QuickBooks Tip – Understanding Your Chart of Accounts
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.
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