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Why Your Chart of Accounts Is So Important, and A Look at Its Contents

Depending on the complexity of your business, you may never need to look at your Chart of Accounts. But you should understand it anyway.

Your Chart of Accounts helps you categorize transactions. 

If your business still maintains a lot of paper accounting documents, imagine what it would be like if you didn’t have a way to file and retrieve them. If you just stacked them up in the order they arrived in your office or were processed, how would you find all of the paid invoices at the end of the month to create a report? When your accountant asked you for your income and expenses for the previous quarter for tax purposes, you’d be up all night rooting through your stack of papers.

And once you’d separated your documents by money in and money out, you’d still have more sorting to do. You’d have to break down the expense pile into different types of income and expenses. A filing cabinet and a lot of labeled folders would improve the situation tremendously.

And that’s why QuickBooks’ Chart of Accounts (a standard element of double-entry accounting) is so critical. QuickBooks comes with a default Chart of Accounts that it modifies some based on your type of business. You can modify it, too, but you first need to understand its composition. QuickBooks classes cover this topic in depth.

Here are the primary types of accounts that QuickBooks uses:

Assets. What does your company own? You have current assets, which are liquid possessions. They either are actual money (checking, savings and money market accounts) or they could be easily converted to money (accounts receivable, inventory, etc.).  It’s more difficult and time-consuming to get money from your fixed assets, since they’re physical property that you’d have to sell (computers and other office equipment, land, vehicles, etc.).

Examples: Prepaid Insurance, Undeposited Funds, Construction Equipment

Liabilities. What does your company owe? Do you have outstanding loans, for example? When you see the word “payable” or “loan” in an account name, that’s a liability. They’re usually classified as short-term, current or long-term.

QuickBooks training courses explore the creation and modification of accounts.

Examples:  Payroll Liabilities/FUTA Payable, Loan – Vehicles, Mortgage – Office Building

Income. This one’s pretty obvious: Where does your money come from in terms of your daily workflow? Product sales? Professional fees? Reimbursable expenses? (If you receive income in a way that’s not related to your day-to-day business tasks, it’s classified as Other Income.)

Examples: Construction Income/Labor Income, Reimbursement Income/Mileage Income, Service Income/Training

Expenses. What do you regularly have to spend money on, no matter what? Insurance? Utilities? Telecommunications costs? (Expenses that are one-time or infrequent, like selling an asset at a loss, are Other Expenses.)

Examples: Bank Service Charges, Depreciation Expense, Payroll Expenses/Payroll Taxes

Cost of Goods Sold. What do you have to spend money on to create your products?  This is primarily labor and materials.

Examples: Job Materials, Equipment Rental, Subcontractors

There are other types of accounts in QuickBooks, like Equity and Non-Posting. It would be a good idea to get QuickBooks training on the Chart of Accounts because it’s the backbone of your accounting system. You’ll need to proceed carefully when you start to tweak it.

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