At the heart of any accounting system is a good chart of accounts. QuickBooks Online is no different.
The chart of accounts tells the financial software what to do with the dollars that we, as QBO users, post there. If the account is an asset or liability, the balance in the account is increased or decreased depending on the type of transaction we use.
That balance remains, even across multiple years. It’s the account type that makes that happen.
On the other hand, if we create an expense type of account, we will see the dollars posted to that account depending on the date we put on reports. A Profit and Loss report for August of 2015 will show the expense amount for a particular account for that time period only, regardless of what may have happened in the past.
The balance in an asset or liability account though, will show the total of all transactions since the beginning of the QuickBooks file, even if a balance sheet for August 2015 is created.
So, it is very important to use correct account types.
QBO goes even further to help your financial reports come out correctly.
You can view your chart of accounts by navigating to Transactions on the left panel and then choosing Chart of Accounts.
The above screenshot shows how the list appears. Note the column headers.
The first column (left) displays the name of the account. This is usually specified by the QBO user.
The second column shows the account type as we were explaining a few paragraphs ago. In the graphic, you can see Bank, Accounts Receivable, and Other Current Asset types of accounts.
The third column is circled in order to garner extra attention. This is the Detail Type. This is a way QBO is given more information about how you intend to use this account. That information helps QBO decided where the account balance should appear on financial reports like Profit and Loss and Balance Sheet.
The fourth column shows the account balance, but only for balance sheet accounts, those accounts of the types assets, liabilities, and equity.
If we scroll down this list to the income and expense accounts, no balance shows. Income and expense accounts close for reporting purposes at the end of each year. QuickBooks does not maintain an indefinite total balance for those types of accounts.
Also note that there are two account balances for the bank accounts shown. If we could see far enough down the list to view the credit card accounts too, you would see both account balance columns filled there as well.
The difference tells us there is a difference between what our QuickBooks balance in this account is and the balance coming from the financial institution. There are transactions we need to match or enter from our bank feeds.
Once you are more familiar with and understand the QBO chart of accounts, it becomes easier to create new accounts correctly.
More on Standard Chart of Accounts…
Hector Garcia, CPA
Certified Advanced QuickBooks ProAdvisor