Chapter 2
Using Accounts in QuickBooks
In this chapter:
• Review the accounts that QuickBooks uses
• Decide whether to use numbers for accounts
• Create accounts
• Create subaccounts
• Edit, delete, and merge accounts
The Accounts that QuickBooks Uses
QuickBooks uses accounts to categorize the many different transactions that occur as you operate your business, and the list where all these accounts live is called the chart of accounts. In addition, these accounts are further categorized by type. Assets, liabilities, income, and expenses, for example, are the account types most frequently used. The good news is that as you enter transactions in QuickBooks, you don’t have to worry about the “behind the scenes” entries that need to be made to the accounts that are affected, because QuickBooks takes care of this for you.
For example, when you sell goods or services to a customer and send them an invoice, the Invoice Transaction screen asks you to fill in the name of the customer, the product or service you sold, and the amount you’re charging. QuickBooks posts the amounts related to the transaction to the accounts you specify and also posts a record of that transaction in the customer’s account. Later, when the customer pays the invoice, QuickBooks will show that the invoice has been paid, and it will also increase your bank account for the amount of the payment.
QuickBooks might have created some accounts for you during the initial setup of your company, but you’ll likely need to create additional accounts to ensure that your chart of accounts reflects the activities that are unique to your business. You create the chart of accounts first because some of the other QuickBooks lists you create require you to link the items in those lists to your accounts.
Assets
An asset is something you own, such as
• Money in your bank accounts (sometimes called cash on hand)
• Money owed to you by your customers (called accounts receivable)
• Equipment, furniture, and so on (called fixed assets)
• The inventory you stock for resale if you are a distributor or manufacturer (called inventory assets)
Liabilities
A liability is something that you may be holding but does not belong to you. It is something you owe to someone else, such as
• Money you owe your vendors and suppliers (QuickBooks account type: Accounts Payable)
• Sales tax you have collected and must turn over to the state (QuickBooks account type: Current Liability)
• Money withheld from employees’ pay that you must turn over to government agencies (QuickBooks account type: Current Liability)
• Outstanding loan balances (QuickBooks account type: Long Term Liability)
Equity
Your equity is your business’s net worth and is made up of the following:
• The capital invested in your business (called capital)
• The capital you’ve withdrawn from the business (if your business isn’t a corporation)
• The profit (or loss) including accumulated earnings in prior years (called retained earnings)
Income
Income, also referred to as revenue, is made up of the following:
• Money you collect when you sell products
• Fees you collect for services
• Income derived from interest
Expenses
Expenses are the monies you spend to operate your business. You use the chart of accounts to track or categorize your expenses so you can analyze your business’s performance and, of course, also file tax returns. Generally, expenses are divided into two main categories: cost of goods sold (COGS) and general and administrative expenses.
Cost of goods sold usually comprises the following:
• Cost of raw materials for manufacturing
• Cost of goods you resell in a wholesale or retail business
• Cost of materials consumed/sold in a service business
General and administrative expenses include these:
• Overhead (utilities, rent, insurance, and so on)
• Office supplies
• Payroll
• Services you purchase
• Taxes
Use Account Numbers
By default, QuickBooks uses account names only in the chart of accounts. However, you can change this setting so that your accounts have numbers in addition to the names.
The advantage of using numbers is that you can arrange each section of the chart of accounts by category and subcategory, because within each type of account, QuickBooks displays your chart of accounts in alphanumeric order. Without numbers, QuickBooks displays each section of your chart of accounts in alphabetical order.
You can also use numbered subaccounts (see the section “Use Subaccounts” later in this chapter) to provide subtotals for accounts on many QuickBooks reports and to make it easier to enter transactions. For example, using account numbers gives you the ability to arrange your bank accounts in a logical order, making sure your primary bank account is always at the top of the drop-down list users see when making bank deposits or writing checks. It can also be handy if you open another bank account or if you change banks, because it helps you better control the order in which the accounts appear when selecting them in transactions. So, for instance, if the account number you used for your old checking account was 1000, and you now want to use that number for your new bank account, it’s a simple task to edit the original account number to, say, 1150 (which moves it to the bottom of the list) and give the new checking account the 1000 number so that it will appear at the top of the list.
Enabling Account Numbers
To switch to a number format for your accounts, you have to enable the account number feature. Choose Edit | Preferences from the menu bar to open the Preferences dialog, and select the Accounting icon in the left pane. Click the Company Preferences tab, and select the Use Account Numbers check box (see Figure 2-1).
