How to set up a Chart of Accounts in QuickBooks - QBalance.com (2023)

The QuickBooks Chart of Accounts is very customizable. You can start with a standard Chart of Accounts that the QuickBooks wizard will help you set up. However, this does not mean you have to leave the chart of accounts as is. The chart of accounts should be modified to meet the needs of your business. This will give you the ability to produce reports that will help you make good management decisions.This article will cover the following categories:

• What is a Chart of Accounts
• The Balance Sheet Accounts
• The Income Statement Accounts
• Sample Chart of Accounts in QuickBooks, examples
• How to set up a Chart of Accounts

The chart of accounts should be modified (add or delete accounts) to help produce very useful reports. If you feel you could use some help in reviewing and modifying your current chart of accounts or with the setup of a new chart of accounts, give us a call @ 800-216-0763.

What is a Chart of Accounts?

In customizing your chart of accounts, you can rename accounts to make their names more meaningful. Or, add new additional accounts that are more applicable. It may be that an account already set up is too broad. Create one or more sublevel accounts to help categorize further down that broad main account. And, there may be a need to delete accounts that are not important.

The Chart of Accounts is a list of all the accounts with each their associated balance that make up your business. The funds that go into these accounts are based on the transactions created while running your business.

Accounts are the backbones of your QuickBooks transactions:

Every transaction your business creates will point to two or more accounts within your Chart of Accounts. Here are the transactions that can be created in QuickBooks:

• Estimate – also known as: bid, proposal, or quote, this document gives the items, descriptions, quantity, and price of the products or services your prospective customer is interested in. Accounts example: Estimate, Material Income, Subcontractor Labor Income, Sales Tax Payable.
• Sales Order – this document would be set up once the approval to move forward with the estimate is received and you need to track that order within your business before it is shipped. Accounts example: Sales Orders, Materials Income, Sales Tax Payable.
• Invoice – this document is created when you turn the estimate or sales order into an invoice for requesting payment of products and services to be sent to the customer. This is usually set up with payment terms so that the customer knows the payment due date. Accounts example: Accounts Receivable, Materials Income, Inventory Asset, Cost of Goods Sold, Sales Tax Payable.
• Receive Payment – use this feature when your customer is ready to pay you on an invoice you sent them for products and services they purchase from you. Accounts example: Checking – bank account, Accounts Receivable.
• Sales Receipt – this document is created when a customer pays immediately for products or services purchased. Accounts example: Checking, Labor Income, Sales Tax Payable.
• Purchase Order – this document is created to tell your vendor (the company you are purchasing from) the items you wish to purchase. Keep up with what is ordered, when it is received and the expense you will owe that vendor. Accounts example: Purchase Orders, Job Expenses: Job Materials (COGS).
• Bill – is not a document but a way to keep track of your expenses in QuickBooks. A bill is set up usually based on a vendors invoice to you on the items for services or products that you purchased from them. Bills are what you owe a vendor to be paid at a later date (usually by the due date). Accounts example: Accounts Payable, Utilities: Telephone expense.
• Bill Payment – use a bill payment feature in QuickBooks when you are ready to make a payment on a vendor’s invoice(s). Accounts example: Checking, Accounts Payable.
  
• Deposits – Customer payments can be recorded either directly into a bank account or more likely placed in a temporary holding account called Undeposited Funds to be grouped at a later point for depositing to a bank account. Account example: Checking, Undeposited Funds.

How is a Chart of Accounts grouped for reporting purposes?

There are six broad account categories in the Chart of Accounts. Three of these categories make up the Balance Sheet report:

• Assets – what is owned by the business
• Liabilities – what the business owes
• Equity – what is the net worth of the business

The Balance Sheet shows a quick snapshot of how the business is doing at a point in time.

The other three categories make up the Income Statement report:

• Income – the sales of products and services a business sells.
• Cost of Goods Sold – this category many times is abbreviated as COGS – used for inventory tracking. This section affects both the balance sheet and the Income statement.
• Expense – purchases paid for the benefit of the business.

The Income Statement which can be referred to as the Profit and Loss Statement shows whether a business is making or losing money. This statement can be reviewed to determine where the business can cut back on their expenses and also, to expand on the income streams that are more profitable.

The Balance Sheet and Income Statement Report are two very important accounting reports necessary for every business.

Account Names versus Account Names with account numbers.

The chart of accounts can be set up by creating account names or account numbers with account names. You must turn on account numbers in QuickBooks under Preferences > Accounting > Company preferences and selecting the Use account numbers.

Account numbers give you the most flexibility in categorizing your accounts.

QuickBooks allows you to use up to seven-digit numbers. However, you may not need numbers that large.

Here is an example of a breakdown of how to use numbers when categorizing accounts.

