Setting Up Your Chart of Accounts

By Kathleen Fernan // KNKBS Co-Owner

Account Numbers


Using numbers with your chart of accounts is not required, but it is an excellent way to properly organize your chart of accounts list. Understanding the standard numbering system will help you add new accounts in the future.

To turn on the feature in QuickBooks go to Edit \ Preferences \ Accounting

Click the box next to “use account numbers”


Standard Numbering Scheme:

1. Assets

2. Liabilities

3. Owners Equity

4. Revenue

5. Cost of Goods Sold – Direct Product Expenses

6. Cost of Goods Sold – Direct Selling Expenses

7. Operating Expenses

8. General and Administrative Expenses


When setting up your chart of accounts it is important to choose the proper account type (Assets, Liabilities, Equity, etc.) as these types determine which financial statement to report them on.

Assets, Liabilities and Owners Equity flow to the Balance Sheet

Revenue, Cost of Goods Sold (CGS) and Expenses flow to the Income Statement


1. Assets
Assets are things that you own, whether paid for or not.

QuickBooks has several descriptions of Assets:

Bank (1000)
Bank Checking or Savings Accounts
Petty Cash

Accounts Receivables (1100)
Receivables are moneys owned to you from the normal course of business.
They are created by “invoicing” your customer.

Other Current Assets (1200)
Current assets are moneys you will receive back within the year (current); examples include deposits you paid on purchases, deposits on utilities, moneys owed from employees or owners, and the cost of your inventory.

Fixed Assets (1500)
Fixed Assets are major purchases that will stay on the books until you dispose of the asset, such as automobiles, computer equipment, telephone equipment, buildings and property, furniture etc.

Accumulated Depreciation (1600)

Fixed Assets are not expensed immediately. They are written off over the life of the asset. For example, an automobile can be written off the books over 5 years. We capture the accumulated write-offs in this separate account as a “contra-asset” account. This helps us know what the net book value of the asset is (don’t confuse this with market value).


Building =                                          $1,125,000

Less Accumulated Depreciation             - 575,000

Equals Net Book Value                        = 550,000



Other Assets (1800)

Corporation Setup Fees




2. Liabilities
Liabilities is the money you owe. They will be classified as short term or long term. Short term is money that needs to be paid back within a year (or sooner). Long term is debt that will be on the books more than a year such as the mortgage on the building, auto loans,  and loans from owners.


Accounts Payable (2000)

Normal bills owed to vendors during the normal course of business.

Utilities, rent, office supplies, legal and accounting


Payroll Liabilities (2100)

Monies deducted from employees checks and the related state and federal taxes that are due to the agencies. This account is normally zero as many of these liabilities need to be paid immediately.


Sales Tax Payable (2200)

Sales tax that is charged to your customers is held in this liability account until you are required to pay the sales tax. This is different for each company. Some are monthly, quarterly or annual and the state board can change this frequency each year based on your volume of tax collected.


Credit cards (2300)

Credit card transactions are entered into a separate register into QuickBooks this makes for easy finding, recording and reconciling of transactions. Each credit card is setup separately


Other Current Liabilities (within one year) (2400)

Customer deposits collected


Long-Term Liabilities (over one year) (2500)

This is large debt for the business that will be paid off longer than one year.

Mortgage on the building or land

Auto loans

Loans from investors/owners with promissory notes and interest accruing


Net Working Capital is defined as Assets Minus Liabilities


If you take the total short term Assets on your books and subtract them from your short term liabilities you have what we call “net working capital”. This is the amount of capital you have to use for the business. When you are “upside down” that means you have more liabilities than assets.


Example of healthy net working capital:


                    Assets:

                        Cash and Receivables:                            $25,000

                    Liabilities:

                        Accounts Payable and credit cards:        -$15,000

                    Net working capital:                                    $10,000


Example of unhlealthy/"upside down" net working capital:


                    Assets:

                        Cash and Receivables:                               $25,000

                    Liabilities:

                        Accounts Payable and credit cards:          -$55,000

                    Net working capital:                                     -$30,000


3. Owner's Equity (3000)


Equity is what your company is worth. It is an accumulation of the original capital investment, plus or minus your profit and loss over the years and minus any distributions you have taken out of the company.


