Accounting Explained: How Accounting Actually Works (Without the Jargon)

If accounting has ever felt confusing, overwhelming, or like something you’re just supposed to “trust” without fully understanding, you’re not alone.

I see this all the time with small business owners, bookkeepers, and even accounting students. You’re entering transactions, running reports, and maybe even reconciling accounts… but it’s not always clear how everything connects or why the numbers look the way they do.

This post is here to change that.

In this guide, I’m walking through how accounting actually works, step by step. Not from a theory-heavy textbook perspective, but from the practical, real-world view I use every day inside QuickBooks Online.

What Accounting Really Is (At Its Core)

At its simplest, accounting is the process of recording financial activity and turning it into useful information.

Every time money moves in or out of your business (whether that’s a sale, a bill, payroll, or a bank transaction), accounting captures that activity and organizes it in a way that allows you to understand what’s happening financially.

Accounting isn’t just about compliance or filing taxes. When it’s done properly, it becomes the foundation for decision-making.

Transactions Are Where Everything Starts

Every accounting system begins with transactions.

These might include:

• Sales invoices
• Bills from suppliers
• Expenses paid by debit or credit card
• Customer payments
• Payroll
• Transfers between accounts
  

Each transaction records what happened, when it happened, and which accounts were affected.

This is why consistency matters. The way transactions are entered determines how everything flows through your reports later.

How Transactions Turn Into Reports

Once transactions are recorded, accounting software like QuickBooks Online organizes them behind the scenes.

From there, those transactions feed into three core financial reports:

1. The Income Statement (Profit & Loss)

This report shows performance over a period of time.

• How much income you earned
• What expenses you incurred
• Whether you made a profit or loss
  

It answers the question:

“How did the business perform?”

2. The Balance Sheet

The balance sheet is a snapshot at a single point in time.

• What the business owns (assets)
• What it owes (liabilities)
• The remaining equity
  

It answers the question:

“Where does the business stand financially today?”

3. The Statement of Cash Flows

This report explains how cash actually moved.

• Why profit and cash aren’t the same
• Where cash came from
• Where cash went
  

It answers the question:

“What happened to the money?”

Understanding how these reports connect is one of the biggest breakthroughs for people learning accounting.

Why Accounting Can Feel Confusing

Accounting often feels difficult because people are shown the outputs (reports) before they understand the inputs (transactions).

When you don’t understand how:

• an invoice affects accounts receivable,
• a bill affects accounts payable,
• or why profit doesn’t match the bank balance,
  

it’s easy to lose confidence in the numbers.

Once you understand the flow (transaction → accounts → reports) everything starts to make more sense.

What I Recommend Reviewing Regularly

If you want accounting to feel manageable instead of stressful, start here:

• Review transactions regularly (don’t let things pile up)
• Reconcile bank and credit card accounts consistently
• Look at your balance sheet, not just your profit and loss
• Ask questions when something doesn’t make sense
  

Accounting is a skill that improves with repetition and review, not perfection.

Who This Understanding Is For

This approach to accounting is helpful if you are:

• A small business owner managing your own books
• A bookkeeper building confidence beyond data entry
• An accounting student trying to connect theory to real-world practice
• Someone using QuickBooks Online and wanting to truly understand the numbers
  

The goal is not to memorize rules, it’s to understand the story your financial data is telling.

Accounting doesn’t have to feel mysterious or intimidating.

When you understand how transactions flow into reports, and how those reports support better decisions, accounting becomes a tool instead of a stressor.

If you’d like to see this process demonstrated step by step inside QuickBooks Online, be sure to watch the accompanying video. And if you ever have questions about how something works in your own file, leave a comment or reach out as chances are, you’re not the only one wondering.

Helpful Resources

If you’re working through your accounting in QuickBooks Online and want a little extra support, these resources may be helpful:

Compare QuickBooks Online Plans

Not all features are available in every version of QuickBooks Online. If you’re unsure whether your current plan supports what you’re trying to do, this comparison breaks it down clearly.

https://www.mycloudbookkeeping.org/quickbooks-plan-comparison

Download the Free Month-End Checklist for Small Business

A simple, practical checklist to help you review your books consistently and catch issues early before they turn into bigger problems.

https://learn.mycloudbookkeeping.org/small-business-month-end-checklist

In this video, I’m going to explain what accounting actually is and how information moves from day-to-day transactions into the financial statements you rely on to manage a business.
I’m Kerry from My Cloud Bookkeeping, and I’ll use  QuickBooks Online to walk through it.”

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Here we are in the QuickBooks Online sample company. QuickBooks Online, like any other accounting software, is just an automated way to collate all of the day-to-day transactions within your business. And capturing those transactions is the first step in accounting.