• 1000-1499 Current Assets
  • 1000 Checking Account
  • 1001 Savings Account
  • 1002 Petty Cash
• 1500-1999 Fixed Assets
  • 1500 Furniture and Equipment
  • 1600 Vehicles
  • 1700 Land
• 2000-2999 Liabilities
  • 2000 Accounts Payable
  • 2100 American Express Credit xxxx (last 4 digits of account number)
  • 2200 Visa Credit xxxx
• 3000-3999 Equity
• 4000-4999 Revenue (Income)
• 5000-5999 Cost of Goods Sold (Job Costs)
• 6000-6999 Expenses (Overhead)
  • 6000 Automobile
  • 6050 Insurance
  • 6080 Bank Service charge
  • 6200 Depreciation Expense
• 7000-7999 Other Income
• 8000-8999 Other Expenses

Numbers give a business further numerical breakdown in the categorizing their chart of accounts.

The Balance Sheet Accounts

Now, we will explain the three balance sheet categories: Assets, Liabilities and Equity accounts that are part of the Balance Sheet report. These three main categories are always within the top portion of a business’s chart of accounts. Why is it important to have these accounts and run a balance sheet report? It takes a snapshot of your business and lets you know how your business is doing at any point in time. The balance sheet shows what you own (assets) versus what you owe (liabilities). You would usually run a balance sheet at the close of a fiscal period: month, quarter and year-end.

What types of accounts are Assets?

An Asset is something that has value that your business owns and helps in generating income. Some assets include: current assets: cash, accounts receivables, inventory and fixed assets: machinery, building, and land. On the balance sheet, the current assets are set up before the fixed assets due to they are easier to turn into cash.

Here is a basic breakdown of the types of assets you may include. We will show the account type in bold and possible accounts included next to each.

• Bank Accounts – Business Checking, Business Savings, Payroll Checking, Petty Cash (this is for out of pocket expenses), Barter Checking.
• Accounts Receivable – Accounts Receivable Account or A/R, is its abbreviation, is used to keep track of all the open invoices that have yet to be paid.
  
• Current Assets – Inventory, Undeposited Funds (usually these are accounts that can be easily turned into cash, if necessary).
• Fixed Assets – Equipment, Furniture and Fixtures, Vehicles, Accumulated Depreciation, Land
• Other Assets – Start-up costs (Accountants use), Accumulated Amortization, Notes Receivable (for officer, owner, or other related party). Notes Receivables are promissory notes for the purpose of showing money owed to the business – the owner may have lent money to another individual to be paid back at some future date. There may be a need for more than one Notes Receivable account, so name them appropriately.

Take a look at this sample asset section of the Chart of Accounts of a contractor based company in QuickBooks:

As you can see, there are a few different bank accounts and many more other current assets. You can add to your chart of accounts with the accounts that are pertinent in running your business. However, do be careful that you are not duplicating the same account twice by just naming it slightly different. You want to include only accounts that are necessary for the running of the business.

What types of accounts are Liabilities?

A liability is something that is owed. Each business may have of these liabilities and more. The business may buy products or services using credit and that forms a liability back to the company they purchased from.

Here is a basic breakdown of the types of Liabilities you may include:

• Accounts Payable – Accounts Payable – this account helps keep track of what the business owes to be paid at a future date. These are open invoices and bills that involve business purchases such as office supplies, utilities, computer equipment, and supplies and more.
• Credit Cards used to make business purchases – American Express, Visa acct # xxxx, MasterCard acct # zzzz – the xxxx and the zzzz would be the last four digits of the account number to help differentiate credit cards used in the business.
• Current Liabilities – Accrued Expenses, Sales Tax Payable, Deposits from Customers, Current portion of long term liabilities (for accountants use). Payroll Tax Payable – If the business is handling the quarterly taxes for payroll then create sub-accounts for:
  • 941 Tax
  • 940 Tax
  • Unemployment
  • State withholding
• Long-Term Liabilities – Are loans, usually set up as a Loan Agreement or a Notes Payable agreement. The difference is that the loan agreement goes into greater detail with obligations spelled out for both the lender and the borrower and must be signed by both parties. Both types of agreements will state the following:
  • The amount of the loan
  • Loan period
  • Interest
  • Late Fees

In QuickBooks, you can set up the main loan account and then set up sub-accounts. However,it may be best to keep loan agreements in a separate account from the Notes Payable agreements for tracking purposes.

This is a sample liability and equity section of the Chart of Accounts of a construction company in QuickBooks:

Here you have your different credit cards and other current liabilities. If you are using similar credit cards such as two visa accounts, within the name add the last 4 numbers of the account so you can differentiate between the two cards.

What types of accounts are Equities?

