you get started choosing account names, let’s

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look at the guiding principal behind designing your chart of accounts—your business
model!

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 Table of Contents

1: Why Accounting?...................................................................................................
Who Are You? .................................................................................................................................
A Book is Born.................................................................................................................................
2: Find Your Motivation ............................................................................................
Witnessing........................................................................................................................................
Abundance.......................................................................................................................................
Wealth...............................................................................................................................................
Epiphany ..........................................................................................................................................
A Way Out of the Dark and Into the Profit .................................................................................
3: Managing Bookkeepers and Financial Advisors ................................................
Bookeeping = Yuck! ........................................................................................................................
Liberation from Chaos....................................................................................................................
Comparative Advantage................................................................................................................
Finding Trustworthy Help ............................................................................................................
See the Shadow................................................................................................................................
See the Light.....................................................................................................................................
4: Accounting Basics Made Fun (Of) .....................................................................2
Calendar or Fiscal Year?............................................................................................................... 4
Cash or Accrual Basis? ................................................................................................................. 4
What are Account Types? ............................................................................................................ 4
Profit and Loss Report Format.................................................................................................... 5
Balance Sheet Statement Format................................................................................................. 6
Setup Account Names By Account Types................................................................................. 7
5: Define Your Business Model .................................................................................
Consider Other Interested Parties ................................................................................................
Refer to the IRS Schedules .............................................................................................................
A “Business of One” .......................................................................................................................
Systems for Your Business Model ................................................................................................
1: Just Business ................................................................................................................................
2: Business and Personal Commingled........................................................................................
3: Just Personal ................................................................................................................................
4: Moonlighting ...............................................................................................................................
Help. It’s Confusing!.......................................................................................................................
6: Design Rules!..........................................................................................................
Use Account Numbers? .................................................................................................................
Account Numbers Schema ............................................................................................................
Excellent Account Names ..............................................................................................................
Group Accounts by Areas of Business Management.................................................................

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 Alphabetical Order .........................................................................................................................
Keep it Simple..................................................................................................................................
Close the Chart of Accounts ..........................................................................................................
Ready. Set. Go!.................................................................................................................................
7: Bank Account .........................................................................................................
Bank Account Names .....................................................................................................................
Reconcile your Bank Statement.....................................................................................................
Petty Cash Spending.......................................................................................................................
Petty Cash Deposits ........................................................................................................................
Transferring Money........................................................................................................................
8: Credit Card ............................................................................................................
Credit Card Account Names .........................................................................................................
Credit Card Statement Reconciliation..........................................................................................
Staff Reimbursed Expenses ...........................................................................................................
Compulsive Debt ............................................................................................................................
The Debit Card ................................................................................................................................
9: Your Filing System.................................................................................................
Paperwork = Boring!.......................................................................................................................
From Disaster to Organization in One Day Flat.........................................................................
Brand New Filing System ..............................................................................................................
Design Your Filing System ............................................................................................................
Organizational Tips ........................................................................................................................
Paperwork Reduction Acts............................................................................................................
10: Profit and Loss Accounts.....................................................................................
P&L Report Format.........................................................................................................................
Profits or Prophets? ........................................................................................................................
Don’t Use Proper Names on Your P&L .......................................................................................
11: Income...................................................................................................................
Income Account Names .................................................................................................................
Tracking Sales Tax ..........................................................................................................................
Q&A: What Counts as Income? ....................................................................................................
Reimbursed Expenses as Income..................................................................................................
Income By Location ........................................................................................................................
12: Cost of Goods .......................................................................................................
P&L Report Format.........................................................................................................................
Cost of Goods Account Names .....................................................................................................
Income and Cost of Goods.............................................................................................................
Labor Costs ......................................................................................................................................
Case Study: General Contractor....................................................................................................
How Important is Cost of Goods?................................................................................................
13: Expense .................................................................................................................
P&L Report Format.........................................................................................................................
Tax Deductible Expenses ...............................................................................................................

