Did you know that your QuickBooks Chart of Accounts file is the most critical component of your bookkeeping system? This chart of your general ledger (GL) accounts holds the framework in recording your bookkeeping transactions and producing your financial statements.
If you are in the process of setting up a new QuickBooks file, you should understand that these GL accounts are grouped into four basic categories as follows:
- Income – include any categories for your business receipts, such as sales or services
- Expenses – include any categories for money spent by the business, such as rent, utilities, payroll expenses, travel, etc.
- Assets – include anything your business owns such as building, land, equipment, vehicles, and inventory, as well as liquid assets such as bank accounts and accounts receivable (what customers owe you)
- Liabilities – include any outstanding loans or payable such as bank loans, promissory notes, income taxes payable, payroll taxes, credit card balances, and accounts payable (what you owe vendors)
Here are some helpful tips and tricks to assist you with setting up your Chart of Accounts:
- Begin with the basic accounts created by Intuit with the questions they ask when setting up your new file. These general ledger (GL) accounts should provide you with a good start.
- Review the tax forms that will need to be completed for your business (i.e., Schedule C on your 1040 for sole proprietors or Form 1120 or 1120S for LLC’s) to assess which categories of expenses should be included with the chart of accounts. This will eliminate the need for pulling these transactions from a larger category for tax reporting purposes.
- Determine which income, cost of goods sold and expense accounts you would like to see reported on your profit & loss (or income) statement. Would you like to see details on the different types of income you receive from different sources? Would you like to group your operating expenses separate from your administrative expenses? Deciding how you want the output of these financial statements to look will help in establishing the appropriate GL accounts in your chart of accounts.
- Determine how you would like to see your assets and liabilities reported on your balance sheet. Would you like to see each of your fixed asset accounts reported separately? Or would you prefer to group them by type (i.e., equipment, furniture & fixtures, vehicles, etc.) Be sure to break out all of your business bank accounts, credit card liability accounts and loan accounts to provide as much detail as possible on this financial statement.
- Be careful not to set up numerous small GL accounts where it will be difficult to read and analyze your financial statements. For example, instead of having a separate expense account for PayPal fees, wire transfer fees and monthly banking fees, you could group these into a generic Fees account.
- Understand that your chart of accounts is ever evolving as you continue to add more loan accounts, different income sources, new expense accounts, etc. Even after the initial setup, you should plan to review your chart of accounts on a regular basis to make necessary updates or mark certain GL accounts as inactive if they are no longer used.
- Most importantly, be consistent in using the same GL account for similar transactions to provide quality analysis of your business income and expenses from month to month or year to year. It is difficult to compare your sales or expenses when you are not comparing apples to apples.
Should you need any assistance with setting up or reorganizing your chart of accounts in your QuickBooks file, please reach out to our RAD team in Williston (802-308-4293) or Rutland (802-775-7132), and one of our expert QuickBooks Online Certified ProAdvisors will be happy to help.
Written by Martha Leonard, Bookkeeper, RAD