Financial Reports that make sense are the result of a well-built Chart of Accounts. Your QuickBooks Online account is made up of lists, and the most important list you will build within your QuickBooks Online account is your Chart of Accounts. Your company’s income, expenses, assets, liabilities and owner equity will be presented in your Financial Reports with the accounts that you create within your companies Chart of Accounts.
For your companies’ financial reports to make sense and become meaningful to you as a business owner, you should carefully consider the naming convention of your accounts as they relate to your business operations. When you tell QuickBooks Online what industry you’re in, it creates a “default” Chart of Accounts list based on that initial setup selection. Your next steps are to further customize this account list for your unique business.
You Should Create Parent & Child Accounts for Business Expenses
When customizing your Chart of Accounts list, it is important to create “Parent” and “Child” accounts for your expenses, including your COGS (cost of goods and services sold) expenses. Do keep in mind that with the Essentials and Plus subscriptions of QuickBooks Online you are limited to 250 accounts. However, there is no limit to the number of accounts you can create with the Advanced subscription of QuickBooks Online.
An example of this is to create a “Parent” account named “Payroll Expenses”, then create a “Child” account named “Wages”. This “Wages” account can have its own “Child” accounts for “Owner Salary”, “Employee Salary”, “Employee Hourly” and “Employee Overtime”. The “Wages” account can be a “Child” account of the “Payroll Expenses” account while the other accounts can be “Child” accounts of the “Wages” account. The transactions in each of these accounts will Subtotal with the “Payroll Expenses” account.
You Should Create Parent & Child Accounts for Business Income
Most small businesses have more Expense Accounts than Income Accounts. Choose your income accounts wisely. Remember that the setup of your Products and Services will have more detail than your Income Accounts. You may have hundreds of Products and Services setup, and only a half-dozen Income Accounts. Each of the Products and Services that you Purchase and Sell get mapped to a specified Income Account and a COGS (cost of goods sold) Expense Account. Also note that some Services require Sales Tax to be charged, while others do not. Stay informed on your State requirements.
One example of “Parent” and “Child” Income Accounts is having a “Parent” account for “Service Income” and “Child” accounts for “Taxable Services” and “Non-Taxable Services” Creating these accounts will help you tie the income on your Profit and Loss Report to your Sales Tax Liabilities by Income Type. They will help you keep a correct accounting of your Taxable and Non-Taxable Services sold to your customers. In most States, Accounting Services are Non-Taxable; while General Contracting Services are Taxable. It is important to research whether or not the Services that you sell to your customers are Taxable or Non-Taxable in the States that you sell those Services in.
You Should Create Parent & Child Accounts for Business Liabilities
When customizing your Chart of Accounts list it is important to create “Parent” and “Child” accounts for your business Liabilities. If you have employees, you will have a number of “Payroll Liabilities” such as “Payroll Taxes” and “Employer Health Insurance Payable”. When your QuickBooks Online payroll service is setup, some default accounts are automatically created in your Chart of Accounts. However, if you use another payroll provider such as Gusto, Paychex, Benefits Mall or ADP, you will need to create a customized Payroll Chart of Accounts and develop a process for recording your Liabilities.
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The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.