Your chart of accounts is the superstar of your bookkeeping system. And when we say super, we mean SUPER.

A chart of accounts is the skeleton of your financial system. Think of it as an outline of all the accounts in your accounting system. Accounts are:

  • Bank accounts
  • Credit cards
  • Income 
  • Expenses
  • Assets
  • Liabilities

Many bookkeeping mistakes stem from a messy chart of accounts. When you’re unclear about your income categories, expense categories, and bank accounts, bookkeeping mayhem ensues. The result? Incorrect categorization of tax deductions, inputting duplicate transactions, and over or under reporting your income. #NotCute

The more succinct and clear your chart of accounts is the more likely you’ll have bookkeeping success. Which is why it’s important to spend time in the beginning of your bookkeeping journey setting up your chart accounts. 

Below is a step by step guide to setting up your chart of accounts in QuickBooks Online. 

Adding bank accounts and credit cards to your chart of accounts

Instructions:

  1. Go to Accounting -> Chart of Accounts
  2. Click New (green button on the top right)
  3. Account Type-> Bank Account or Credit Card Account
  4. Detail Type-> Choose Detail
  5. Name-> Enter name (Tip: Name it something that will make sense to you and you can easily identify )
  6. Description-> Leave blank unless you want to add a description 
  7. Subaccount-> You do not need to check this unless you have credit cards with multiple users. See video for how to set up credit cards with multiple users. 
  8. Balance-> Leave blank
  9. Click Save and Close

Identifying your income categories 

Just like going grocery shopping without a list leads to some questionable food choices (Dorito sandwiches anyone?), setting up a chart of accounts without a list of planned categories can lead to some questionable bookkeeping choices. 

Before setting up your income categories in QuickBooks Online, get clear on what your income streams are and how you want to track your various sources of income. 

A lot of people use one generic income category like “Sales” or “Services” to track all of their income streams. While it may seem easier to have one broad, all encompassing income category, it robs you of seeing key information about your revenue. Getting specific about your income streams helps you understand how your business makes money, what’s changing in your revenue, and what drives those changes. 

Here’s how to identify your income categories. 

Step 1: List all of your products and services 

Don’t focus on the organization of this list. Rather, brain dump all the ways you make money. Some examples could be:

  1. Services you offer on an hourly basis
  2. Services you offer on a package basis
  3. Physical products
  4. Digital products
  5. Affiliate revenue
  6. Ad revenue

Get detailed and granular about what you sell. For example, instead of saying “Service Packages” list out all of the types of service package you offer, like “Website Development Package”, “Website Maintenance Package”, and “Website Security Package.” 

Step 2: Group similar products and services together 

Next, look at your big, messy list and group similar products and services together. For example, if you have three types of website packages, you could group them together.  

You may have a few income streams that cannot be grouped with anything else. That’s okay! You don’t need to force the groupings- just allow them occur naturally. 

Step 3: Give each group a name that makes sense to you

The most important part of this step is giving your groupings (and any lone ungrouped income streams) a name that makes sense to you. Ultimately, you’re the one who needs to know what’s going on in your finances, so you want to be clear about what these income streams include. The name should resonate with you and make sense when you see it. 

Now you have a list of your primary income categories! 

Step 4: Identify income subcategories

Income subcategories help you glean additional information about your income. They give you details about your primary income categories while keeping your chart of accounts short and organized. 

To identify your income subcategories, ask yourself, “Are there any additional details I want to know about how I make money?” You may want to review your list from Step 1 to see if there’s anything on that list you want to know more about. 

For example, if you have a primary income category that is Design Services, you might want to know which type of design services generate the most revenue. In this case, your income sub-categories would be Website Design, Print Design, and Digital Campaign Design. Here’s how it would look:

Design Services
     Website Design
     Print Design
     Digital Campaign Design 

Adding income categories to your chart of accounts

Instructions:

  1. Access your chart of accounts by going to Accounting -> Chart of Accounts
  2. Click New
  3. Account Type-> Income
  4. Detail Type-> Chose type (we like to keep it simple with Service Fee Income or Sale of Product Income)
  5. Name-> Name based on the income streams you identified
  6. Description-> Not needed 
  7. Subaccount-> Click if this is a subcategory of a parent income account
  8. Checkbox
  9. Select from drop-down
  10. Save and Close

Editing and deleting income and expense categories 

Your QuickBooks Online bookkeeping file has already been set up with the most common business expenses. However, you may need to delete expense categories that you don’t use for you business. This keeps your bookkeeping streamlines and straight forward. 

To edit an income or expense category:

  1. Find income or expense category you want to edit in your chart of accounts
  2. Click the down arrow next to Run Report
  3. Select Edit
  4. Edit income category data
  5. Save and Close

To delete an income or expense category:

  1. Find income or expense category you want to edit in your Chart of Accounts
  2. Click down arrow next to Run Report
  3. Select Delete
  4. Are you sure you want to delete this-> Yes
  5. Note: You cannot delete a parent category that has subcategories, you must delete the subcategories first 

Other types of categories account in your chart of accounts:

You may have noticed that there are a bunch of other types of accounts in the drop down menu of Account Type. You also may have noticed that most of these accounts sound like fancy shmancy accountant's lingo. 

If you felt intimidated by the list, we’ve got your back. This overview will help you feel like the Rocky Balboa of accounting lingo (cue Eye of the Tiger). 

Account Receivable (A/R): Money that owed to you by your customers. The most common example are your customer’s open invoices. 

Accounts Payable: Money that you owe to others for goods or services. For example, if you receive a bill from a vendor and have 30 days to pay the bill, the bill becomes an accounts payable. 

Fixed assets: Long-term piece of property that your company owns that can be converted to cash but not readily (as you can’t just go to the ATM machine and trade in your display case in for cash). Examples include furniture, equipment, vehicles, buildings, land, leasehold improvements, and the cost of patents or trademarks (these are intangible assets). 

Current assets: Short-term assets that are expected to convert to cash within one year. Examples include inventory, loans given to others, short-term investments, and prepaid expenses. 

Current liabilities: Money due to others that’s expected to be paid within 12 months. Examples include customer deposits, federal and state taxes owed, line of credit, short-term loan, payroll taxes owed, and sales tax owed. 

Long-term liabilities: Money due to others that is expected to be paid in more than 12 months. The most common example is a long-term loan, like a business loan. 

Equity: Equity is how much of your business is actually yours. It’s also what you personally put in and take out of your business. Anything you put into your business is a Shareholder Contribution, what you take out is a Shareholder Distribution. 

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