As an entrepreneur managing the books for your own business, one of the first and most important aspects of your accounting that you’ll need to understand is your chart of accounts. Luckily, setting up your chart of accounts in QuickBooks Online is simple, thanks to the platform’s straightforward accounts categorization.
But if running your own accounting is a whole new world, you may be wondering, What is a chart of accounts?
Simply put, it is the complete list of all of your company’s accounts and balances. In QuickBooks Online, the chart of accounts represents and organizes your company’s assets, liabilities, income, and expenses. You will use this to get a complete picture of how much money is flowing in and out of your business.
Read on to learn more about:
Account categories and types.
How to set up your QuickBooks chart of accounts.
How to use sub-accounts.
Tips for keeping your accounts clean and organized.
Account Categories Explained
There are two main account categories in QuickBooks Online: Balance Sheet accounts and Income and Expense accounts.
Balance Sheet Accounts
A balance sheet is a statement of a business or organization’s assets, liabilities, and equity, detailing the balance of income and expenses over a prior period. Each balance sheet account has its own register to track individual transactions and balances for the respective account.
The balance sheet is one of your primary financial statements, broken out into three major distinctions:
Assets: Anything your company owns that has value (e.g., building, land, equipment, vehicles, valuables, inventory)
Liabilities: Anything your company owes other parties (e.g., bank loans, credit cards, mortgages, payroll taxes, and accounts payable)
Equity: Your company’s total assets minus its total liabilities
QuickBooks Online categorizes these into the following main account types:
Bank: Your company bank accounts
Accounts Receivable (A/R): Money due to your company in the short-term
Equity
Asset, Current Asset, Fixed Asset
Credit Card: Your company credit card accounts
Accounts Payable (A/P): Your bills
Other Current Liability or Long-term Liability
Income & Expense Accounts
Income accounts track the source of your income. Most small businesses start with one or two broad categories, like “sales” or “services.” But depending on what kinds of services and products you offer, you’ll want to create separate line items in your chart of accounts for each type of income. This will help you better understand your financial health and determine what is bringing in the most cash flow. After all, certain offerings cost much more of your effort, time, and money.
Expense accounts track what your company is spending—in other words, they help you track money that you no longer have. For example, if you purchase new office equipment, the money moves from your cash account to the fixed asset account.
As with your income, it’s also a good idea to break up expenses into separate sub-accounts to more accurately track your spending.
Note that income and expense accounts do not have their own registers.
How to Set Up Your QuickBooks Online Chart of Accounts
The standard chart of accounts provided during the initial QuickBooks Online setup will suit most small businesses and entrepreneurs. Eventually, you may need to add to, edit, or delete accounts due to your business’s needs. Below are easy steps for each.
Add an account:
Select Accounting from the left menu.
Click New.
Select the appropriate account type in the Category Type dropdown menu.
Select the appropriate Detail Type in the dropdown menu.
Fill in all remaining fields and click Save and Close.
Edit an account:
Select Accounting from the left menu.
Locate the account you’d like to edit.
Click the dropdown arrow next to Account history or Run report (depending on the account).
Select Edit.
Make all desired changes and click Save and Close.
Edit an account’s history:
Select Accounting from the left menu.
Locate the account you’d like to edit.
Select Account history.
Select the transaction you’d like to edit.
From here, you can make changes to all available fields and click either Delete, Edit, Cancel, or Save.
How to Use Sub-accounts
The sub-accounts feature under QuickBooks Online’s chart of accounts gives you the ability to break down expenses, income, and other transactions into greater detail. For instance, under your “bank fees” account, you could create a sub-account for “PayPal fees.” Or, your “utilities” account may include sub-accounts for gas, telephone, water, etc.
You can create sub-accounts under any main (i.e., “parent”) account to keep your chart of accounts organized and obtain more detailed reports. Doing so will allow you to make smarter decisions about your business.
Create a new sub-account
To create a new sub-account under an existing account, follow these steps:
Click Settings (with the gear icon) > Chart of Accounts.
Select New, then select the account type and detail type.
Select Is sub-account, then enter the parent account.
Name your new sub-account and add a description if you choose.
For the as of date, tell QuickBooks when you want your account to start. Then add the Balance in the account as of the date you choose. (Note: Only some types of accounts need this, like bank, credit card, asset, and liability).
Click Save and Close.
Convert an existing account into a sub-account
To turn an existing account into a sub-account, simply:
Click Settings (with the gear icon) > Chart of Accounts.
Find the account and select the small downward arrow in the action column. Then click Edit.
Select Is sub-account, then enter the parent account.
Click Save and Close.
A Few Final Tips
To maintain an organized Quickbooks Online chart of accounts, remember these few simple tips:
Keep your line items simple: Use clear titles that make sense to you and your accountant (e.g., “bank fees” and “rent expense”).
Account numbers: Only use them if you have an extensive chart of accounts. These are often unnecessary for small businesses.
Remove accounts you do not use.
Do you need help setting up your QuickBooks chart of accounts? We’re ProAdvisor Program Gold Certified and will be happy to help you start all of your bookkeeping on the right foot! Contact us for a free consultation or call 603-505-2368 to learn more today.