A QuickBooks Payroll Tip for creating a more functional Payroll Liabilities section on your Chart of Accounts.
QuickBooks, by default, provides a limited Payroll Chart of Accounts containing only two accounts – Payroll Liabilities and Payroll Expenses. When you run a Balance Sheet or a Profit & Loss Report (or look at your Chart of Accounts listing) you only see the totals with no details and have to run further reports to find the individual amounts that make up the totals. I find this to be problematic.
This article will show you how to add sub-accounts to the standard Payroll Liabilities account so that you can quickly and easily “see” the individual amounts for each payroll liability and how to edit your existing payroll items to accurately point to these new accounts. A little extra work up front will provide you with a very function Payroll Liabilities section on your Chart of Accounts.
Step 1 – Determine the required Payroll Liability Sub-Accounts
Open your Payroll Items List {Lists menu -> Payroll Items} and scroll to the bottom, and pay close attention to the items that are currently pointing to or assigned to Payroll Liabilities.
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NOTE: You may want to customize the columns that are displayed in this list. To do so, right-click the Liability Account heading -> choose customize columns -> from the available columns list click on Expense Account -> the Add button -> Liability Account -> the Add button -> Payable To -> and the Add button. Click Ok. This will provide you a more detailed and functional Payroll Item List to work with, as shown in the screenshot above.
From this list, we will determine what we need to add to our Chart of Accounts to make it more functional. We will be adding sub-accounts for:
- Federal Unemployment {FUTA}
- Federal Withholding {FWH}
- Medicare {M-CARE}
- Social Security {FICA}
- State Withholding {STWH}
- State Disability {SDI}
- State Unemployment {SUI}
- Employee Training Tax (ESD}
Step 2 – Create Payroll Liability Sub-Accounts
Once you have the list of items that we will be adding as sub-accounts to the main Payroll Liabilities account; go to your Chart of Accounts {Lists menu -> Chart of Accounts}.
- Click the Account button {at the lower left corner of this window} -> choose New -> click the radio button next to Other Account Types and from the drop down menu choose Other Current Liability -> click the Continue button
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- In the Account Name, type in Federal Unemployment -> click the box next to Subaccount of and then from the drop down menu choose Payroll Liabilities. Add other details as required or necessary.
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- Click the Save & New button to create the other items from your list.
NOTE: Create a single account for Social Security and Medicare.
Step 3 – Edit existing payroll items mapping them to the new accounts
Going back to your Payroll Item List, edit each item assigning them to the newly created sub-accounts.
- Click on the Federal Unemployment payroll item -> click the Payroll Item button -> choose Edit -> click the Next button -> from the Liability Account drop down menu -> choose Federal Unemployment
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- Click the Next button until you get to the last window then select Finish.
NOTE: You may receive an Update transactions with new account window, here you can choose to update all existing transactions OR update transactions starting on a specific date. My personal preference would be to update all existing transactions – you may want to consult your accountant about this.
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When you have finished mapping the items to your new sub-accounts; simply opening and viewing your Chart of Accounts will provide you with a detailed account of each of your payroll liabilities, as well as the grand total.
On Wednesday, we’ll provide instructions for making the Payroll Expenses section of your Chart of Accounts provide more information on Profit & Loss Reports.
The QuickBooks Chart of Accounts is the backbone of your entire accounting system, and it’s important that you understand how it works.
Think of your Chart of Accounts as a filing cabinet with individual files for each type of accounting information that you wish to track. For example, if you need to know how much money you spend on small tools that cost under $50.00, you would create a file (Expense account in the Chart of Accounts) for Tools Under $50 and post (file) all your purchase receipts (checks, cash expenses, credit card receipts, etc.) to that account.
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The Chart of Accounts is a complete list of a businesses accounts and their balances. You will use it to track how much money you have spent, how much money you have – and - how much money you owe.
The Chart of Accounts also holds information about the following:
Assets – things your company owns. This section is usually divided into two groups.
- Current Assets – things you can easily turn into cash, such as; checking accounts, savings accounts, money market accounts, accounts receivable, and inventory.
- Fixed Assets – items with a minimum cost (for example $500.00 or more) that you could sell to generate cash, such as; trucks, equipment, or land.
