Our Blog

Thought Leadership from the Leaders in Virtual Accounting and Bookkeeping Services
A chart of accounts is the backbone of your business’s financial system. It's the filing system for all of your transactions, and it helps you categorize income, expenses, assets, liabilities, and owner’s equity. QuickBooks Online makes this critical component of accounting accessible, but it's up to you to tailor it to your business's unique structure and financial tracking needs. Here’s how you can set up and manage your chart of accounts effectively.
Understanding Chart of Accounts

The chart of accounts is a comprehensive list of all the accounts in your general ledger, each account serving a unique purpose to record the business’s financial transactions. It helps you organize in a granular fashion, allowing you to track money flow with precision. QuickBooks Online supports various types of accounts, including assets, liabilities, equity, income, and expenses. By categorizing every transaction into one of these buckets, you build a financial structure that feeds into your reports and overall business health.

Types of Accounts to Leverage

Assets: These are the resources your business owns or controls. They can be current like cash, bank accounts, and inventory, or long-term like vehicles and property.

Liabilities: Liabilities are your business’s obligations or debts, including accounts payable, loans, and taxes owed.

Equity: Equity represents the owner's stake in the company and any retained earnings. It's the financial interest in the assets after liabilities have been accounted for.

Income: This includes all the money your business earns from sales, services, or any other source.

Expenses: Expenses are the costs that are incurred to generate revenue. They are the money flowing out of the business and include utilities, wages, and supplies.

Setting Up a Chart of Accounts in QuickBooks Online

Begin by navigating to the chart of accounts feature within QuickBooks Online. Then, follow these steps to structure your accounts.

Accessing the Chart of Accounts

In your QuickBooks Online dashboard, go to the Accounting tab and select Chart of Accounts. From there, you can either add a new account or start by creating an account from the recommended chart of accounts.

Creating Main Account Categories

Start by creating the foundational main categories for your chart of accounts without getting too detailed at this stage. Think of it as the highest level of grouping for all your transactions.

  1. Click the "New" button.
  2. Choose "Account Type" and select from the dropdown the type of account you're creating (e.g., bank, credit card, expense).
  3. Select the detail type (e.g., checking, savings) and enter a relevant account name.

Adding Subaccounts for Detailed Tracking

If you need more detail for account tracking, you can create subaccounts under a main account. This provides an additional level of categorization without cluttering your chart of accounts.

  1. After creating the main account, select "Is a subaccount" and choose the parent account.
  2. Enter a name for the subaccount.

Now your chart of accounts should have a structure that allows for both a top-level view and detailed tracking.

Customizing Accounts

Mold the chart of accounts to fit your business like a glove. Don't be afraid to alter or rename the accounts for more clarity and specificity.

Renaming Accounts for Clarity

Accounts presented in QuickBooks can sometimes be a bit technical or vague. Rename them to reflect what they really stand for in your business. For instance, "Bank Loan - Vehicle" instead of "Long-Term Liability."

Assigning Account Numbers

While not required, assigning a numbering system to your accounts can help organize and quickly find them, making your financial reporting more efficient.

  1. Go to the "Settings" menu and select "Chart of Accounts."
  2. Click the small arrow beside "New" and choose "Batch Edit."
  3. In the Batch Edit window, assign numbers to your accounts either manually or using an auto-number sequence.

Organizing Accounts for Ease of Use

With that new numbering system in place, consider reordering the list of accounts so they make logical sense. Typically, your most frequently used accounts should be top-tier for easy access.

Mapping Accounts to Business Operations

Match your chart of accounts with how money flows in and out of your business. Each account should represent a clear aspect of your operations.

Aligning Accounts with Business Transactions

Ensure that every financial transaction in your business can be neatly slotted into one of your chart of accounts categories. This alignment is crucial for accurate financial reporting and compliant tax filings.

Ensuring Consistency and Accuracy in Categorization

Train yourself, bookkeepers, and accountants to consistently apply the chart of accounts to all transactions. Inconsistent categorization can muddle the picture your financial reports paint, making decision-making more difficult.

Monitoring and Adjusting Accounts

Your chart of accounts is not set in stone. Regularly review and revise it as your business evolves. New products, services, or business activities may require new accounts to be created or existing ones to be modified.

Regular Review of Accounts

Make it a routine to review your chart of accounts monthly or quarterly. Consider whether the current structure provides the clarity and insight you need. If not, it’s time for an adjustment.

Making Adjustments as Business Needs Evolve

When it’s clear that certain accounts are no longer necessary or new ones could provide better tracking, be proactive, and make the changes. This ensures your financial system grows with your business.

Common Mistakes to Avoid

Navigating QuickBooks Online can be tricky, and there are common missteps to watch out for when setting up your chart of accounts:

Failing to Customize: One size doesn’t fit all in the world of charts of accounts. Avoid using a generic template that doesn’t match your business’s operations.

Mixing Up Categories: Ensure that you understand the purpose of each type of account and categorize your transactions correctly.

Overcomplicating the Chart: Resist the urge to create an overly complex chart of accounts with too many sub-categories. Clarity and simplicity are key.

Logical Numbering System: Random or illogical account numbering can lead to confusion. Be consistent and map out a system that makes sense for your business from the get-go.

Ignoring Updates: A chart of accounts that doesn’t adapt to your business's changes becomes less useful over time. Stay on top of updates.

A well-designed chart of accounts in QuickBooks Online is an essential tool in a small business’s financial management arsenal. By setting it up right the first time and maintaining it with vigilance, you ensure your books are accurate, your reports are insightful, and your financial health is crystal clear.

Click Here For More Business Tips

exit strategy alignment
New Call-to-action
New Call-to-action
New Call-to-action

Subscribe to Email Updates


View All

10 Signs Your Business Is Ready For Outsourced Accounting Services