QuickBooks for Contractors blog

Why is the chart of accounts important?

The Chart of Accounts is the backbone of your accounting system. It is the complete list of all the accounts you need to categorize your business activities. Based on the information you provide in this interview, QuickBooks will create a recommended Chart of Accounts that is designed to track your business and help you to make good financial decisions for your company.

As your business grows, you can tailor your Chart of Accounts to meet your business needs.

Understanding your chart of accounts.

The chart of accounts is the backbone of your accounting system. That’s why it’s so important to understand how it works. Think of a chart of accounts as a file cabinet, with a file for each type of accounting information you want to track. For example, if you need to know how much money you spend on postage, you’ll set up a file (an account in the chart of accounts) for Postage Expense.

Although you aren’t required to use account numbers in your chart of accounts in QuickBooks, your accountant may recommend that you do so.

Assets are things your company owns. They’re usually divided into two groups-current assets and fixed assets.

Current assets are generally numbered from 10000- 14999. These are assets that you can easily turn into cash, such as checking accounts, savings accounts, money market and CD accounts, accounts receivable, and inventory. So you might want to use account number 10000 for your company checking account because a checking account is a current asset.

• 10000 – 14999 Bank Accounts

Fixed assets are usually numbered from 15000 – 19990. These are items with a minimum cost (for example, $500.00 or more) that you would have to sell to generate cash.   Automobiles, equipment, and land are examples of fixed assets. For example, suppose last year your company bought a new computer system for $1,100. Since the cost of the system was more than $500, the purchase was entered to an asset account rather than to an expense account. Consult your accountant or tax preparer to determine the actual minimum cost you should use to determine fixed assets.

• 15000 – 15999 Accounts Receivable

• 16000 – 16999 Other Current Assets

• 17000 – 18999 Fixed Assets

• 19000 – 19999 Other Assets

Liabilities are funds your company owes. For example, say your company borrowed $20,000 from the bank. When the $20,000 loan was deposited to the checking account, the deposit was entered in the liability account Bank Loans, not an income account.  Liabilities are usually broken down into two groups.

Current Liabilities are generally numbered 20000-24999.  These are liabilities that will be paid off within a year, this would include accounts payable, credit cards, payroll taxes, etc.

• 20000 – 20999 Accounts Payable

• 21000 – 23999 Credit Cards

• 24000 – 26999 Other Current Liabilities

Long-term Liabilities are generally numbered 27000-29999.  These are liabilities that will take more than a year to pay off, this would include a truck loan, equipment loan, a loan to buy a piece of property, etc.

Your capital account structure depends on whether your company is organized as a sole proprietorship, partnership, or corporation.

If your company is a sole proprietorship, you need an Equity account and an Owner’s Drawing account. Use the Equity account to keep track of the total amount of money you’ve invested since starting the business. Use the Owner’s Drawing account for money you take out of the business for personal use, such as checks to the grocery store, dry cleaners, ATM transactions, your salary, and any money that gets deposited into your personal accounts. It’s important to keep in mind that the owner of a sole proprietorship doesn’t get a regular “employee” paycheck with money deducted for payroll taxes. Instead you pay quarterly estimated taxes, which you should always allocate to the Owner’s Drawing account.

If your company is a partnership or LLP (Limited Liability Partnership), you need to set up Equity and Drawing accounts for each partner.

If your company is an “S or C corporation” or an “LLC corporation,” it should have a Common Stock account and sometimes a Preferred Stock account. Common stock and preferred stock represent the total sum of stock the company has issued. An LLC might have Member stock if there is more than one person who owns stock.

“Income” or “revenue” is the income you get from your normal day-to-day business tasks, such as professional fees, income for services rendered, reimbursable expenses, or products you sell.

Job or Project Costs, or Cost of Goods Sold (as it is called in QuickBooks), are all the costs associated with your line of business.

For example, if you’re a home builder, the job costs are whatever it costs you to build a home, including direct labor, materials, subcontractors, dump fees, and equipment rental.

If you sell products, this includes cost of inventory, raw materials, freight charges, and any labor for building the finished goods. Other examples of project costs include reimbursable expenses such as overnight mail, court costs (for an attorney’s office), blue prints (for an architect), and purchases made on behalf of the customer such as furnishings bought by an interior designer or auto parts bought by a mechanic.

If you design homes, the job costs include all your costs of designing a home, such as design labor, drafting materials, supplies, and engineering costs. If you do both designing and building, you’ll have both sets of costs.

For professional service businesses, project costs are the costs that you incur in order to complete a project. Project costs are also referred to as direct costs. For example, if you hire an outside consultant and his or her time is billable to the customer, that is a direct or project cost. Other examples of project costs are reimbursable expenses such as overnight mail, messenger service, court costs (for an attorney’s office), blue prints (for an architect or engineer), and purchases made on the behalf of a customer, such as furnishings bought by an interior designer or computer parts bought by a computer technician.

Cost of Goods Sold also includes the cost of raw materials, freight charges for getting raw material to a warehouse, labor for building the finished goods, and freight charges for getting the goods to the customer. For manufacturing businesses, the Cost of Goods Sold includes the costs incurred in producing or building a product. For a wholesale business, Cost of Goods Sold are the costs of the goods you purchase for resale. for a distributor business, Cost of Goods Sold are the costs to purchase and distribute goods to the customer.

Overhead Costs, or Expenses, are fixed costs you have even if you run out of work.  Examples include rent, telephone, insurance, and utilities.

Other Income is income you earn outside the normal way you do business, including interest income, gain on the sale of an asset, insurance settlement, a stock sale, or rents from buildings you own.

Other Expense is an expense that’s outside of your normal business, such as a loss on the sale of an asset or stockbroker fees.