On their first day of using QuickBooks Online, Jill and Bob we freaking out because they couldn’t understand the Chart of Accounts. After all, they weren’t accountants and didn’t deserve to be subjected to the ‘torture’ of learning accounting terminology. Well, since then, Jill and Bob breathed a sigh of relief because they read How to Set Up Chart of Accounts in QuickBooks Online (Part 1), where I covered:
- How to get to the Chart of Accounts
- How to view the Chart of Accounts
- How to edit accounts
- How to add a sub-account
- How to delete an account
In this post: How to Set Up Chart of Accounts (Part 2), were going to take our knowledge up a notch and learn:
- How to add accounts to the Chart of Accounts
- How to change the category type of an account
- Best practices when setting up the Chart of Accounts
Now its only a matter of time before Jill and Bob become QuickBooks Online: Chart of Accounts experts.
HOW TO ADD AN ACCOUNT TO THE CHART OF ACCOUNTS IN QBO
Let’s walk through how to add a new account to the Chart of Accounts.
To add a new account:
Go the the Chart of Accounts.
Select New.
(For our example, we’ll add an Expense account)
- Under Category Type, select Expenses.
- Under Detail Type, try to find the best match for the type of account that you’re adding. If you’re not sure, select Other Miscellaneous service cost.
- Add the account name.
- Finally, select Save and Close.
If you go back to the Chart of Accounts, you will see the account which was just added.
Next, let’s add a new Sub-Account to the Chart of Accounts.
In the Chart of Accounts, select New.
(For our example, we’ll add another Expense account)
- Under Category Type, select Expenses.
- Select the appropriate Detail Type (for this example, let’s make it Vehicle Insurance).
- Enter or change the account name.
- Check the box “Is sub-account”.
- From the drop-down menu, select the account under which the new sub-account will appear (for our example, let’s use the Insurance account).
- Finally, select Save and Close.
If you go back to the Chart of Accounts, you will now see that Vehicle Insurance shows up as a sub-account of Insurance.
How to change the Category Type of an account
The account type determines where the account will show up on financial reports, such as the Balance Sheet and the Profit & Loss Report.
To change the Category Type of an account:
Go the the Chart of Accounts and select the account for which your want to change the category type. (For our example, lets change from an expense account type to a Cost of Goods Sold account type)
- To the right of the account name, select the drop down arrow.
- Select Edit.
- Under Account Type, from the drop down menu, select Cost of Goods Sold.
- Finally, select Save and Close.
If you go back to the Chart of Accounts, you will now see that Construction Materials is now a Cost of Goods Sold account.
BEST PRACTICES WHEN SETTING UP THE CHART OF ACCOUNTS
Lets go over some best practices for going over the Chart of Accounts:
How do you know whether you need to delete an account, or how do you know if you’re adding too many sub-accounts? Those are great questions. So, let me give you some examples to help provide some clarity.
Example 1: If you want to track travel expenses and add sub-accounts for airfare, auto, hotel, and travel meals, is that reasonable? The answer is YES. Each is a separate and distinct component of travel expenses, but should be tracked in the main category of travel expenses. Additionally, some accounts, such as Travel Meals, have special tax treatment, so it’s a good idea to keep this account separate from the other travel-related accounts (as it’s own sub-account).
Let’s look at another example.
Example 2: If you want to track office supplies by paperclips, pens, paper, toner, binders, notebooks, and ten other sub-accounts, is that a good idea? The answer is NO. Those are too many sub-accounts. They will clutter up your Chart of Accounts and reports
A quick Chart of Account tip
Are you looking for an account but can’t find it? Then, try filtering by name.
Simply enter the account name, and all of the account categories that contain that name will show up on the list
Closing
Now that I’ve shown you How to Set Up Chart of Accounts (Part 2), you may want to become more familiar with the Chart of Accounts on your own. Here’s what I encourage you to start doing:
- Use sub-accounts to further categorize your sales income, especially if you have a business with different service offerings.
- Delete any accounts that you don’t clearly need. This will make your Chart of Accounts less cluttered.
- Add any Expense accounts that you may need. Most business will have the same overall expenses, such as rent or office supplies. However, some businesses will have expenses which are unique only to their business.
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