How money flows into and out of a business

QuickBooks added a Home window a number of years ago. The intent was to make it easy for people to see which window to use for a given transaction.

This was an improvement over prior versions, since they didn’t show any kind of work flow. Even so, I still I encourage people to access the various windows in other ways, ways that I think are more efficient than using the Home window (for example, keyboard shortcuts and using the Open Window List). I know many people like the QuickBooks Home window,  but it is limited in what it shows. For example, it doesn’t convey how money flows into and out of a business. This is because the main divisions are according to categories of persons (Vendors, Customers, Employees), not according to money flow (Money in, money moving around, money out).

The QuickBooks Home window does clearly show the correct flow of certain transactions. For example, it shows how when Enter Bills is used, Pay Bills follows it. A very common mistake is that people use the Enter Bills window, but then use the Write Checks window to record the bill payment. Notice how Write Checks is down near the lower right corner? It is not connected to Enter Bills at all. Using Write Checks in place of Pay Bills creates problems with the financial statements and Accounts Payable aging reports. If people follow the QuickBooks Home window, they will avoid some of the most common mistakes that I often see.

QB Home window
The QuickBooks Home window

Below is a table I made that explains how money flows into and out of a business. It isn’t divided by categories of persons, as we see above. It is divided by the money flow. There are three main categories and they are color-coded:

  • Blue for money in
  • Pink for money moving around inside the business
  • Green for money out

I included information about which window is used in QuickBooks, since that is the accounting software with which I am most familiar. However, the accounting theory shown on the first and third columns of each color will apply regardless of the accounting software used. This is because basic accounting theory does not change and all accounting software is built upon it. This table is appropriate for anybody who wants to improve their bookkeeping skills regardless of the accounting software they use. If something other than QuickBooks is used, just ignore the center column of each color.

money flow in and out of a firm 20180728
Table showing the flow of money into, within, and out of a business

Business ratios will be affected in nearly every case, including the center/pink columns (Money moving around inside the business).

* I put an asterisk for credit card payments. This is because they can be thought of in two ways, transfers within a business, and liability payments that go outside a business. They are sort of both at the same time. Notice that credit card payments are NOT business expenses. The business expense that was incurred with the credit card is a separate bookkeeping transaction from the payment that reduces the balance on the credit card.

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