QuickBooks Tip – The Chart of Accounts, What It Is & It’s Many Uses In Your Business
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.
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”.
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.