Nearly every time I begin working with a new client, I have to modify their Chart of Accounts. There is generally a lack of proper organization and a misuse of Balance Sheet and Income Statement type accounts that requires my assistance. There are usually three issues found in the misuse of the accounts:
- Redundancy – Many accounts that are similar in nature are oftentimes used for the same things. For example, Office Expense and Office Supplies; Sales and Services; Owner’s Equity and Owner Draws & Distributions.
- Obsolescence – Some accounts may have been relevant for the business 5 to 10 years ago, but serve no real practical value for the company now. These accounts do not get used and are taking up space. These accounts may even get used accidentally from time to time.
- Parent Type Accounts – Parent Accounts are simply a holding place for several sub-accounts that relate in a certain way. (For instance, the Insurance Parent Account may hold sub-accounts of Liability, Health, Auto, and Dental). Using this example, nothing should ever be booked under Insurance, but should always go under the more detailed sub-account such as Insurance:Dental. These accounts should be used to accurately track your money and compare budgets and forecasts from previous periods. Using the parent accounts alone would not give an accurate picture of where cost cutting measures should be attempted, for instance.
Organizing your Chart of Accounts is never really an exact science because, like your budget, it will evolve as your business grows and changes. Properly managing your Chart of Accounts is a crucial exercise in guiding your business along the path you have planned.
The QuickBooks Desktop version is much more flexible for sorting and situating your Chart of Accounts at any point during the life of your business. The QuickBooks Online version is not as flexible, as oftentimes accounts are created by the software itself and are tied to automatic downloads (as well as your item list). These accounts cannot be deactivated, even if automatic activities are no longer used, and you are sometimes stuck with irrelevant accounts. In this situation, it is imperative that your bookkeeper understands your business model and how to properly book your transactions.
When starting a business from scratch, QuickBooks Desktop will offer to take you through a wizard process to assist you in creating and organizing your Chart of Accounts for the first time.
In the screen shot below, choose Detailed Start, and you will go through a more extensive wizard:
Here is where you choose the type of industry you are engaged in:
Finally, here is where QuickBooks tells you which accounts will be created, based on how you answered the questions in the wizard. Selections here may be modified by adding or removing checkmarks.
*NOTE* If you choose “Express Start” in the first screen-shot above, then QuickBooks will only ask you your business name, industry, and business type. The software will then create a chart of accounts for you automatically.
My personal rule of thumb is to create a “General Business” type of Chart of Accounts (for products or services or both) and then modify as you see fit as business activities get going and/or you create a budget or forecast. Once you have time to see your business in action, you may prefer using custom account names, as well as relevant sub-accounts for things like marketing, office, travel, and cost of goods/services sold.
Note: AccuraBooks is a bookkeeping firm only, so please consult with your Certified Public Accountant for verification and clarification about the contents of this article.