Set up a functional chart of accounts for your business in QuickBooks
Tracking sales and business expenses is one of the most fundamental functions of running a successful company. Without knowing how much money your company is making or spending, it is difficult to determine true efficiency and profitability. Many entrepreneurs tell me they think they’re making money, but when I ask how much, they usually stumble.
QuickBooks makes tracking sales and expenses easy, but to get it right, you need to set it up right from the start. Setup begins with the chart of accounts list. This is a list containing all the financial categories in the company’s accounting system. An account is a unique category representing a specific type of financial transaction. This list is used to organize the company’s finances, prepare financial statements and record various transactions such as expenses, sales, investments, asset purchases, loans, etc.
The most important point in designing an effective chart of accounts is to start with the goal in mind. In other words, you must first determine what information is relevant to your decision-making process, and then determine how detailed you want your chart of accounts to be. For example, if you run a transport company, it may be relevant to know what you spend on petrol, parking and tolls. Because these costs can be a significant part of your bottom line, many shipping companies will specifically track these costs separately. However, if you are an interior design business, then the individual breakdown of these car/truck costs may not be relevant or meaningful. Designers often put all car-related costs into one general category called “Car Costs”. For an interior design company, the level of expense detail may be more important in a different area, such as: customer purchases such as art, furniture, fabrics, etc. Or in the area of work-related expenses, such as: reproduction of a plan, travel or subcontractor fees. Therefore, determining the level of detail you need is the most important step in designing a well-functioning chart of accounts.
QuickBooks allows you to group and organize expenses in a standard chart of accounts template using one main category and numerous subaccounts. Sub-accounts allow users to receive detailed level reports along with a summary of the main category. For example: most companies pay different types of insurance costs. QuickBooks allows you to create a main category called insurance, with subcategories listing different types such as: health, liability, auto, etc. At the end of the period, you will be able to see not only your total insurance costs, but also amounts for each individual subcategory. This level of reporting will help you understand your company better and enable you to solve problems faster, strategize smarter, and make smarter decisions faster.
Simple step-by-step instructions for setting up your chart of accounts using QuickBooks software
Make sure your QuickBooks software is open.
1. Select Lists in the top menu bar, and then click Chart of Accounts
2. Click the Account button at the bottom left and select New. This command is used to create a new account
3. When the New Account window opens, identify which category type the account belongs to. QuickBooks will use this information for reporting purposes
4. Click Continue
5. In the Name field, enter the name you are assigning to the account. For example: insurance, legal fees, accounting fees, etc. Please be brief and do not use vendor or customer names such as: Jon’s Automotive. The category name is a general description.
6. If you are adding a subaccount to a main category, click the Subaccount check box. If you have created an account called Utilities, you can now create sub-accounts such as: Electric, Gas, Water, Recycling, etc.
7. In the Description field, give a brief explanation of the purpose of this account
8. Continue to enter the relevant information about your bank in the other fields
9. If you know which tax return line the new account belongs to, you can select it from the Tax Line drop-down menu. Most people leave it blank, and you can too. Unless you plan to import financial data from QuickBooks into Intuit-compatible tax preparation software, you do not need to map the tax lines for your new accounts
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