FIGURE 2-1 |
Enable numbers for your chart of accounts. |
ProAdvisor RecommendsWhen You Need to Run Reports Without Account Numbers
As convenient as it is for you (and your accountant) to have numbered accounts so you can track your finances by category and subcategory, you may have to produce reports for an outside stakeholder (such as your bank). They may have certain financial categories that they’ll want to look at first, and it’s easier for them if your accounts, especially your expenses, are in alphabetical order.
To produce reports without account numbers, putting each account type list back into alphabetical order, turn off the account number feature by deselecting the option in Accounting Preferences (Edit | Preferences | Accounting). Print the reports, and then turn the feature on again. QuickBooks stores account numbers as part of the account name, so when you re-enable account numbers, all your numbers appear exactly as you created them.
If you chose a prebuilt chart of accounts when you set up your company file, those accounts are switched to numbered accounts automatically. However, the QuickBooks numbering scheme is designed to keep accounts in alphabetical order, especially in the Expenses section. This costs you some of the advantages and efficiencies that well-planned numbers bring, but all you have to do is create your own plan and then edit the accounts to change the numbers (see “Edit Accounts” later in this chapter).
Accounts you added yourself (over and above the prebuilt accounts that were automatically brought into your company file) have to be edited to add numbers; QuickBooks doesn’t automatically number them.
When you select the option to use account numbers, the option Show Lowest Subaccount Only (refer to Figure 2-1) becomes accessible. This option tells QuickBooks to display only the subaccount on transaction windows instead of both the parent account and the subaccount, making it easier to see precisely which account is receiving the posting.
If all your accounts aren’t numbered and you select Show Lowest Subaccount Only, when you click OK, QuickBooks displays an error message that you cannot enable this option until all your accounts have numbers assigned. After you’ve edited existing accounts that need numbers (any accounts that QuickBooks didn’t automatically number for you), you can return to the Preferences dialog and enable this subaccount option.
Creating a Numbering System
After you’ve set up numbered accounts, you have a more efficient chart of accounts, so you, your bookkeeper, and your accountant will have an easier time managing your chart of accounts. Numbers give you a quick clue about the type and category of the account you’re working with. As you create accounts, be sure to maintain the logic of your numbering system, assigning ranges of numbers to account types. A common approach to account numbering is shown here:
• 1xxxx Assets
• 2xxxx Liabilities
• 3xxxx Equity
• 4xxxx Income
• 5xxxx Expenses
• 6xxxx Expenses
• 7xxxx Expenses
• 8xxxx Expenses
• 9xxxx Other Income and Expenses
This example uses five-digit numbers because QuickBooks uses five-digit account numbers. QuickBooks permits account numbers of up to seven digits, so you’re not going to run out of numbers no matter how many accounts you need for your business.
Creating Ranges of Numbers
Account types have subtypes, and you need to assign ranges of account numbers to match those subtypes. The starting number of each range has to be the same as the starting number for the account type. That means that if you use numbers starting with a 1 for assets, all of the number ranges for different subtypes of assets must start with a 1.
Let’s take assets, for example. You can use 10000 through 10999 for bank accounts, 11000 through 11999 for receivables and other current assets, and then use 12000 through 12999 for tracking fixed assets such as equipment, furniture, and so on. Follow the same pattern for liabilities, starting with current liabilities and moving to long term. It’s also a good idea to keep all payroll withholding liability accounts together.
If you have inventory and you track cost of goods, you can reserve a section of the chart of accounts for those account types. Some businesses use 43000 through 49999 for cost of goods, and some companies dedicate the numbers in the 5xxxx range to that purpose.
ProAdvisor RecommendsRe-sorting Your Chart of Accounts
When you first set up your chart of accounts, your accounts are sorted by type and then by number. Because the order of these accounts can be changed manually, you may, over time, find it more difficult to find and work with some accounts in your list. You can fix this by re-sorting the list. Open your chart of accounts, click the Account button, and select the Re-Sort List command to return the list to its original order.
You can, if you wish, have a variety of expense types and reserve the starting number for specific types. Some businesses, for example, use 5xxxx for sales expenses, then use 60000 through 79999 for general operating expenses and 8xxxx and 9xxxx for other specific expenses that should appear together in reports such as taxes, penalty fees, and so on. You can also use one range of expense accounts, such as 70000 through 79999 for expenses that fall into the “overhead” category.
Usually, you should create new accounts by increasing the previous account number by 10 or 20 (or even 100 if you don’t have a lot of accounts), so you have room to insert more accounts that belong in the same general area of your chart of accounts when they need to be added later.
