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Accounting Basics Part 2: Chart of Accounts in QuickBooks

Last week I discussed the accounting equation and how it laid the foundation for data entry, accounting for each transaction, and building the financial statements including the Balance Sheet and Income Statement. The next step I would like to introduce in helping you understand basic accounting, QuickBooks, and the financial statements of your business is the Chart of Accounts in QuickBooks and accounting.

If you have purchased QuickBooks and started a company through the setup process, you will have entered information about your business, including your industry; see image below:

After this point QuickBooks will prompt you to build a Chart of Accounts. It will offer you a standard template based on the industry you selected. I would like to explain in greater detail for you what this Chart of Accounts is, how it is compiled, and how it is used in your day-to-day use of QuickBooks.

The Chart of Accounts is a list of the various accounts used in the general ledger. The general ledger contains in this order all of the assets, liabilities, stockholders’ equity, income, and expense accounts specific to your business. Keep in mind that all fo the accounts in the Chart of Accounts are specific to your business and the number and type of accounts will need to be tailored to your business.

The Chart of Accounts is ordered in the order accounts appear first on the Balance Sheet, and then on the Income Statement. The Chart of Accounts will be a list similar to the following; take a look and see what would apply to your business:

Cash
Checking Account
Savings Account
Accounts Receivable
Supplies
Inventory
Prepaid Expenses
Fixed Assets
Accumulated Depreciation

Notes Payable
Accounts Payable
Interest Payable
Payroll Liabilities
Unearned Revenue
Credit Cards
Loans
Common Stock
Retained Earnings
Dividends

Income
Advertising Expense
Auto Expense
Depreciation Expense
Insurance Expense
Interest Expense
Meals and Entertainment
Office Supplies
Rent Expense
Salaries and Wages
Supplies Expense
Travel Expense
Uncategorized Expense

It will look something like this in QuickBooks:

Forgive the long list, but I wanted to make sure you could have a good idea about some of the basic accounts on this list and what you would and wouldn’t use in your business. Every transaction that you enter into QuickBooks will go affect 2 of these accounts. Yes, two. This is the basis of the accounting equation – if you add to one side, you have to add to the other or subtract from the same side to keep the equation in balance. For example, when you earn income and receive a check, the check would add the the asset account of your checking account on the left side of the equation, and would also add to the revenue account on the right side of the equation. It gets a little more complicated the deeper you go into accounting, but that is the basic idea.

So when you set up your QuickBooks account, go ahead and use the standard Chart of Accounts that QuickBooks provides for your industry, but if you have an account you need to add (a new bank account, credit card, an expense you want to track, etc) go ahead and add this account to your Chart of Accounts by selecting Account -> New and selecting the appropriate type of account and naming it.

Typically you will be entering transactions through a bank account ledger (which we will get into next time), and you should select the appropriate account from the Chart of Accounts for each transaction.

This data entry will populate your financial statements and turn the raw data into valuable information that you will be able to use to analyze, understand, and make educated decisions about your business. I hope this was helpful to you to further understand the basics of accounting with QuickBooks.

Keep Reaching!

Mark

One comment on “Accounting Basics Part 2: Chart of Accounts in QuickBooks

  1. Pingback: Payroll - Setting up Payroll Accounts in QuickBooks - The Sum of Business

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