Capital Investment                                                                 + $50,000

Less Distributions                                                                   - $10,000

Retained Earnings: Accumulated profits (losses)

over the course of doing business                                           +$85,000

Net Equity                                                                                    + $45,000



The balance sheet is the first financial statement in Accounting.

It contains one basic rule:

Assets – Liabilities = Equity


Every entry in accounting is “balanced”; that means there are two sides to every transaction. Some transactions go to the Balance Sheet, while the other side goes to the Profit and Loss Statement.


The Balance Sheet must balance as follows:

        Assets:  $100,000                                  Liabilities:     $25,000

                                                                      Equity:           $75,000

        Total assets: $100,000            =            Total liabilities and equity: $100,000


4.  Revenue (4000)
This is the money you have invoiced (if on accrual basis; collected if on cash basis) from your customers over the normal course of business. You may have multiple sources of income so we will setup a tiered system of accounts so reporting will be clear and can be easily summarized.

INCOME (4000)
· Services (4100)
· Products Sold (4200)
· Interest Income (4300)

5. Cost of Goods Sold (CoGS) (5000)
CoGS or CGS is the cost associated with the products you sell. For example, say it costs $75 between materials and labor to manufacture a widget, and then you sell it to the customer at $125.  We capture the raw materials and labor costs in the CGS accounts.

CGS (5000)
· Raw Materials (5100)
· Labor (5300)
· Shipping (5400)
· Merchant service fees (5600)

6. Cost of Goods Sold – Selling Expenses (6000)

· Salesman Commissions, ads, website, direct marketing etc.

Gross Profit


Gross profit is Total Income minus Cost of Goods Sold. This is the profit you have earned on your products, before any normal operating expenses.

7. Operating Expenses (7000)


These are the expenses that are not directly related to creating your products. Since we typically have a lot of expenses we will used a tied system to simplify the profit and loss statement. (Note: just because these expenses are listed below does not necessarily mean they are deductible for your entity. Check with your CPA.)


Payroll and Related (7100)

  • Salary officers
  • Hourly wages
  • Payroll taxes:

FICA

FUTA

SUI

  • Workman Comp Insurance

Rent and Utilities (7200)

  • Telephone
  • Security


General Office Expense (7300)

  • Office Supplies
  • Bank Charges
  • Membership dues


Insurance (7400)

  • General & Liability
  • Health Insurance


Advertising and Marketing (7600)

  • Ads, paper and online media
  • Website development


Travel (7700)

  • Airfare
  • Hotels
  • Tips, cabs
  • Meals away from home


Automobile Expenses (7800)

  • Lease expense
  • Fuel
  • Repairs and Maintenance


General and Administrative Expenses (8000)

These are sometimes uncontrollable expenses and not reoccurring on a monthly basis.


Professional Services (8100)

  • Legal
  • Tax Preparation
  • Outside services (consultants)


Taxes (8200)

  • State taxes
  • Federal Taxes
  • Sales tax paid on company purchases


Interest (8300)

  • Interest expense on loans
  • Finance charges
  • Late Fees


Depreciation (8900)

  • Depreciation
  • Amortization



Profit and Loss Statement


The profit and loss statement reports all Income and Expenses for the current fiscal year. This basically tells you how your business is doing: are you making or losing money?


INCOME

LESS: Cost of Goods Sold

    GROSS PROFIT


EXPENSES

Operating Expenses

Payroll and Related Taxes

Rent and Utilities

General Office Expenses

Marketing and Advertising

Travel

Insurance

Automobile

General and Administrative

    TOTAL EXPENSES


            NET INCOME or (LOSS)

Kathleen Fernan has spent over 40 years in the accounting industry and 20 years as a QuickBooks Advanced Pro Advisor. Kathleen’s company K&K Business Solutions, Inc. provides accounting conversions, troubleshooting, systems integration, procedural flow and training to small and medium sized businesses. In addition to her accounting background, Kathleen is an ACT! certified consultant and trainer. Contact KNKBS at the button below to reach Kathleen.


Copyright 2020

Contact KNKBS for support