Liabilities – money your company owes others. This is usually broken down into two groups.
- Current Liabilities – things that will be paid off within a year, this would include; accounts payable, credit cards, payroll taxes, etc.
- Long-term Liabilities – things 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.
Equity or Capital – is the difference between what you have (your assets) and what you owe (your liabilities)
Income/Revenue – the money that you receive from your normal day-to-day business operations, such as; professional fees, services rendered, products you sell, etc.
Cost of Goods Sold/Job Costs/Direct Expenses – all the costs of building or assembling your product or service; direct labor, materials, subcontractors, equipment rental, etc.
Expenses/Overhead Costs – fixed costs that you would have even if you ran out of work; rent, telephone, utilities, etc.
Other Income – money that you earn outside of the normal operation of your business; interest income, rent of a building, etc.
Other Expenses – are expenses that are outside of your normal business, such as; a loss on the sale of an asset, stockbrokers fees, etc.
QuickBooks comes with several “pre-configured” Chart of Account lists, which you can select during the EasyStep Interview when you create a new company file, however, these pre-configured lists seldom meet all of your needs – which means that you will have to add to them in order to meet the needs of your company.
Other Chart of Account blog articles:
- Using Account Numbers in your QuickBooks Chart of Accounts
- The Chart of Accounts and it’s Many Uses in your business
- Modifying & Working with your Chart of Accounts
Many companies fail to set up their charts of accounts correctly in QuickBooks. Over the years I have seen charts of accountants that look like a collage of accounts in helter skelter format without any logical order, containing duplicate if not triplicate accounts, inconsistent protocols, and even inappropriate, if not undecipherable, names.
At tax time, when their CPA receives either a backup or Accountants copy of the file like OR reports that have been created from the file, it becomes an even bigger mess. The trial balance that must be created by the tax preparer requires countless hours of reclassifications and groupings to mesh and coordinate the amounts within the file to the classifications required on tax returns and financial statements. Business owners then bear the costs of needless and expensive clean ups, often tacking on an additional $500 to $1000 per year to their annual accounting bills.
There is no excuse for not having a QuickBooks chart of accounts set up in a format compatible with what is reported on a company’s tax return as well as their financial statement. Once set up, a simple click in QuickBooks prints a readable and well-organized financial report for internal management, bankers, other creditors, bonding companies, shareholders, etc. In addition, with some mapping to an Intuit tax software program, the client’s trial balance amounts can be exported to the company’s tax return by the tax preparer with another click of the mouse.
In order to minimize the costs associated with having their tax returns prepared, as well as interim and year-end financial reports, businesses owners would be well advised to adopt account names, groupings, and an overall format required by their tax returns. A good chart of accounts can accommodate the requirements of both internal and external financial reporting, since subaccounts would provide any necessary detail required by management and interested outside parties – while a simple click of the Modify Report button in QuickBooks re-arranges the expense accounts in alphabetical order – often the desired presentation for banks.
Many Certified Public Accountants (CPA’s) and Certified Public Bookkeepers (CPB) prefer to have their clients set up the chart of accounts using account numbers. Many clients do not want to use numbers because they find them cumbersome.
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A compromise is to turn on the “Use account numbers” preference (Edit menu -> Preferences -> Accounting -> Company Preferences tab -> Use Account Numbers) when setting up the chart of accounts. Then, turn off the account numbers preference. When the preference is off, account numbers are not eliminated, simply hidden from view. At the end of the year, the CPA can turn the preference back on and add account numbers to any accounts created by the client during the year.
When the “Use account numbers” and “Reports-Show accounts by Name only” preferences (Edit menu -> Preferences -> Reports & Graphs -> Company Preferences tab -> Reports – Show Accounts by: Name Only option) are activated, account numbers appear next to the account name in QuickBooks financial reports.
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Many users prefer not to have account numbers display on financial reports. If, instead, the preference “Reports-Show accounts by Description only” is activated, the account description entered when the account was setup is used. Therefore, when using account numbers, enter an account description. (This description can be identical to the account name.)
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The Chart of Accounts is the most important QuickBooks list. It is the backbone for a company to track how much money it has, how much money it owes, how much money is coming in, and how much money it is spending.
