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Last UpdatedOct 6, 2023
If you’re new to QuickBooks or looking to enhance your understanding of this crucial feature, you’re at the right place. In this article, we will cover everything you need to know about the Chart of Accounts and how it empowers you to effectively manage your financial data. Read on to know more about the power of the Chart of Accounts in QuickBooks.
The chart of accounts, also known as COA, comprises a list of account numbers and names that are pertinent to your company. Typically, it consists of four main categories, namely:
In accounting software, a general ledger is employed, wherein your asset accounts (what you own) are balanced with your liability accounts (what you owe). While this concept is valuable in theory, its practical implementation poses challenges. Due to the discrepancy between current assets and current liabilities, accountants often utilize other account types to ensure the accuracy of the general ledger.
To gain a better understanding of the balance sheet and other relevant financial statements, it is essential to grasp the components that constitute a chart of accounts. Organizing your company’s chart in a systematic manner can facilitate easier access to financial information.
Within each category, specific accounts are distinguished by line items. Each line item represents an account within its respective category. Additionally, some companies may include equity accounts in their chart. An equity account represents the residual value remaining after accounting for all operating expenses and revenue accounts.
The primary types of accounts encompass asset, liability, income, and expense accounts. Below are further details regarding each account type.
Your asset accounts may consist of:
The COA simplifies the management of various asset accounts by organizing them into line items, enabling easy monitoring of multiple components. Asset accounts can be intricate since they not only record the initial cost of each asset but also involve processes like depreciation.
Your liability accounts encompass various items, such as:
Current liabilities refer to payments that are due within the current year, while non-current or long-term liabilities are payments due more than a year from the date of the financial report.
The income category is often underutilized by business owners. Here are the most common types of revenue or income accounts:
Many new owners initially start with broad categories like “sales” and “services.” While some income types are easily generated at a low cost, others require significant effort, time, and expense. It can be beneficial to create separate line items in your chart of accounts for different types of income.
Instead of combining all your income into a single account, consider identifying and categorizing your profitable activities by income type. By analyzing which locations or events generate the highest cash flow, you can make more informed business decisions.
For example, let’s say you have a store that sells various items:
Expense accounts represent the money you have spent. For example, when you pay rent, the funds are transferred from your cash account to the rent expense account. Expense accounts enable you to monitor the money that has been depleted.
Here are additional examples of expense accounts that your business may utilize:
It is advisable to divide expenses into separate accounts. For instance, if you frequently ship products, it would be beneficial to track costs from different shipping carriers individually. Within each line account, you can create sub-categories to categorize the various expenses associated with each carrier.
The process of establishing your chart of accounts is straightforward. Initially, you will need to create a blank chart and allocate the columns. Typically, the chart of accounts is divided into the following three columns:
The account name refers to the designated title of the business account being reported, such as bank fees, cash, taxes, and so on.
Account numbers are assigned to each account name. The following number sequences are commonly used for each account category:
Every account name should be assigned an account type or general ledger category. Choose from the four primary account types: asset, liability, income, and expense.
Here is an example of how your chart will appear once you have included all the necessary components. Once your chart is set up, you can proceed to add specific account names and associate them with their respective account categories.
Standard accounts are provided to all users, with additional accounts specific to your industry being added by QuickBooks software. If you cannot find a required account, you have the option to manually add it. Furthermore, you can edit, delete, or hide existing accounts according to your needs.
|Account||What It Is||Accounts Automatically Included By QuickBooks When You…|
|Accounts Payable (A/P)||QuickBooks allows you to keep track of bills and bill payments for your business. If your business utilizes multiple accounts payable (A/P) accounts, QuickBooks allows you to select the appropriate one when creating and paying bills.||This functionality becomes available when you create a bill for the first time.|
|Accounts Receivable (A/R)||QuickBooks enables you to monitor invoices and payments from your customers. If your business utilizes multiple accounts receivable (A/R) accounts, QuickBooks allows you to select the appropriate one when invoicing or receiving payments||This function becomes available when you create an invoice for the first time.|
|Opening Balance Equity||To maintain a balanced Balance Sheet, QuickBooks automatically offsets opening balance transactions. This ensures that the financial statement remains in equilibrium.||When entering the opening balance for a balance sheet account, this feature comes into play.|
|Payroll Expense||QuickBooks enables you to manage payroll items, including expenses such as salaries, wages, bonuses, and commissions, for your company. It also encompasses company contributions, such as company-paid health plans and portions of taxes like Social Security and Medicare.||It becomes available when you activate payroll for the first time.|
|Payroll Liabilities||It allows you to monitor taxes and deductions from your employees’ salaries until they are remitted to the government. It encompasses various types of taxes, such as federal and state income withholding, as well as local and employee-paid taxes like Medicare and Social Security.||The functionality becomes available when you activate payroll for the first time.|
