Accounting is probably the backbone of any organization. If you want that your business runs smoothly and successfully, then you need to pay heed to the accounting part of your business. Doing that these days would call for the need for software. QuickBooks Software is one such software that takes care of all your accounting needs.
Every time you add or remove some accounts from your business transactions, keeping track of that record is important. When such a transaction occurs, it is extremely crucial that you carefully record it into the correct account. This is where the charts of account comes into the picture. They are particularly beneficial in recording any addition or deletion of an account from QuickBooks. Read the complete blog to understand in detail how to set up a chart of accounts in QuickBooks? This will guide you in keeping a better track of your business’s accounts.
What does Chart of Accounts really mean?
The chart of accounts literally means that it is a collation of all the accounts listed in your business. It is basically a list of all names and account numbers that are particularly relevant to your company. Furthermore, a typical chart of accounts has four categories. The primary account types in a standard chart of accounts are:
1.) Asset Accounts
2.) Liability Accounts
3.) Income Accounts
4.) Expense Accounts
Let us understand each of these accounts in detail:
1.) Asset Accounts
Asset accounts are basically entities that you own. It can be anything valuable you own like buildings, land, vehicles, valuables, inventory, bank accounts, notes receivable, etc. The chart of accounts organizes various asset accounts by arranging them into line items which makes it easy to track the multiple components of accounts easily. Asset accounts not only track each asset’s value but also follow each asset’s depreciation.
2.) Liability Accounts
Liability Accounts refer to current or short-term liabilities, accounts payable or bills, Payroll Taxes, bank loans, etc. Current Liabilities are outstanding payments that are due within the year. In contrast, non-current liabilities refer to outstanding payments which are due for more than a year.
3.) Income Accounts
Income is usually the most underutilized category of accounts. Some of the commonly used types of income accounts are as follows:
1.) Sales Income
2.) Rental Income
3.) Dividend Income
4.) Contra Income
While some types of income are easily generated, others require great time, effort, and expense. It is sensible to create different line items in the chart of accounts for different types of income. If you are able to visualize which events are in more cash flow, then you can very wisely manage your business.
4.) Expense Accounts
As the name suggests, expense accounts represent any money that you have spent. An expense account basically keeps track of the expenses that you incur. Below are some examples of expense accounts:
a.) Cost of Sales
b.) Advertising Expense
c.) Interest Expense
d.) Salaries or Wages
Tips for classifying the chart of accounts
Before you understand how to set up chart of accounts in QuickBooks, here are a few tips or pointers that you should keep in mind:
1.) A number of accounting systems are preset with a chart of accounts. The lines of these preset accounts include headers that are numbered, such as 1450.2 and 630.8. These preset chart of accounts may be helpful for bigger firms but is usually of no use to entrepreneurs and small firms.
2.) You must use simple and straightforward titles in the line items that make sense to the reader
3.) Another point you should consider is that you must avoid creating a new line item for every transaction. In place of that, you should make use of the QuickBooks’ subheadings. For example, instead of creating a new line for PayPal fees, you can simply put it under the sub-account bank fees.
How to Setup Chart of Accounts in QuickBooks?
You can follow the below steps to set up the chart of accounts in QuickBooks:
1.) Choose the Lists- Charts of Accounts Command
QuickBooks will display the Chart of Accounts window on your screen.
2.) Pick the Account button
QuickBooks Desktop will display the account menu. When you hit the “Account Menu” option, your system screen will show the option of “New.”
3.) Add a new account by first choosing the account and then New
QuickBooks will display the Add New Account window on the screen
4.) Utilize the Account Type buttons
In QuickBooks, options for different account types are available such as Income, Loan, Fixed Asset, Expenses, etc. It is only through Accounts that you can come to know the location where the data of the accounts is being reported
5.) Click on Continue
After you have clicked on Continue, QuickBooks will display the second Add Account window on the computer screen. You should use the Account Name Box to give a very different name to the new account.
6.) Verify the Sub-Account
If you have chosen the sub-account of the check box, you need to give a name to the parent account
7.) Bank Account
If you use different currencies, then QuickBooks shall remind you to find all those customers, and bank accounts who utilize different currencies
8.) Get Account info
In the Add New Account in QuickBooks, the credit card account type will help in storing all card details.
9.) Acknowledge the Tax Line
On a company’s tax return, the cash account balance shall be recorded. You can add a bank account still by making use of the Tax Line mapping drop-down list.
10.) Save New Account
Finally, you need to click on Next so that it saves the account information, and then it will display the “Add New Account” window. Furthermore, when both these accounts are set up, the new accounts will appear on the chart of accounts.
We hope you have understood the steps mentioned above for “How to Setup Chart of Accounts in QuickBooks?” issue. Employing the said methods, you can very easily navigate this issue of setting up a Chart of Accounts in QuickBooks.
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Frequently Asked Questions
Q1. What does the chart of accounts mean in QuickBooks?
Ans. A list of all accounts that enable QuickBooks to track your financial information is called a chart of accounts. These accounts are used to classify the transactions from sales forms to tax reforms. Each account holds some transaction history and lets you know how much money you have or how much do you owe to somebody.
Q2. Is there a standard chart of accounts? If yes, what is it?
Ans. Yes, a standard chart of accounts is a list of all accounts that comprises a company’s general ledger. Furthermore, it is a filing system for categorizing as well as classifying all transactions in accordance with the accounts that they affect.
Q3. How is a chart of accounts different from a general ledger?
Ans. The general ledger can be thought of as the record of all financial transactions in the organization, whereas a chart of accounts is a list of all accounts that are utilized in the organization’s accounting system.
Q4. What is the order of listing charts of accounts?
Ans. As in financial statements, in a chart of accounts also, accounts are shown in the same order. Consequently, assets and liabilities come first, while revenue and expenses follow behind.
Q5. How are charts of accounts classified?
Ans. The charts of accounts are classified into five major categories:
1.) Asset accounts
2.) Liability accounts
3.) Equity accounts
4.) Revenue Accounts
5.) Expense accounts
Q6. What use does a chart of accounts have for the company’s management?
Ans. A chart of accounts is used to keep & manage a record of transactions in the organization. It also is a major indicator for investors and shareholders who can gain clearer insights into the company’s financial health. Each chart of accounts contains a name, brief description, and an identification code which makes it easier for chart readers to locate specific accounts.
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