The chart of accounts is a list of income and expense accounts to which you assign your daily transactions. This list is one of the most important lists you will use in QuickBooks; it helps you keep your financial information organized. If this list is created properly you can capture information in a timely manner that will help you make good financial and management decisions for the business.

Understanding the chart of accounts isn’t too complicated; there are simply six standard accounting categories: assets, liabilities, equity, income, cost of goods sold, and expense.

Assets include items you have purchased in the past that will be used in the future to generate economic benefit. QuickBooks offers these categories in the order of how fluid the asset is, or in simple terms how quickly you can turn the asset into cash:

• Bank—You use this account type to track your cash in and out of the business. This account type (in addition to the credit card account type) is the only account type that you can select as the payment account in the Pay Bills or Write Checks dialog.

• Accounts Receivable—This account type requires a Customer or Customer and Job name with each entry. You use this account type when generating an invoice or credit memo form or when receiving a customer payment. You can create more than one Accounts Receivable type account if you want.

• Other Current Asset—This account type is general in nature and includes the QuickBooks Inventory Asset as well as the Undeposited Funds account used for deposits “in transit.”

• Fixed Asset—This account type shows purchases of goods or materials that will be used by the business long term in generating revenue. Accumulated Depreciation totals are also held in this account type as a negative fixed asset.

• Other Assets—User-defined other asset accounts are created in this section.

Liabilities are the debt the company has yet to pay. QuickBooks includes these subgroupings:

• Current Liability—This is debt that is expected to be paid within one year. This grouping includes the QuickBooks Accounts Payable account plus any user-defined liability accounts.

• Credit Cards—Optionally, users can use this grouping to track the charges and payments made against a company credit card. One benefit is that you can reconcile this account like you do your bank account and download your credit card transactions directly into your data.

• Other Current Liability—This is debt that is expected to be paid within one year. This grouping includes the QuickBooks-created Payroll Liabilities and Sales Tax Payable, as well as other user-defined liability accounts.

• Long Term Liability—This is debt that will not be paid within one year.

The Equity account category holds the owner’s (or owners’) residual interest in the business after the liabilities are paid. Accounts for this section include Common Stock; Owner’s Equity; Retained Earnings; and Open Bal Equity, an account created by QuickBooks that is discussed in more detail in Chapter 13, “Reviewing and Correcting the Opening Balance Equity Account.”

Money that is earned after paying expenses is recorded as income. Your company might have one income account or several depending on the detail needed for your financial analysis. Other categories include Other Income, or income that is generated from the sale of a product or service not normal to your operations.

This account type is for costs that are directly related to producing a service or good for sale. There is a direct relationship between these costs and your revenue. If your company sells a product, your cost of goods sold (COGS) expenses would be the material and labor costs to make and sell the product. By contrast, your office expenses for rent or advertising are considered indirect and should not be posted to the Cost of Goods Sold account type.

An expense is recorded when an asset is used or there is an outflow of cash. The expense accounts created during the EasyStep Interview will provide you with the basic classifications needed for properly tracking your expenses.

Additionally, while QuickBooks does not automatically create other groupings within the expenses category, a recommendation would be to group your expenses by fixed (or uncontrollable) and variable (or controllable). When you review your costs, these additional groupings will make easy work of determining which costs you have more control over.

You can also categorize expenses as an Other Expense, which is an expense that is not normal to your operations.

Are you familiar with Excel? Does your accountant have a preferred chart of accounts? Create the list in Excel with a few required fields. Then, import the list into your QuickBooks data file. Before performing any import, it is recommended that you make a backup of your data file. The import is not reversible!

For accountants, the ability to import an existing chart of accounts from an Excel worksheet makes sharing a common chart of accounts with multiple clients easy.

Create a spreadsheet in Excel, shown in Figure 2.1, with the following fields:

• Type—This field is required. It refers to account categories and subcategories in QuickBooks. The spelling must be exactly like the QuickBooks account type.

Figure 2.1 An Excel worksheet created to import a chart of accounts into QuickBooks.

• Number—This field is optional and is the account number assigned in the Add New Account or Edit Account dialog. Using account numbers is optional in QuickBooks. See the section titled “Preferences That Affect the Chart of Accounts,” later in this chapter, for information about account numbering preferences.

• Name—This field is required. You can set default preferences in QuickBooks for including name only, description only, or name and description on reports.