Name Accounts
Whether or not you choose to enable account numbers, you have to give each account a name. What’s more, you should take steps to ensure that your account naming convention is consistent. Why is this important? Because when I visit clients who haven’t established and enforced naming conventions, it’s not uncommon to find accounts with names such as these:
• Telephone Exp
• Exps-Telephone
• Tele Expense
• Telephone
• Tele
The problem here is that every one of those accounts had amounts posted to them. That’s because users “guess” at account names when they see a drop-down list, and they point and click whatever they see that seems remotely related. If they don’t find the account the way they would have entered the name, they create a new account (using a name that is logical to them). You can avoid all of those errors by establishing rules about creating account names, limiting which users have authority to create new accounts, and then making sure your users search the account list before applying an account to a transaction.
Here are a few suggestions. You can adjust them to meet your own needs or create different rules that you’re more comfortable with. But the important thing is consistency!
• Avoid apostrophes and quotes.
• Set the number of characters for abbreviations. For example, if you permit four characters, telephone is abbreviated “tele”; a three-character rule produces “tel”.
• Make a rule about whether spaces are allowed. For example, would you rather have “Repairs & Maintenance” or “Repairs&Maintenance”?
Create Accounts
After you’ve done your homework and decided on a naming and numbering scheme, creating accounts is a piece of cake:
1. Press CTRL-A to open the Chart Of Accounts window.
2. Press CTRL-N to enter a new account.
3. In the Add New Account: Choose Account Type dialog (see Figure 2-2), select the type of account you’re creating. If the account type you need doesn’t appear in the major category list on the dialog, select Other Account Types and choose an account type from the drop-down list.
FIGURE 2-2 |
Start by selecting the type of account you want to add. |
4. Click Continue to create the account.
The dialog you see when you fill out account information varies depending on the account type you chose, because different types of accounts require different information. In addition, if you’ve opted to use numbers for your accounts, there’s a field for the account number. Figure 2-3 shows a blank Add New Account dialog for an Expense account.
FIGURE 2-3 |
The only required entry for an account is a name. |
Select From Examples
If you created your company file in QuickBooks 2014 and you selected an industry type during the setup, a button labeled Select From Examples in the Add New Account dialog will display for certain account types. Clicking the button produces a list of accounts that QuickBooks thinks you might want to consider adding to your chart of accounts. As you can see in Figure 2-4, the list of accounts matches the account type you selected when you started the process of adding an account.
FIGURE 2-4 |
QuickBooks suggests accounts to add to your chart of accounts. |
The accounts suggested are those that were available for the industry you selected when you created your company file but were not selected for inclusion in your chart of accounts.
The following account types do not have the Select From Examples feature:
• Bank
• Credit Card
• Equity
• Accounts Receivable
• Accounts Payable
• Long Term Liability
Optional Fields for Accounts
The Description field in the Add New Account dialog is optional, as is the Note field (which appears only on some account types). You can assign a Tax-Line Mapping to your accounts (see Figure 2-3), which can be a huge timesaver if you do your own taxes or if your tax preparer is using one of Intuit’s tax preparation software programs. QuickBooks exports data for each account to the appropriate tax line if you use TurboTax to do your taxes, for example. In order to do this, QuickBooks has to know which tax form you use, and you probably provided that information when you set up your company file. In fact, if you selected a tax form when you set up the company file, QuickBooks automatically inserts a tax line assignment for Income, Cost of Goods Sold, and Expense Accounts.
If you didn’t select a tax form, the Tax-Line Mapping field doesn’t appear. But you can add the tax-line information in the Company Information window. You get to this window by opening the Company menu, selecting My Company, and then clicking the edit icon on the top-right side of the My Company window. You’ll find the Income Tax Form Used drop-down list located on the Report Information tab.
ProAdvisor Tip: You can use QuickBooks without assigning a tax line. Knowing which tax line to assign to an account is not always apparent, so if you’re unsure about assigning a tax-line mapping, consult with your accountant or a tax professional first.
Some account types (bank, credit card, assets, liabilities, loan, and equity) have a button labeled Enter Opening Balance. Clicking it opens a dialog in which you can enter an opening balance. While convenient, I recommend that you do not enter opening balances here when you’re creating accounts. See “ProAdvisor Recommends: What You Should Know About Entering Opening Balances for Accounts” as well as Chapter 7 to learn about better ways to enter beginning balances.
As you finish creating each account, click Save & New to move to another blank Add New Account dialog. By default, the new dialog is configured for the same account type as the account you just created, but you can change the account type by selecting another type from the drop-down list at the top of the dialog.