|Retained Earnings||When starting a new fiscal year, QuickBooks automatically moves the net income into your retained earnings account.||This process occurs when you set up a new company file.|
|Sales Tax Payable||This feature allows you to monitor and manage all sales tax that you collect and pay. Any outstanding amounts that are yet to be paid represent a liability that is payable to the respective sales tax jurisdictions.||This functionality becomes available when you activate sales tax tracking.|
|Uncategorized Expense||Expenses that are not allocated to a specific expense account, such as an opening vendor balance, can be recorded.||You can enter an opening balance for a vendor to account for these expenses.|
|Uncategorized Income||Income that is not attributed to a specific income account, such as an opening customer balance, can be accounted for.||You can enter an opening balance for a customer to include this income in your records.|
|Undeposited Funds||This feature enables you to keep track of customer payments you collect until they are deposited.|
|Inventory Asset||This feature in QuickBooks allows you to monitor the worth of your inventory.||You can utilize it when adding an inventory part or assembly for the first time.|
|Reconciliation Discrepancy||QuickBooks enables you to track any modifications made to previously reconciled transactions since the last account reconciliation.||To reconcile discrepancies, you can enter an adjustment to account for these changes.|
Now that you have set up your chart of accounts, it is essential to keep it organized as you continue to add or modify accounts. The following tips will help you establish a successful chart of accounts:
When initially creating your line items, opt for simplicity. Ensure that your account names are meaningful to both you and your accountant. Use straightforward titles like “bank fees” or “bottling equipment.”
Over time, you may find the need to create new line items for each transaction. However, doing so could clutter your company’s chart and make it difficult to navigate. Instead, take advantage of sub-accounts within your accounting software.
For example, suppose you need to create a new account for “PayPal fees.” Rather than adding a new line to your chart of accounts, create a sub-account under “bank fees.” Similarly, if you pay rent for a building or equipment, you can set up a “rent expense” account with sub-accounts for “building rent” and “equipment rent.”
Include an account statement column in your COA to indicate which financial statement each account will be used for—cash flow, balance sheet, or income statement. For instance, balance sheets typically include asset and liability accounts, while income statements encompass expense accounts.
Your chart of accounts is a dynamic document for your business, and as such, accounts will need to be added or removed over time. The general rule for adding or removing accounts is to add accounts as they arise, but wait until the end of the year or quarter to remove any outdated accounts.
Modifying an account in the COA involves the following steps:
The first step is to choose the account that needs to be modified. In QuickBooks, you have the flexibility to modify accounts at any time. From the chart of accounts, scroll down to locate the desired account, click on the drop-down arrow next to “Run Report,” and select the “Edit” option.
You will be directed to a window where you can modify the Account Name and Account Description fields. It’s important to note that if you have already recorded transactions using the account, avoid changing the category type as it can have significant impacts on your financial statements.
Before exiting the account, remember to save the changes to ensure they are applied. Neglecting to save the modifications will result in the loss of your work.
By following these steps, you can successfully modify an account in the chart of accounts while maintaining the integrity of your financial data.
To maintain a neat and organized bookkeeping system, you have the option to make an account inactive in QuickBooks. By doing so, the account information and transactions are preserved for your records, while keeping it hidden from the active account list.
Before making an account inactive, it’s important to disconnect it if it is linked to a bank. Once disconnected, you can proceed to make the account inactive by selecting “Make Inactive” from the Action dropdown menu. This ensures that the account remains hidden.
If there is a balance remaining in the inactive account, QuickBooks Online will generate a journal entry to transfer the balance to another account. Rest assured, your transactions associated with the account will still be accessible and won’t disappear.
To make an account inactive, follow these steps:
If you need to view your inactive accounts again, you can adjust the settings in the chart of accounts. Simply click on the gear icon above the table and select the option to “Include Inactive” in the Other category. This will allow you to see the inactive accounts within your chart.
If you wish to make an account active again, you have the option to do so. However, please note that the journal entry created when the account was made inactive will remain unchanged. To reactivate the account, simply click on “Make Active” in the Action column. This will restore the account to its active status.
To access the Chart of Accounts, you can begin by selecting it from either the Company menu or the Accountant menu. Simply navigate to either of these menus and choose the option for Lists or Accountant to access the Chart of Accounts.
To access the Chart of Accounts in QuickBooks Online, click on the Settings icon and then select Chart of Accounts from the available options.
To view and print your Chart of Accounts in QuickBooks, follow these steps:
[Related: How To Print Checks Online In QuickBooks]
In conclusion, we explored what a Chart of Accounts is and its importance in organizing and categorizing financial transactions. By leveraging the power of the Chart of Accounts in QuickBooks, you can streamline your financial management processes, generate accurate reports, and make informed business decisions. With this knowledge, you are well-equipped to effectively manage your financial data in QuickBooks and drive the success of your business.
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