• Description—This field is optional. You can set default preferences in QuickBooks for including name only, description only, or name and description on reports. For more information about the appearance of the description on reports, see Chapter 16, “Reporting Tips and Tricks.”

• Bank Account/Credit Card/Account Number—This field is optional and contains the account’s number assigned by its holding institution.

• Opening Balance—This field is optional. If you enter a balance in this field, QuickBooks will debit or credit the account, with the offset going to the Open Bal Equity account. If you do not enter any value, no transaction will be created.

• As of Date—This field is optional. This is the date assigned to the transaction created when a value is placed in the opening balance column. If no date is entered and an opening balance amount was recorded, QuickBooks will default the transaction date to today’s computer system date.

Other fields you can include are reminder to order checks, track reimbursed income, income account for reimbursed expenses, and an option to mark the account as inactive in QuickBooks.

To import the list you first must map the Excel column data to the appropriate QuickBooks data field.

From a new QuickBooks data file:

1. Click File, Utilities, and select Import, Excel Files. The Add Your Excel Data to QuickBooks dialog opens.

2. Select the Advanced Import button on the right, as shown in Figure 2.2.

Figure 2.2 New for QuickBooks 2008; the Add Your Excel Data to QuickBooks Wizard helps users import lists from Excel, including the Chart of Accounts.

The term Intuit Interchange Format (IIF) refers to data exchange functionality that has been around for quite some time. It is a method for exporting lists from one QuickBooks data file and importing these lists (not transactions) into a new QuickBooks data file. The process creates a comma-separated value format file with the extension of .iif. You can view and edit this file using Excel.

The most common use for this tool is to export lists from one QuickBooks data file to a new QuickBooks data file. The process is easy and relatively error free. Other uses for the tool include transaction imports. This book does not cover this topic; however, you can find more information about this utility by typing IIF in the search field at www.quickbooks.comsupport.

The IIF format is a preferred and easy method to use if you already have a QuickBooks data file with a chart of accounts (or other lists) that you want to duplicate.

The only disadvantage to working with an IIF format file is all the extra information that is in the worksheet, making it awkward to edit or add to the existing information.

Perform the following steps to export an IIF-formatted chart of accounts file from an existing QuickBooks file:

1. Click File, Open to open the QuickBooks file that has the chart of accounts (or other lists) that you want to export and duplicate in another file.

2. Click File, Utilities, select Export, Lists to IIF Files.

3. Select Chart of Accounts by clicking to place a check mark in the box, as shown in Figure 2.6.

Figure 2.6 The Export dialog shows choices of lists available for export.

4. Click OK; you are prompted to save the file.

Figure 2.7 shows the exported QuickBooks chart of accounts in the IIF format in an Excel workbook. You can see that it is not as user friendly a format as the Excel import discussed previously.

Figure 2.7 A chart of accounts IIF format file.

To import the saved IIF file into a new QuickBooks file, do the following:

1. Click File, Open to open the new QuickBooks file, preferably one that does not have a chart of accounts or other list types you are importing. (Importing into a file with an existing chart of accounts is possible. QuickBooks might not import an account if it detects a duplicate account already in the data file.)

If you have not already created your new file, click File, New and follow the prompts. (See Chapter 1, “Creating a New QuickBooks Data File,” for more information on using the EasyStep Interview to create a new QuickBooks data file.)

2. Click File, Utilities, and select Import, IIF Files.

3. The Import dialog opens, browse to the location of the stored IIF formatted file.

4. With your mouse pointer select the file and click on Open.

5. QuickBooks then imports the IIF formatted file into the QuickBooks data file.

Now that you have your new data file with new lists from another file you are ready to begin entering transactions. Just think of all the time you saved by not having to manually create each list item in the new file.

Using specific preferences, you can modify much of how the QuickBooks features work. Click Edit, Preferences, and select the Accounting preference. Next, click the Company Preferences tab (see Figure 2.8).

Figure 2.8 These preferences affect the chart of accounts.

Here is a list of the preferences that affect the chart of accounts. They are all found in the Accounting preferences section.

• Use account numbers—Selecting this option turns on the data field that holds a numeric assignment for each chart of accounts. By default, this feature is not selected in a newly created QuickBooks file.

• Show lowest subaccount only—If you have created a subaccount listing under a main (parent) listing, any drop-down menu will show only the lowest subaccount level, preventing users from posting to the main account.

