The Chart of Accounts can make or break a set of books, but have no fear, because you can modify what’s there to get back to a beautiful list of accounts.
You can only create up to 250 accounts within your Chart of Accounts if you are using QBO Simple Start, Essentials or Plus. If you are using one of those versions and need to create more than 250 accounts then you will need to upgrade to QuickBooks Online Advanced.
Add a New Account
Click on the Gear and choose Chart of Accounts.
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Select New.
Select the Type of account to set up. There are 15 preset Account Types in QuickBooks Online.
Be extra mindful when selecting the correct one for your client’s business, since mistakes here can affect the reports…and taxes!
As a demonstration, let’s set up an Equity account for when the owner takes cash out of the bank for their own personal use (as opposed to running payroll). If a sole proprietor, call it an "Owner Draw" account. LLCs call it a “Member Distribution” and corporations call it a “Shareholder Distribution.”
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Select Equity.
Detail Type: Choose the Tax line associated with this Equity account. This makes it easier to run reports at tax-time.
Name: “Owner Draw”
Description: (optional). Use this as a training reminder as to the purpose of the category.
Select Save.
Now, add another account. Also create an Owner Contribution account for any personal out-of-pocket money the owner uses for business expenses.
Creating Subaccounts
Subaccounts allow you to further analyze the expenses. The idea is to use a main header account and break it down into smaller categories. For example, you can break Auto down into subaccounts of Fuel, Repairs and Maintenance, Parking, and Licenses.
If you implement Subaccounts, the company will get greater detail, but it adds to the complexity of the system. It can open the door to PEBCAK! If you’re using Subaccounts, create a Subaccount for every need, or call one “Other ____”. DO NOT POST into the header account. The header account is used to get subtotals for the Subaccounts.
To make Subaccounts, start with the header category. I’ll use Auto as my example. Does “Auto Expenses” already exist in the Chart of Accounts? If not, add it using the instructions from the previous section.
After Auto Expenses is set up, make another new COA category. Choose the Account Type Expense. Choose the Detail type Auto.
Enter the account name “Fuel” (or “Gas” if you prefer).
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Place a checkmark in the Subaccount of box. Click the drop-down arrow and select the parent account name Auto Expenses. Select Save and close.
The new Fuel subaccount is added to the Chart of Accounts list. It is indented in the hierarchy.
Repeat these same steps to create “Parking” and “Repairs and Maintenance.”
Earlier I mentioned making a subaccount for “Licenses,” but you may only incur that expense once every few years. A better option may be to add an “Other Auto” subcategory instead, as a catchall for fees and any other random Auto-related expenses.
Editing an Account
If you need to change anything about how an account is set up, select the drop-down arrow, and choose Edit.
Deleting an Account
There’s really no such thing as deleting an Account in QBO. All Accounts are actually inactivated, and can still be looked at, included in reports, and reactivated with no loss of data.
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Balance Sheet accounts can only be Deleted if they have a $0 balance. If you Inactivate a BS account with a balance, it will be offset to Opening Balance Equity.
To delete an account on the Chart of Accounts list, click on the drop-down arrow on the far right of the account to be deleted. Select Delete.
Following-up
Setting up the Chart of Accounts is exciting for those of us who love building the clients’ needs into the QuickBooks Online file structure. Remember, mistakes here can affect reports and taxes!
My next article will cover merging two accounts and using the register. If you would like a deeper understanding of the Chart of Accounts, including a tour of the Profit and Loss Statement and Balance Sheet, please register for my December QuickBooks Chart-of-accounts class.