Setting Up Your QuickBooks Online® Company – Part Five

In this edition (Part 5) of Setting Up Your QuickBooks Online® Company we look at 'Working with Lists' including the Chart of Accounts. So the natural question to ask is, "What are Lists?"

Lists are the backbone of QuickBooks Online. Most screens in QBO get their content from different “lists” of information. This ensures that the data is entered consistently from day to day.

Lists you work with every day include: Customers, Vendors, Chart of Accounts, and Products and Services.

The same name cannot appear on more than one list. For example, you may have a Vendor who also buys things from you as a Customer. In that case, as long as the names are slightly different, you’ll be fine. I tend to add the business designator, like LLC or Inc. to the Vendor name. Some people add on an extension code such as “Royalwise Solutions-V” and “Royalwise Solutions-C”.

Lists such as Payment Methods, Terms, and Classes can be set up one time and only modified as your needs evolve.

List items can be deleted, inactivated, and merged. For example, if you find you have the same customer under both the business name and the contact’s name, copying the correct Display Name and pasting it into the “bad” one will merge the two, combining all their transactions into one.

The Chart of Accounts is the ultimate list in QBO

The Chart of Accounts is the most important list in any QuickBooks Online file. Just as a house without a foundation, frame, and roof would fall down, your company’s reporting won’t make any sense without a properly designed Chart of Accounts (COA).

When I work with business owners, I always highly recommend they tap the expertise of a QuickBooks ProAdvisor, their accountant, or a bookkeeper to make sure their Chart of Accounts are correct.

During the setup process, QBO asks which industry you’re in, and it creates a default Chart of Accounts. Afterwards, it still needs to be customized to fit the unique business. Select Gear > Chart of Accounts or in the left sidebar, Accounting > Chart of Accounts.

The Chart of Accounts list opens.

Let’s start by analyzing the structure of your COA so that you understand what it all means.

The top part of a Chart of Accounts contains the categories found on a Balance Sheet. The bottom part contains the categories found on a Profit and Loss report.

Add, delete, and rename your accounts so that these reports make sense not just for tax filings, but also to your clients. Business owners don’t think like we do, and I’ve found that renaming the accounts so that they use the company’s terminology helps increase categorization accuracy.

The Balance Sheet: Assets, Liabilities, and Equity

A Balance Sheet Report shows you all the accounts that deal with your financing.

Assets include all the things you have: bank accounts, fixed assets including equipment and trucks, and inventory. Assets also include what the Customers owe. This is called the Accounts Receivable, or A/R.

Liabilities include what the company owes to other people. This is called the Accounts Payable, or A/P for short. Additional liabilities include credit cards, loans, sales tax, and payroll taxes owed to the state and federal governments.

Equity includes the net worth of the company. Equity equals the company’s total assets minus its total liabilities. On a Balance Sheet, it looks like this: Assets = Liabilities + Equity. This makes sense because everything a business has, has been received by either getting a loan, charging a credit card, or through the owner’s capital.

I personally think about it as Assets – Liabilities = Equity. In other words, what you own minus what you owe equals the worth of your company.

Understanding the Profit and Loss Report - What’s on it and Why

The Profit and Loss Report (P&L) lays out your income and operational costs, showing you how much profit (or loss) the company made.

A few definitions to get us started:

  • Income categories refer to the ways the company makes money. Include an Income account for each distinct revenue stream. Income accounts are general bucket categories that total up all the specific Services and Products that get listed on Customer Invoices.
  • Expenses include all the overhead administrative costs of running a business.
  • Cost of Goods are direct costs associated with delivering your goods or services. They are deducted from Income to calculate Gross Profit. Cost of Goods includes Supplies and Materials, Shipping expenses, Cost of Labor, Equipment Rental, and other miscellaneous costs. If you had to pay for a product or labor in order to earn the Income, it’s a COGS.

The following accounts are created automatically by QuickBooks Online as you need them:

  • Accounts Receivable (A/R) – How much money customers owe the company. It is created the first time you enter an Invoice.
  • Inventory Asset – What is the value of the current inventory in a company’s warehouse? This account is created the first time you enter an Inventory Item.
  • Undeposited Funds – This account holds the money collected until it is physically deposited in a bank account. It is a required category.
  • Accounts Payable (A/P) – How much money does the company currently owe to Vendors? This account is automatically set up when you create your first Bill.
  • Sales Tax Payable – Created when you turn on the Sales Tax Feature.
  • Uncategorized Income – PEBCAK! Transactions entered into QuickBooks Online through the Banking Feed, but accidentally not assigned to a specific Income Account. This Account should be empty. (See my previous article called “Navigating QuickBooks Online without PEBCAK!”)
  • Uncategorized Expense – PEBCAK! Transactions entered into QuickBooks Online through the Banking Feed, but accidentally not assigned to a specific Expense Account. This Account should be empty.
  • Cost of Goods Sold (COGS or COS) – The COGS account tracks the expenses incurred in order to provide the service. If the company isn’t able to deliver the product or service without purchasing consumable items or hiring a subcontractor, those costs go into this account.
  • Payroll Expense – Created when the payroll feature is turned on. All payroll expenses are mapped to this account by default.
  • Opening Balance Equity – QuickBooks Online records the beginning balance of each account on the date the QBO file was created in the Opening Balance Equity. After setup is complete, transfer the total in OBE to Retained Earnings, so that its final balance equals $0.
  • Retained Earnings – This tracks your company’s cumulative net profit from previous fiscal years. QuickBooks Online automatically transfers the undistributed profit (or loss, as the case may be) to the Retained Earnings Equity Account on January 1 every year.

Conclusion

Keeping track of your company activity using the Profit and Loss Statement is essential to money management.

Customize it not just for tax reporting, but also to monitor the business’s specific metrics. Find out what categories are important to your business owners, and be sure the Chart of Accounts reflects the data they need to see on their reports.

Look for my next article, which will cover modifying the Chart of Accounts, creating sub-accounts, editing an account, and inactivating accounts.

If you would like more help with your Chart of Accounts, please REGISTER for our QBO 101: Setting-up QBO webinar on October 30, 2019 at 12:00 pm Eastern-time.