When you’re finished creating accounts, click Save & Close, and then close the Chart Of Accounts window by clicking the X in the upper-right corner.
Use Subaccounts
Subaccounts provide a way to post transactions more precisely by using subcategories for main account categories, while also giving you the ability to view key reports at both the subaccount and parent account levels. To create a subaccount, you must first create the parent account.
For example, suppose you have the following parent account:
• 6130 Car/Truck Expense
You can create the following subaccounts:
• :6131 Car Lease
• :6132 Gas
• :6135 Mileage
• :6138 Insurance-Auto
ProAdvisor RecommendsWhat You Should Know About Entering Opening Balances for Accounts
Unless you start your business the day you start using QuickBooks, you haven’t yet opened a bank account, and you haven’t purchased any equipment for your business, many of your accounts already have an existing balance. For example, you probably have money in your business bank account, either because your business has been operating for a long time and you’re just getting around to using QuickBooks, or because you provided startup money for your new business.
It is best not to enter any figures in the Opening Balance field of any account that has this option, because QuickBooks (which is a true double-entry accounting application) needs to make an offsetting entry of the same amount you entered into an offsetting account. Of course, QuickBooks has no way of knowing the source of that money, so the offsetting account it uses is called Opening Bal Equity, which is an account QuickBooks invented for just this purpose. In actuality, the money in your bank account may be the result of a loan you made to your business, capital you invested in your business, or sales you made before you started keeping records in QuickBooks.
Your accountant will want to zero-out the balance in Opening Bal Equity, and sometimes that’s a difficult job because it’s hard to tell how the balance was arrived at—was this opening balance the result of transactions in past years? If so, it needs to be moved to the Retained Earnings account. Is it from the current year? If so, what’s the real source of the amount (because it has to be moved to the proper account)? Is it a combination of both? If so, you’ll have to remember every entry and explain it to your accountant so the appropriate amounts can be moved to the appropriate accounts.
So it’s best to ignore the Opening Balance field when you create an account, and after you’ve created the account, create a transaction that accurately describes the source of this amount. Chapter 7 details an easy-to-follow process you can use to enter opening balances and historical data correctly and efficiently. Be sure to ask your accountant to help you create the transactions that provide the details behind the opening balances for your accounts.
The colon in the account names listed here is added automatically by QuickBooks on some reports to indicate a parent account: sub account relationship.
ProAdvisor Tip: To get the most out of using subaccounts when viewing reports, you should be sure that, once you create them, you post transactions to the correct subaccount—and not the parent account. Why? Because when you post directly to a parent account that has subaccounts attached to it, reports that include transactions to this account will appear as if they were posted to a subaccount called “Other.”
Viewing Subaccounts
When you have subaccounts, the Chart Of Accounts window displays them indented under their parent accounts (see Figure 2-5), as long as you’ve configured the window to display accounts in Hierarchical view.
FIGURE 2-5 |
It’s easy to see that the Car/Truck expense account has subaccounts to track expenses more accurately. |
If you know you created subaccounts, but you don’t see any indented listings, your Chart Of Accounts window has been configured to display accounts in Flat view, which is a simple listing of accounts. To remedy this, click the Account button at the bottom of the window and select Hierarchical View.
Creating Subaccounts
To create a subaccount, you must have already created the parent account. Then take these steps:
1. Open the Chart Of Accounts list.
2. Press CTRL-N to create a new account.
3. Select the appropriate account type.
4. Click Continue.
5. Enter a number (if you’re using numbered accounts).
6. Name the account.
7. Click the Subaccount Of check box to place a check mark in it.
8. In the drop-down box next to the check box, select the parent account.
9. Click Save & New to create another account or Save & Close if you’re finished creating accounts.
Multiple Levels of Subaccounts
You can have multiple levels of subaccounts. For example, you may want to track income in the following manner:
Income
Income:Consulting
Income:Consulting:Software Training
Creating the sub-subaccounts is as easy as creating the first-level subaccounts; just make sure you’ve already created the first-level subaccounts. When you fill in the Add New Account dialog, after you check the Subaccount Of check box, select the appropriate subaccount to act as the parent account.
Caution: If you plan on using a third-party integrated application that shares data with your QuickBooks data file, it is best to avoid using multiple levels of subaccounts, because the integrated application may not be able to post to an “imbedded” account. Check with the developer of your integrated application just to be sure.
Showing Lowest Subaccounts Only
When you view accounts in the Chart Of Accounts window, subaccounts appear under their parent accounts, and they’re indented. However, when you view a subaccount in the drop-down list of a transaction window, it appears in the format: ParentAccount:Subaccount. (If you’re using three levels, the list appears as ParentAccount:Subaccount:Sub-subaccount.)