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It is not necessary to have a chart of accounts that provides for every conceivable transaction. Instead, the chart of accounts should include the minimum number of accounts necessary to capture the appropriate financial information and be flexible enough to allow for future growth. The chart of accounts should be designed to include the accounts necessary for both financial and income tax reporting.
QuickBooks makes it easy for you to set up a chart of accounts.
When you create a company file in QuickBooks (File menu -> New Company), an EasyStep Interview is launched to guide you through the process. Follow its “wizard” to initially setting up your company in QuickBooks, selecting the appropriate legal structure and select a predefined chart of accounts for your industry.
If you are unable to find your precise industry, you can:
- select the industry closest to yours
- copy a chart of accounts from another company in QuickBooks
- import a chart of accounts from another source
- or if you are adventurous, start from scratch
No need to fear: virtually everything can be undone, which is one of the reasons QuickBooks is so very popular; it is all so forgiving.
Always use account numbers.
You have to enable the use of account numbers, from the Edit menu -> choose Preferences -> select Accounting -> and click on the Company Preferences tab, and then selecting “Use account numbers”.
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Using account numbers allows your company the most freedom of organization and arrangement of your account format in your financial reports. By using numbers, you can arrange reports into meaningful sections, groups, or categories. By default, QuickBooks orders all financial accounts in financial reports in numerical order. If you wish to change the account order in the report, just change the account’s number. This flexibility is not available when you use just using account names. Additionally, it is a simple process to rearrange these same reports in alphabetical order, if and when desired: simply select Modify Report -> Display -> Sort in Ascending order/Descending order.
You are allowed up to 7 digits for an account number in QuickBooks; a minimum of 5 is recommended if you require numerous accounts and subaccounts. Unfortunately, QuickBooks preconfigures their numbering system using 4 digit – which is rather limiting. I often use, and recommend, a 5 digit account numbering system for construction companies:
10000 – 19999: Assets
10000 – 14999: Current Assets
- 10000 – 10999: Cash
- 11000 – 11999: Receivables
- 12000 – 12999: Inventory
- 13000 – 14999: Other Current Assets
15000 – 19999: Noncurrent Assets
- 15000 – 15999 – Fixed Assets
- 16000 – 19999 – Other Assets
20000 – 29999: Liabilities
20000 – 25999: Current Liabilities
- 20000 – 20499 – Accounts Payable
- 20500 – 20999 – Credit Cards
- 21000 – 25999 – Other Current Liabilities
- 21000 – 21999 – Accrued Expenses
- 22000 – 22999 – Payroll Liabilities
- 23000 – 23999 – Debt, Current Portion
- 24000 – 24999 – Capitalized Leases, Current Portion
- 25000 – 25999 – Other
26000 – 29999: Noncurrent Liabilities
- 26000 – 26999 – Debt, Noncurrent Portion
- 27000 – 27999 – Capitalized Leases, Noncurrent Portion
- 28000 – 29999 – Other
30000 – 39999: Equity
- 30000 – 30999 – Capital Stock
- 39000 – 39999 – Retained Earnings
Revenue: 40000 – 49999
50000 – 59999: Cost of Goods Sold
- 50000 – 50999 – Materials
- 51000 – 51999 – Labor
- 52000 – 52999 – Subcontractors
- 53000 – 53999 – Equipment
- 54000 – 59999 – Other Direct Costs
60000 – 89999: Expenses
- 60000 – 69999 – Selling Expenses
- 70000 – 89999 – General and Administrative Expenses
90000 – 99999 : Other Income (Expenses)
There is no excuse for not having a chart of accounts set up in a format compatible with what is reported on one’s tax return as well as one’s financial statement. Once set up, a simple click in QuickBooks prints a readable and well-organized financial report for internal management, bankers, other creditors, bonding companies, shareholders, et al.
This format need not be inconsistent with that used for internal and external financial reporting, since subaccounts would provide any necessary detail required by management and interested outside parties; while a simple click under report modification in QuickBooks re-arranges the expense accounts in alphabetical order, often the desired presentation for banks.
Important – Accounts may be added to or deleted from the chart of accounts at any time, but an account cannot be deleted easily once a transaction has been posted to it. Consequently, ensure the chart of accounts is complete and unnecessary accounts have been deleted before recording any transactions.