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 Initial Setup For Expense Account Names..................................................................................
Additional Expense Account Names ...........................................................................................
Operating & General Expenses .....................................................................................................
Expense Account: Sub Account Names.......................................................................................
Insurance Account Names.............................................................................................................
Medical Account Names................................................................................................................
Travel and Entertainment Account Names.................................................................................
Payroll Account Names .................................................................................................................
In-House Payroll Account Names ................................................................................................
Payroll for Only One Employee....................................................................................................
Professional Services Account Names .........................................................................................
Miscellaneous & Uncategorized ...................................................................................................
Closing Out the Year ......................................................................................................................
Tithing ..............................................................................................................................................
14: Other Income........................................................................................................
P&L Report Format.........................................................................................................................
Other Income Account Names......................................................................................................
Passive Income ................................................................................................................................
Portfolio Income..............................................................................................................................
15: Other Expense......................................................................................................
Why Track Personal Expenses? ....................................................................................................
Personal Expense Account Names ...............................................................................................
College Account Names.................................................................................................................
Household Account Names...........................................................................................................
Job-Related Account Names..........................................................................................................
Medical Account Names................................................................................................................
Property Account Names...............................................................................................................
Home Office Deduction .................................................................................................................
Why being a Saver Works..............................................................................................................
Why being a Miser doesn’t Work .................................................................................................
16: Profit and Loss Report ........................................................................................
The Meaning of Money ..................................................................................................................
Audit Your P&L Report .................................................................................................................
Sample P&L Detailed Report ........................................................................................................
Sample P&L Summary Report ......................................................................................................
Monthly Analysis............................................................................................................................
Yearly Analysis................................................................................................................................
Income Taxes ...................................................................................................................................
The Role of Tax Experts .................................................................................................................
Preventative Auditing ....................................................................................................................
Profit flows to Balance Sheet .........................................................................................................
Balance is Profitable........................................................................................................................
Planning for the Future ..................................................................................................................

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17: Balance Sheet Accounts.......................................................................................
Balance Sheet Format......................................................................................................................
Use Proper Names ..........................................................................................................................
Balance Sheet Data Entry ...............................................................................................................
18: Accounts Receivable ............................................................................................
Analysis of Accounts Receivable ..................................................................................................
Collecting Accounts Receivable....................................................................................................
19: Inventory ..............................................................................................................
Balance Sheet Format for Assets ...................................................................................................
Case Study: Cafe .............................................................................................................................
Inventory or Cost of Goods? .........................................................................................................
Inventory Account Names.............................................................................................................
20: Fixed Asset............................................................................................................
Fixed Assets Account Names........................................................................................................
Fixed Asset Account: Sub Account Names .................................................................................
Depreciation.....................................................................................................................................
Cars & Taxes ....................................................................................................................................
Houses & Taxes ...............................................................................................................................
Are Computers Fixed Assets? .......................................................................................................
New Asset Acquisition...................................................................................................................
Value of Existing Fixed Assets ......................................................................................................
21: Other Asset ...........................................................................................................
Other Asset Account Names .........................................................................................................
Loans Given .....................................................................................................................................
Portfolio Account Names...............................................................................................................
Retirement Savings Account Names............................................................................................
Art & Collectibles............................................................................................................................
Turning Assets into Income...........................................................................................................
Leaving Your Assets.......................................................................................................................
22: Accounts Payable .................................................................................................
Maximize Cash Flow and Pay Bills ..............................................................................................
23: Liability.................................................................................................................
Balance Sheet Format for Liabilities & Equities..........................................................................
Leveraging .......................................................................................................................................
Other Current Liability Account Names .....................................................................................
Long Term Liability Account Names...........................................................................................
Retainers...........................................................................................................................................
Credit Line Account Names ..........................................................................................................
Student Loans ..................................................................................................................................
24: Equity....................................................................................................................
Equity Account Names ..................................................................................................................
Equity Account: Sub Account Names..........................................................................................

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 Owner’s Investment .......................................................................................................................
Personal Funds for Business Expenses ........................................................................................
Owner’s Draw .................................................................................................................................
Owner’s Earnings Per Hour ..........................................................................................................
Opening Balance Equity.................................................................................................................
Retained Earnings...........................................................................................................................
25: Balance Sheet Report ..........................................................................................
Balance Sheet Format......................................................................................................................
Sample Balance Sheet .....................................................................................................................
Audit Your Balance Sheet ..............................................................................................................
Statement of Net Worth (Personal Balance Sheet) .....................................................................
The Value of a Business..................................................................................................................
Balance Sheet Analysis...................................................................................................................
Financial Planning ..........................................................................................................................
Net Worth Flows to Profit..............................................................................................................
Information leads to Empowerment ............................................................................................
Thanks a Million ........................................................................................................
Definitions of Terms...................................................................................................
Recommended Reading, Etc. ..................................................................................9
End Notes ....................................................................................................................

1
Groucho Marx, www.quotations-page.com
2
Inventory, Barron’s Dictionary of Business Terms

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