For example, if you create a parent account named Income with a subaccount Consulting, the Account field drop-down list in transaction windows shows Income:Consulting. If you’ve used numbers, remember that the number is part of the account name, so the Account field shows something like the following:
Because many of the fields or columns in transaction windows are narrow, you may not be able to see the subaccount names without scrolling through each account. This can be annoying, and it’s much easier to work if only the subaccount name is displayed. That’s the point of enabling the preference Show Lowest Subaccount Only, discussed earlier in this chapter. When you enable that option, you see only the subaccounts in the drop-down list when you’re working in a transaction window, which makes it much easier to select the account you need.
Edit Accounts
If you need to make changes to any account information (including adding a number after you enable numbered accounts), select the account’s listing in the Chart Of Accounts window and press CTRL-E. The Edit Account dialog appears, which looks like the account card you just filled out. Make your changes and click Save & Close to save them.
Delete Accounts
It’s not uncommon to clean up your chart of accounts to get rid of accounts you’ll never use or to remove duplicate accounts. (You can’t have two accounts with the same name or number because QuickBooks doesn’t permit that, but it’s certainly possible to end up with multiple accounts that are similar, such as Tel, Tele, Telephone.)
To delete an account, select its listing in the Chart Of Accounts window and press CTRL-D. QuickBooks asks you to confirm the fact that you want to delete the account. Click OK to remove the account.
You can delete any account that isn’t in use, which means the account has never been used in a transaction or linked to a sales or payroll item. You don’t have to search all your transactions to find out whether an account has been used in your system; you can just try to delete it, and if it’s been assigned to a transaction or item, QuickBooks issues an error message explaining why you can’t delete it.
Also, you cannot delete an account that has subaccounts unless you first delete the subaccounts, which can be accomplished only if the subaccounts have never been used in a transaction. However, a workaround for saving the subaccounts and getting rid of the parent account is first to turn the subaccounts into parent accounts. To accomplish this, either drag the subaccount listing to the left in the Chart Of Accounts window (be sure the window is displaying accounts in Hierarchical View and the list is in its original sort order), or edit the subaccount to remove the check mark in the Subaccount Of check box.
If you can’t delete an account but you don’t want anyone to use it, you can hide it—QuickBooks calls this making it inactive. If you have a duplicate account, you can merge it with the other account. Those topics are covered next.
Make Accounts Inactive (Hiding Accounts)
When you make an account inactive, you’re hiding the account from users. When an account is inactive, it doesn’t appear in drop-down lists in transaction windows, so it can’t be selected. The account continues to exist “behind the scenes” and its history remains in the system; it just doesn’t appear in drop-down lists during transaction entry.
To make an account inactive, right-click its listing in the Chart Of Accounts window and select Make Account Inactive. QuickBooks doesn’t ask you to confirm your action. You can also make an account inactive by selecting it and pressing CTRL-E to open the account record in Edit mode; then select the check box labeled Account Is Inactive to enter a check mark.
By default, inactive accounts aren’t displayed in the Chart Of Accounts window, but if you’ve made any accounts inactive, the Include Inactive check box at the bottom of the window becomes accessible (if it’s grayed out that means no inactive accounts exist). Select the check box to insert a check mark, and you can see your inactive accounts, which are displayed with an “X” to the left of the listing.
To return an inactive account to active status, be sure that the Chart Of Accounts window is displaying inactive accounts, and then click the “X” to toggle the account’s status to Active.
Merge Accounts
Sometimes you see two accounts that should be one. For instance, you may have accidentally created two accounts for the same purpose. As I discussed earlier in this chapter, I’ve worked with clients that had accounts named Telephone and Tele, with transactions posted to both accounts. Those accounts are definitely candidates for merging. You can merge accounts only when the following conditions exist:
• Both accounts are of the same account type (for example, you cannot merge an Expense account with an Other Expense account).
• Both accounts are at the same level (you cannot merge a subaccount with a parent account).
Take the following steps to merge two accounts:
1. Open the Chart Of Accounts window.
2. Select (highlight) the account that has the name you do not want to use.
3. Press CTRL-E to open the Edit Account dialog.
4. Change the account name to match the account you want to keep.
5. Click Save & Close.
6. QuickBooks displays a dialog telling you that the account number or name you’ve entered already exists for another account and asks if you want to merge the accounts. Click Yes to confirm that you want to merge the two accounts.
Remember, the way to do this is to start with the “bad” account and rename it to match the “good” account—the one you want to keep.
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