Your Chart of Accounts is the foundation of your QuickBooks file. It determines where your transactions are categorized and how that information appears on your financial reports.
A well-organized Chart of Accounts can make your Profit & Loss and Balance Sheet easier to read, help you identify bookkeeping problems, and provide your CPA or tax professional with better financial information.
A poorly organized Chart of Accounts can do the opposite: duplicate accounts, vague categories, unnecessary accounts, and incorrectly classified transactions can make your financial reports difficult to interpret.
What Is the Chart of Accounts?
The Chart of Accounts is the complete list of accounts your company uses to organize its financial activity in QuickBooks Online.
Most accounts ultimately fall within five major accounting categories:
Assets — What the company owns or controls, such as bank accounts, Accounts Receivable, inventory, vehicles, equipment, and other assets.
Liabilities — What the company owes, such as credit cards, loans, lines of credit, and other obligations.
Equity — The owner’s financial interest in the company, including owner contributions, distributions, and retained earnings.
Income — Money earned from the company’s normal business activities.
Expenses — Costs incurred while operating the business, such as rent, utilities, advertising, insurance, payroll-related expenses, and professional services.
Organizing these accounts correctly helps QuickBooks produce meaningful financial statements.
Don't Create an Account for Every Vendor
One common mistake is creating a separate expense account for every company you pay.
For example, instead of creating:
- Verizon
- AT&T
- T-Mobile
you may simply need an account such as:
Telephone & Internet
The vendor tells you who you paid. The Chart of Accounts should generally tell you what you paid for.
The same concept can apply throughout your books.
Instead of creating accounts for Home Depot, Lowe’s, and Ace Hardware, you might categorize those purchases according to their actual purpose, such as Repairs & Maintenance, Supplies, or an appropriate asset account.
Use Accounts and Subaccounts to Add Detail
QuickBooks Online allows you to create parent accounts and subaccounts.
For example:
Utilities
- Electricity
- Water
- Gas
- Telephone & Internet
Or:
Professional Services
- Accounting
- Legal
- Consulting
This gives you additional detail without turning your Chart of Accounts into a long, disorganized list.
However, more detail isn’t always better. Create subaccounts when the additional information is actually useful for managing or reporting on the business.
Avoid Duplicate and Unnecessary Accounts
As a QuickBooks file grows, it’s common to find accounts that serve essentially the same purpose.
For example:
Office Supplies
Office Expense
Office Supplies & Expense
General Office Expense
Transactions may become scattered among all four accounts even though they represent similar business activity.
Before creating a new account, check whether an appropriate account already exists.
A cleaner Chart of Accounts makes your reports easier to analyze and helps maintain consistency when categorizing transactions.
Choose the Correct Account Type
When creating an account in QuickBooks Online, choosing the correct Account Type is extremely important.
The Account Type determines where the account appears on your financial statements.
For example, an expense account normally appears on the Profit & Loss, while assets, liabilities, and equity accounts normally appear on the Balance Sheet.
A transaction can therefore be entered into QuickBooks and still produce misleading financial reports if the account itself was created under the wrong type.
Your Chart of Accounts Should Fit Your Business
There is no single Chart of Accounts that works perfectly for every company.
A restaurant, construction company, real estate business, consulting company, and online retailer may require very different accounts.
The goal isn’t to create as many accounts as possible.
The goal is to create a structure that allows you to categorize transactions consistently and produce financial reports that are useful for your business.
A Better Chart of Accounts Creates Better Reports
Your Profit & Loss and Balance Sheet are built from the transactions recorded throughout your Chart of Accounts.
If those accounts are poorly organized—or transactions are consistently categorized into the wrong accounts—the reports may not accurately communicate what’s happening financially in your company.
A well-organized Chart of Accounts gives your bookkeeping structure.
Accurate books start with accurate classification.
Need Help Organizing Your QuickBooks File?
BK PROS can review your QuickBooks file and help identify duplicate accounts, unnecessary accounts, incorrect account types, unusual balances, and other bookkeeping issues that may be affecting your financial reports.
Not sure whether your Chart of Accounts is organized correctly?
Get Your Books Reviewed.