• Require accounts—By default, this feature is selected in a newly created QuickBooks file. If this feature is not selected, any transactions saved without an appropriate income or expense account will be posted to a QuickBooks automatically created uncategorized income or uncategorized expense account. This process follows the rule that there must always be a debit and credit side to each transaction. Fortunately, you do not have to know how to post a debit or credit because QuickBooks does this thinking for you with each transaction.

Account Numbering

Beginning with QuickBooks 2007, the chart of accounts offers a new standard five-digit numbering system. Although account numbering is not required in QuickBooks, many accountants recommend that their clients assign account numbers to the chart of accounts list.

The standard chart of accounts number range that QuickBooks recommends is as follows:

Although you are given quite a bit of flexibility in creating the chart of accounts using a variety of methods, QuickBooks creates certain accounts that are hard-coded into the programming of the software, meaning you do not need to create them yourself.

A common mistake is to create these accounts, not recognizing that they were already created or will be created when the related form is chosen.

I usually recommend to my clients to accept the default chart of accounts because they can be modified at anytime. Even if you select None/Other during the EasyStep Interview when creating a chart of accounts, there are specific accounts in QuickBooks that are automatically created. These accounts are

• Payroll Liabilities (Other Current Liability)

• Capital Stock (Equity)

• Opening Bal Equity (Equity)

• Retained Earnings (Equity)

• Shareholder Distributions (Equity)

• Payroll Expenses (Expense)

Additionally, if you selected None/Other during the EasyStep Interview when presented with a list of industry-specific chart of accounts, QuickBooks creates the following accounts only when the associated form or transaction is used or a related preference is selected:

• Inventory Asset (Asset)—(Inventory item created)

• Accounts Receivable (Asset)—(Invoice form opened)

• Sales Tax Payable (Liability)—(Sales Tax preference enabled)

• Accounts Payable (Liability)—(Vendor bill form opened)

• Purchase Orders (Non-Posting)—(Purchase Order form opened)

• Estimates (Non-Posting)—(Estimate form opened)

To determine whether an account was created by QuickBooks, simply edit the account in question; if the Account Type field is not active (grayed out), then this account was automatically created by QuickBooks (see Figure 2.9).

Figure 2.9 In the Edit Account dialog box, if Account Type is grayed out, this account was created by QuickBooks.

When searching for reasons why your financial statements do not appear correct, the first place to look is often the chart of accounts. It is also important to carefully consider the impact of the change on your financials and make sure you choose the right method for correction.

There are many ways to resolve errors found on the chart of accounts. However, before attempting any of the suggested methods here you should consider the following:

• The effect the change could have on prior-period financials

• The effect the change could have on previously recorded transactions

• The impact the changes would have on the records your accountant has kept for the company

A quick review of the chart of accounts should include

• Duplicated accounts

• Unnecessary accounts (too much detail)

• Accounts placed in the wrong account type category

• Misplaced subaccounts

Marking an account inactive is usually the best choice when you have duplicate or extra list items on your chart of accounts (see Figure 2.10). Making an account inactive removes it from any drop-down list on any forms. However, for reporting periods where the account has a value, any reports generated for this time period will include the inactive account balance.

Figure 2.10 Select the Account Is Inactive check box to remove the list item from any drop-down menus.

Figure 2.11 Easily mark accounts inactive from the Chart of Accounts dialog box.

Another method to remove duplicated accounts is to merge the similar accounts. To perform a chart of accounts merge, both accounts must be in the same chart of accounts category; in other words, you cannot merge an Asset with a Liability account.

Before merging accounts be sure to perform a backup of your data, just in case the result is not what you expected. When the accounts are merged, all transactions previously assigned to the removed account will now appear as if they were always assigned to the remaining account.

To merge two accounts, do the following:

1. Click Lists, Chart of Accounts, highlight the account you want to remove with the merge. With the account highlighted press Ctrl+E on your keyboard to open the Edit Account dialog.

2. If you are using account numbering, replace the account number with the account number for the account you want to retain. (If you are not using account numbering, you can simply type the exact spelling of the name of the other account you are merging this one into.)

QuickBooks cautions you that the name is already being used and asks whether you want to continue (see Figure 2.12).

3. Click Yes.

Figure 2.12 QuickBooks offers a word of caution when you are merging two Charts of Accounts lists.

