My client Susan wanted me to re-design her entire company’s chart of accounts, specifically in the Profit & Loss income and expenses areas, including the Cost of Goods Sold type of accounts.
Susan also wanted “Departments” created as well in the expense areas of the chart of accounts; in other words, her company was dividing up into different departments (such as General & Administrative, Research & Development, Corporate/Executive and Marketing). Thus, each department was to incur all of their own office, travel, payroll & meals expenses.
There are two basic ways of building and tracking this within QuickBooks:
- The chart of accounts (in the company’s bookkeeping system) can be built very vertical in nature. So, at the top (with the Income Statement realm) sits the revenue accounts. Next is the Cost of Goods Sold (or direct cost of revenue) type of accounts. Below this begins the company overhead expenses tracking, and this is where Susan wanted to organize all of these expenses by splitting and tracking within each company department, as mentioned above. Overall, this is a very direct way of reviewing all of the company’s costs (holistically) and within each department as well. The drawback to this approach is the entire Profit & Loss (income statement) can be rather lengthy to review (because every department is going to be listed with their own office, travel, payroll & meals expenses) and thus is not the most efficient approach when reviewing, especially for comparison purposes.
- The 2nd option I gave to Susan was to activate the class functionality within QuickBooks. This will add another field to populate within financial functions such as check-writing, credit card charges and billing. The “Class” list will be the exact same as all of the departments Susan wanted to create, as mentioned above. So, each expense transaction entered in (as long as the class field is also populated) will be tied to a specific department as well. Then when Susan wants to see an Income Statement, the report generated will be “Profit & Loss by Class”. This will make the report more horizontal in nature because there will never be a need to create extra departmentalized (and duplicated) expense accounts (as in option 1 above), instead each department (class) will have its own profit and loss reporting as well, when the P&L by Class report is generated, even the total for the company will still be at the far-right side, after all departments are reported in their own respective columns. The drawback to this approach is that whoever is doing the bookkeeping has to remember to always fill in that extra class field on each and every transaction entered into the books, otherwise you will get another column called “Uncategorized” within the P&L by Class report.
Overall, it is just a matter of what is best for the company to pick one option and proceed forward. It is always best to plan and organize the bookkeeping first before deciding on one of the options above.
Note: AccuraBooks is a bookkeeping firm only, so please consult with your C.P.A. for verification and clarification about the contents of this article.