You see across the top here what I typically call the modules within QuickBooks. So we've got an accounting section, expenses and bill payments where we record the expenses of the company, uh, sales course, our income customers, payroll and team.

And when we pop up here to the create button, you can see all of the individual transactions that make up these different sections. So under customers, of course, you can see invoices for sales, sales receipts if you're being paid right away. Under vendors, checks, bills, paying the bills, any vendor credits.

Then under your team you have payroll, and then other you have a list of the other types of transactions. So all of these business transactions. Uh, recorded in your software and as we'll see flow through to create the three financial statements that you can use to manage your financial performance. So let's take a look first and see what happens to all these transactions that we record.

Here we are in the chart of accounts, so the chart of accounts is a list of all of the categories and accounts that make up your system. You can see the first few down here all relate to the balance sheet, and they have that green BAL beside them. As we scroll down further, we come to the accounts that make up your income statement or profit and loss.

You can see income, all of the expenses, all of these categories of where you would be allocating any income or expenses when you were recording your transactions. So p and l ones

and back up to the top to the balance sheet accounts.

Now let's take a look at a listing of all of these transactions that are entered into these categories or accounts in our chart of accounts.

We'll pop up to reports, standard reports.

We'll run a general ledger report. So here's the general ledger, which is not something I find to be particularly useful, but it is a report that will show you every transaction that has been entered into your accounting software. So for last year. If we have a look here it, the first thing it's showing us is every entry that went through your checking account.

Now, this is not organized in anything other than date. There are a lot of transactions here, and we get to our savings, accounts receivable. It's in the same order as our chart of accounts was in. All the movement in the inventory account, the ins and outs of undeposited funds. Basically, this report just gives you the detail of all of the transactions that have been entered into, in this case, QuickBooks Online, or whatever software it is that you're using now the next report we're going to take a look at summarizes all of the data that we just saw in the chart of accounts, and it's called the Child Balance. So free run that for the same period, which was last year.

We can see in the case of the balance sheet accounts, what the balance was at the end of the year, and if we scroll down a little,

we can see the income and expense accounts. So the balance sheet accounts will be showing us what the balance is at the end of the year. So here they are here

and the income and expense accounts show up below, and this is the movement within the period that we chose for our child balance. So this is the total of the transactions for the period of one year.

The child balance, as you can see. Balances at the bottom. The debits and the credits are in total. What we can't see on this report is the profit. There's no way we, we can see how much we actually made without doing a whole pile of math, which isn't the point of accounting software. Now we're gonna run and start looking at some of our actual reports.

First report we're gonna look at is the balance sheet. I always like to start here. It's one of the most important reports for ensuring everything is accurate.

The top of our balance sheet shows all of our assets, everything that the company owns. The second half shows both the liability, what we owe, and if we scroll down a little bit further to the equity section, we're able to see what the net income or profit was for the prior year.

So now let's take a look at our profit and loss. Now if we scroll down to the bottom of our profit and loss, we'll be able to see the net income. It's a hundred ninety two forty six, which agrees to the amount that we just saw on our balance sheet.

So now we have the bottom section of that trial balance.

All of the income and expenses that were recorded when we entered those transactions through our create button are showing up here in our profit and loss.

Now let's take a look at the third financial statement we should be looking at

it's a statement of cash flows. This is a little bit of an interesting report. You can see at the beginning we start with the net income, which we pulled from the bottom of our profit and loss statement, our income statement, but then take a look at what this next section includes.

These items here show the movement in the balance sheet account from the opening balance to the closing. So in this case it would be from January to December, the December last year balance to the December. 31st balance, these amounts are added to or deducted from the net income, and this gives us the cash amount that was either injected into the company or taken from the company.

If your accounts receivable has increased in a way that's less money you've collected, if your accounts payable has decreased, that's an increase to your cash. I have a whole other video going over this in a lot of detail. Here we have the investing activities. We bought a new truck, so that's money out.

And then financing activities. We borrowed some money through notes and the owner, there's some owner contributions which increased. So we take a look at this cash at the end of the period. This should agree to the bank balance that's sitting on our balance sheet. Let's check and sure enough it does. So we start with all of those transactions. They flow into our chart of accounts to create a general ledger, which is just a whole list of everything. We then summarize them into the trial balance, then use those same numbers to create our income statement, our balance sheet, and our statement of cash flows.

And these are the reports that we use to manage the business.

Back to me

That’s how individual transactions flow through an accounting system and end up in the financial statements we use to manage a business.
If you have any questions, leave them in the comments. I’ve got more accounting explanations and QuickBooks examples coming up — like and subscribe, and I’ll see you in the next video. Cheers.”

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