During my time as a lawn care business owner, I recall logging into Wave and navigating to my chart of accounts. I'll admit, it was quite perplexing at first glance. In my confusion, I made the decision to brush it off and not delve too deeply into it. If you find yourself in a similar predicament, let me share some advice.
I encourage you to spare a moment to understand your chart of accounts. Although it may seem intimidating, understanding this crucial component of bookkeeping is the most important step in setting up a new QuickBooks file. By familiarizing yourself with your chart of accounts and optimizing it for your unique needs, you will streamline your record-keeping process. So, take a deep breath, roll up your sleeves, and let's tackle this together.
What is a Chart of Accounts?
The simplest way to describe your accounts is to say they are buckets that your transactions fall into. These "buckets" organize and categorize your transactions so you can keep track of the money coming into and going out of your company. This is important for several reasons:
Your accountant will need this to file taxes. It's important to maintain clear records in order to be compliant with the IRS.
You need this to create reports. Your Profit & Loss and Balance Sheet reports are based off of your chart of accounts. These reports are vital to maintaining an accurate understanding of your company's financial situation.
There are different categories of accounts that can be created. Let's discuss each of them briefly. It's important to note that the first three categories are reflected on your Balance Sheet while the rest of the categories are reflected on your Profit and Loss.
Asset accounts include your bank accounts, accounts receivable, undeposited funds, fixed assets and other company assets. Essentially, anything that your company owns will be tracked in these accounts.
Liability accounts include your credit cards, loans, payroll & sales tax liabilities, accounts payable, etc.
Equity accounts vary widely based on your company's structure. They usually include retained earnings and capital accounts.
Income accounts categorize your revenue. You can create multiple accounts such as Services, Sales, Tips, etc. if you want to track different streams of revenue separately.
Cost of Goods Sold accounts track goods purchased that you sell to your customers.
Expense accounts separate all your operating costs so you can clearly see how you are spending your money.
Other Income accounts are used to record income from sources outside of primary business operations such as interest and sales of assets.
Other Expense accounts refer to various costs incurred by the business that don't fall neatly into operating expenses or cost of goods sold such as bank fees and bad debt.
How to Optimize Your Chart of Accounts
Whether you are setting up a new chart of accounts or trying to clean up an existing one, here are a few tips for optimizing your chart of accounts and making it something to be proud of.
Name your accounts clearly so there is no ambiguity as to what their purpose is. Accounts with generic names such as "purchases" will not bring much clarity on your reports. Each account name should be tailored to your unique company and its reporting goals.
Number your accounts based on the categories they fall into. We recommend consistent numbering based on the outline above (100s for assets, 200s for liabilities, etc.). You may need to enable account numbers in your settings before you can do this.
Create sub-accounts when appropriate. Perhaps you have 7 different marketing channels and you want to track your expenses separately for each one. Create a parent account called "Marketing" and then create sub-accounts for each channel. This way you can see the total you have spent on marketing as well as how much you spent on each channel. Make sure to never classify transactions into the parent account if you do this, or it will defeat the purpose of having sub-accounts!
Deactivate old accounts that you are no longer using. Whether it's a source of revenue that you no longer have, a loan that's paid off, or a generic account created by QuickBooks, deactivating old unused accounts will clean up your chart of accounts and make the process of categorizing transactions smoother.
Although it may be daunting at first, understanding and optimizing your chart of accounts will save you a lot of headache down the road!
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