Each business has a net worth which is also known as Equity. This Equity is usually found by taking the total of all assets and subtracting the total of all liabilities and that total is the business Equity. Another way of looking at that Equity total is what the business owns. In accounting, there are two equations that figure Equity. The first is Asset – Liabilities = Equity; or Assets= Liabilities + Equity. Whether you total to your Equities or you total to your Assets, they should be in balance to the other side of the equation. These three main groups of accounts make up a business Balance Sheet. One of three very important business reports, the other two are the Income Statement and Cash Flow Statement.

What type of equity accounts you set up will depend on the type of business you are, such as: S Corporation, Partnership, Sole Proprietorship or a C Corporation. Here are some general examples of accounts that would be listed in your chart of accounts under the Equity section. These accounts may be included:

• S Corporation: Capital Stock, Retained Earnings – the profits of the business, Opening Balance Equity, Distributions Shareholder – use this account when the owner receives a large payment from a client and wants to keep the funds within the business.
  
• Partnership: Capital Partner – this account can be set up for each partner to hold their capital contributions to the business. There can be more than one of these accounts, however, label individually. Additional Capital Contributed Partner – may be additional funds or assets that a partner contributes during the lifetime of the business. This account would be used to keep these additional contributions separate. Each partner may have one Partner Draw account or the draw account can be subdivided for each partner for: Medical, Personal Taxes, Other. A partner would withdraw funds from the business to cover personal medical or personal tax expenses.
• Sole Proprietorship: Capital, Additional Capital Contributed, Draw Account
• C Corporation: Capital Stock, Retained Earnings, Opening Balance Equity, Dividends, Additional Paid-in Capital

This is a very simple sample of the equity part of the chart of accounts for this construction company:

Depending on the type of company you have set up, you may need to add a Distribution to Shareholders account or a Draw account. If there are other equity accounts that you feel are important within your business, then add the ones you will use.

The Income Statement Accounts

There are two more Chart of Accounts categories that we need to discuss. They are the Income and Expense accounts. There is a third group that only some businesses need and that is the Cost of Goods Sold (COGS) accounts. These accounts are used when a business sells products and has inventory they need to track. These groups of accounts fall below the balance sheet accounts within the chart of accounts.

What types of accounts make up Income?

Income can come from the sale of a product or service. Think about all the ways your business is generating revenue. It could be from any type of product. Are you a consultant selling your time? Do you run classes to help people build skills? Maybe you put on events? Whatever your income stream is from, create an account to track it. Income is one of three parts that make up the Income Statement Report. The other two account categories are Cost of Goods Sold and Expenses.

There are two types of Income accounts in QuickBooks: Income, Other Income.

• Income types: Services, Sales

Important: You may want to use some subaccounts to categorize your Income accounts even further. However, try to keep your list of income & expense accounts to a single page. Use items to collect further detail. When you are ready to run an Income Statement, the use of sub-accounts will give the ability to have subtotals for related accounts.

• Other Income types: Sales write-offs, Interest Income.

Within the chart of accounts of the construction company QuickBooks uses these income accounts:

You can have one main income account and then create a number of sub-accounts to divide your Income into smaller groups. Using sub-accounts in QuickBooks allows you to provide subtotals for related accounts. Or you can create multiple Income accounts as is necessary for your business such as Service Income, Product Income, Events Income, Class Income.

What types of accounts make up COGS?

If you build a product or purchase a product for resale and you keep on hand until it is sold, then it is an Inventory item. You would track them within your COGS accounts. There are three accounts necessary to track inventory: an asset account, cogs account, and an income account.

In QuickBooks set these accounts up as COGS Account, Sales Income Account and Inventory Asset Account.

In this COGS section of the Income Statement, there is one main account type and it tracks all the costs that relate to the items a business sells:

Materials – Labor, Outside services/Subcontractors, Supplies, Small tools

Within the chart of accounts of the construction company QuickBooks uses these COGS accounts:

The Cost of Goods Sold account called Job Expenses has been subdivided into 7 sub accounts. Creating reasonable subaccounts will help you understand the breakdown of the costs to complete the job.

What types of accounts make up Expenses?

This section may have the most number of accounts. However, again we want to reiterate that you should limit the number of accounts to be used. More detail can be added to items which point to one of these accounts. If your Income Statement is more than one page, the business may fail to see the “red flags” as it will be buried among the detail.

Expenses – Advertising – can be subdivided to cover Marketing costs and Inventory used for promotions, Automobile Expense, Bank Service Charges, Cleaning, Contributions, Depreciation Expense, Discounts Taken, Dues and Subscriptions, Insurance – can be subdivided to cover Auto, Business Liab and Contents, Disability Insurance, Life and Medical, Interest Expense, Licenses and Permits, Maintenance & Repairs, Meals & Entertainment, Merchant credit card fees, Office Expenses – can be subdivided into Computer Expenses, Postage and Delivery, Office Supplies and Other Expenses, Payroll Taxes, Professional Fees, Rent, Salaries – Office, Salaries – Officers, Telephone, Travel and Utilities.