The mistake most often made when creating your own chart of accounts is assigning the wrong account type. QuickBooks provides additional subcategories under the six standard accounting types, as identified in the “Understanding the Chart of Accounts” section at the beginning of this chapter.

The Add New Chart of Account entry dialog, shown in Figure 2.13, reduces errors that occur when creating a new chart of accounts. When creating a new account you select an account type and QuickBooks provides a description of what a typical transaction would be for this type. In prior versions of the software, the default type was a Bank Account and users would mistakenly create their accounts as if they were bank accounts.

Figure 2.13 The Add New Account dialog.

Merging accounts can also be advantageous when you want to fix future transactions as well as prior-period transactions. For example, suppose you created a Current Asset account type instead of the correct Expense account type. Simply changing the account type via the Edit Account dialog box (see following steps) corrects all prior period and future transactions to be assigned to the new account type.

To change an account type, follow these steps:

1. Click Lists, Chart of Accounts (or press Ctrl+A). The Chart of Accounts dialog list appears.

2. Select the account for which you want to change the type.

3. Click the Account drop-down menu at the bottom of the list. Select Edit Account (or press Ctrl+E to open the account for editing). The Edit Account dialog box appears.

4. Click the drop-down arrow next to Account Type (see Figure 2.14) and choose a new account type from the list.

Figure 2.14 Changing an existing account’s type.

5. Click Save & Close.

Often in accounting reports you have specific accounts for which you want to see a more detailed breakdown of the costs. You can get this breakdown easily by creating the main account and associating subaccounts with the main account.

Figure 2.15 shows Utilities as a main account with an indented subaccount for each type of utility expense. To create an account as a subaccount:

Figure 2.15 Chart of accounts showing a subaccount relationship to main account.

1. Click Lists, Chart of Accounts (or press Ctrl+A). The Chart of Accounts list appears.

2. Select the account for which you want to add a subaccount or edit the subaccount.

3. Click the Account drop-down menu at the bottom of the list. Select Edit Account (or press Ctrl+E to open the account for editing). The Edit Account dialog box appears.

4. Place a check mark in the Subaccount of box.

5. Click Save & Close.

Users can only assign a subaccount that is in the same general account type. For example, an Expense type cannot be a subaccount of a Current Asset type account (see Figure 2.16).

Figure 2.16 Edit Account dialog assigning a subaccount to main account.

You can also change account relationships directly on the Chart of Accounts list:

1. To remove or add a subaccount directly from the list, place your mouse pointer over the diamond in front of the list item (see Figure 2.17). The cursor changes to indicate that you can drag the item.

Figure 2.17 Select the diamond in front of the account name to change the placement.

2. Drag the diamond to the right and up under the main account (but it must be in same account category) to create a subaccount relationship (see Figure 2.18).

Figure 2.18 Dragging the diamond to the right and up creates the subaccount relationship.

The Chart of Account list shows the corrected relationship (see Figure 2.19).

Figure 2.19 The chart of accounts view after the change is made.

Financial reporting is more accurate when you take the time to review and correct your chart of accounts setup. Often you can manage the information better when you group similar income or expense accounts using the subaccount feature.

So whatever you choose to do, QuickBooks makes it convenient and easy to make the changes necessary to improve the quality of your financial reports.

Before creating or modifying a chart of accounts list, you should consider the following.

About the chart of accounts:

• Understanding the different types of accounts. (Page 38)

• Creating a new data file. (See Chapter 1)

• Modifying or adding to an existing chart of accounts. (Pages 55 and 14)

• Importing a preferred chart of accounts from your accountant. (Page 40)

• Importing a chart of accounts from another QuickBooks data file. (Page 46)

• Setting chart of account preferences. (Page 48)

• Enabling chart of account numbering in QuickBooks. (Page 49)

• QuickBooks required chart of accounts created automatically. (Page 50)

Troubleshooting and correcting the chart of accounts:

• What method is appropriate for your business? (Page 51)

• Making accounts inactive. (Page 52)

• Merging duplicated accounts. (Page 53)

• Chart of account list item with an “*” in the name. (Page 53)

• Correcting the chart of account type. (Page 55)

• Audit trail report and changes to chart of accounts. (Page 56)

• Assigning or removing subaccounts from specific accounts. (Page 57)