Where to start with Xero,Quickbooks or FreeAgent?

Accounting and bookkeeping have become more accessible to the general public as a result of the sudden influx of accounting software into the market in recent years.

Is that correct?

Nothing is more frustrating than believing you know something only to find yourself mired in confusion and complexities that force you to call in a professional in the end!

Hello and welcome to the world of accounting.

The fundamentals "before the fundamentals"

Tools such as Xero, Sage, Quickbooks, and FreeAgent attempt to simplify the process of setting up your accounts with them by simply walking you through the process. When it comes time to do your VAT in Xero or set up your sales tax in Quickbooks or FreeAgent, these tools simply send you a notification informing you that this is now required.

Great. So, if you use Xero, Quickbooks, or FreeAgent, you're already in compliance with Making Tax Digital and your corporate tax returns.

Did you pay all of that money just to comply?

Using these sophisticated tools for nothing more than "reminders" to keep your bookkeeping and tax returns up to date is a spectacular waste of time. It's like buying a Porsche and then only using it to drive Miss Daisy down the street to get her groceries.

To get started with an accounting tool properly, you must first understand some accounting fundamentals so that you can leverage these fundamentals to your advantage and ensure that your business remains profitable.

If you truly want to make the most of Xero, Quickbooks, and FreeAgent, you should at the very least understand what a double ledger is and why it is used in accounting.

More importantly, understand the "Suspense Account" and why, all of a sudden, there's this massive red value automatically inserted into your books after you've entered all of your data!

And, while you can set up your Xero accounts in just a few clicks by following their instructions, you'll only ever drive that Porsche to the grocery store if you don't spend at least some time each day learning more about accounting.

You do not have to do it right away after signing up. However, you should try to learn something new every time you update your books.

So, knowing what you're doing is the "basics before the basics" of setting up a Xero account.

Don't worry, we're here to help.

The absolute necessities of accounting knowledge

Single Entry vs. Double Entry

The invention of the Double Entry Bookkeeping system was a significant historical breakthrough in accounting. In 1494, a Franciscan friar named Luca Pacioli codified this system.

To summarise, Double Entry Bookkeeping necessitates a matching entry in the "Credit" column for every entry in the "Debit" column, and vice versa. When you buy some equipment, for example, your cash is debited while your assets are credited.

A single-entry system requires only one entry and is best suited for small, cash-based systems. However, this system has a number of limitations.

Why is this important to understand? Well, regardless of whether you're a small or large business, Xero, Quickbooks, and FreeAgent — all of the big names in accounting software — use the double-entry system.

This system is required to generate many of the accounting reports required to determine whether a company is viable or not.

Account of Suspense

Because double-entry systems must always balance and every transaction must be explained, a "Suspense Account" is used whenever an amount is unknown where to put it.

For your books to be considered complete, all Suspense Account entries must eventually be explained.

However, there is one Suspense Account entry that does not need to be explained, and it occurs when you first begin using Xero, Quickbooks, or any other accounting software: After you've entered the opening balances for all of your bank accounts into these systems, you'll need to make a matching entry to begin your books in zero.

For example, if all of your opening balances in your bank accounts total £10,000 when you open your Xero account, you'll need a -£10,000 entry somewhere to start your books at zero. The initial balancing entry is recorded in the suspense account.

Online accounting software will automatically add the inverse value of your opening balances to your suspense account, allowing you to start with "zero" and keep your books balanced.

Reconciliation of Bank Accounts

Even if you are a sole proprietor, it is critical to keep your business bank account separate from your personal account in order to keep your books in order.

This makes it simple for you to "reconcile" your bank accounts to your accounting system, which means that all transactions in your bank accounts are assigned to the appropriate "accounts" (i.e. "books" or "ledgers") in your accounting system, and are always entered twice (debit and credit) with nothing left unexplained.

This is known as bank reconciliation.

The Three Fundamental Reports

Which brings us to the final point: the three main accounting reports.

You can only begin to understand the three core reports in your accounting software if you use a double-entry system, understand the purpose of the suspense account's initial entry, and understand the concept of bank reconciliation.

These are the reports:

A profit and loss statement (or "Income Statement") is a summary of "revenues, costs, and expenses incurred during a specified period."Statement of Cash Flows: How much liquid cash do you currently have in your accounts?The balance sheet: "A statement of a business's or other organization's assets, liabilities, and capital at a specific point in time, detailing the balance of income and expenditure over the preceding period." 

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