Other Expenses – These may include expenses to be tracked outside those expenses in direct association with the day to day operation of the business. Also, ask your accountant to set up an account to hold those transactions that you do not know how to handle. Each month or quarter, have the accountant help to reclassify those transactions to the proper account.

Here is a sample from a construction company their expense portion of the Chart of Accounts:

There are 19 main Expense accounts here with eight accounts subdivided further with sub-accounts.

Sample Chart of Accounts in QuickBooks, Examples

In this section, you will see two Chart of Account examples for the Balance Sheet accounts. This will give you and idea of how QuickBooks wizard sets up a Chart of Accounts.

Sample Consulting Company Balance Sheet Accounts

Sample Contractor Company Balance Sheet Accounts

Then we will also, give two Chart of Account examples for the Income Statement accounts.

Sample Consulting Company Income Statement Accounts

Sample Contractor Company Income Statement Accounts

How to Set Up a Chart of Accounts in QuickBooks

It may be best to let QuickBooks first create a chart of accounts for the industry and business type you select when you first create your QuickBooks Company file.

After opening QuickBooks to set up your company file and chart of accounts click on the button below.

It will open this window:

Use the Express Start button.

This window will open:

Fill in the Business Name, Industry and Business type. If you need help click on the Help me Choose button. It will give you a list of industries and or business types to choose from. When you click on each industry, under accounts is a listing of the accounts suggested for that industry. Don’t worry, if it does not exactly meet your business needs. Then, choose the Preview your Settings button. Review your Features selected. You can, also, turn

On or off features within QuickBooks Preferences. Click on the Chart of Accounts tab.

Review the checked accounts QuickBooks has set up. If you see others you know will be necessary, within your file, add a checkmark to the left of the account. Then click ok.

Once your company files opens, you can find your Chart of Accounts by going to the top menu bar and under Lists click on Chart of Accounts. Now you will see the complete list of accounts that QuickBooks set up for you. This is where you can customize your accounts to fit your business.

Add a new account to your Chart of Accounts

In reviewing your bank accounts, you have decided you would like to have a second savings account in this company file. If you are creating more than one account that is similar, such as: a savings account or credit card, it would be smart to add the last 4 digits of the account number on the name of the account. This way you can differentiate between the two.

To start, within the chart of accounts there is a tab at the bottom called Accounts with a down arrow next to it. Click Accounts and choose the New button or use your Ctrl + N to bring up this window:

As you can see, we have chosen the account type called Bank. Click on Continue.

Here you will fill in the following fields: Account Name (don’t forget to add the last 4 digits of the account number for easier reference), Description, Bank account number, and routing number.

The bank account number and routing number are only necessary if you are going to set up bank feed to directly download your bank transactions into QuickBooks. Now click on Save & Close. Upon saving, Set up Bank Feed will pop up. This can be done now or later.

Important to remember: Make sure each account is different enough so that when it comes time to use them, there won’t be questions on which account is the right one to use.

We have added the number 2 after Company Savings account with an _4498 to represent the account number.

Edit an account already set up in your Chart of Accounts

In sticking with the bank accounts, let’s edit the first Company Savings Account, so that it will have the account number on the end for easy reference.

Click on Edit and the following window will open:

Now you have a choice of two different savings accounts within your company file which you can quickly reference since part of the account number is within the name of the account.

As you can see, it is very easy to add additional accounts to QuickBooks.

Delete an account already set up in your Chart of Accounts

The decision was made that you have too many insurance expense accounts and it would be a good idea to remove the ones not necessary to your business. Currently, your company doesn’t offer disability insurance and will not need to track auto insurance. These are two accounts that can be deleted.

Under the Account tab at the bottom of the Chart of Accounts window, click on the Delete account or use your Ctrl + D to delete the Auto Insurance account.

QuickBooks has a pop up that will ask you if you are sure you want to delete the account. If you are sure, then go ahead and click on the OK button. The same process is used again when you want to delete any account your business won’t be using.

Important: Keep in mind that QuickBooks will not allow you to delete any account that already has transactions in it. If the account has one or more transactions, or the account is being used with an item or within payroll, then you can not delete it.

When you try to delete an account that is in use, QuickBooks will pop up this window warning:

If this window does show up when you are deleting an account, cancel out of it and review the account you are trying to delete.

Do you still have questions? If you feel you could use some help in reviewing and modifying your current chart of accounts or with the setup of a new chart of accounts, give us a call @ 800-216-0763.