Understanding the chart of accounts in QuickBooks Online

Hi, this is Katheryn from the QuickBooks team. The Chart of Accounts is the hub of your accounting. It’s the central place where you decide how you organise your transactions. Every account or category you use in QuickBooks for every transaction comes from the Chart of Accounts. Let's go over the Chart of Accounts, how it helps you organise your business, and how it affects your financial statements. To get to the Chart of Accounts, select the gear > Chart of Accounts. Every transaction you record in QuickBooks affects at least two of these accounts. Usually, it’s the bank or credit card account you spent or received money to, and then an account that describes why. Let’s look at an example. Open the Bank Transactions screen. You see a purchase of some staplers for the office. The transaction is already assigned to the correct bank account. And, QuickBooks suggest the most likely category. You just need to enter or confirm the correct category for why you spent the money. Office Supplies, which is an expense account. Back on the Chart of Accounts, the balance for the bank account decreases by what you spent on the staplers. But down in the Office Supplies expense account you don’t see a balance, like you do with the accounts at the top. Let’s look closer at the types of accounts to see why. Each account uses a specific type. The type tells QuickBooks what the account should track, either the balance of the account, or a total of the transactions for specific time periods. Accounts at the top of the list show you how much you own or owe right now. They include accounts you’re already familiar with, like bank accounts, or credit cards. They have balances that tell you how much money you have in those accounts, or how much you owe. Other accounts, like fixed assets, tell you the value of things you own, like a truck or a warehouse…and liabilities tell you how much you owe, like on a mortgage. Equity accounts show you how much the business is worth to the owner. They also help you track ways the owner invests or draws money from the business. You use equity accounts when the owner deposits money into the business, or when they withdraw money for their personal expenses. Income accounts help you track why you receive money from customers or donors. Cost of goods sold and expense accounts, like Office Supplies, help you track your spending. These accounts don’t have balances because they help you track the profit of your business for a specific time period. You don’t usually want to see how much you spent on Office Supplies since you opened your business. So instead, you run a report to see how much you spent for a month or year. QuickBooks comes with many accounts already set up for you. However, you’ll probably want to add some more. When you do you can add them here. This other video here will show you how. Your accounts don’t have account numbers by default, but you can check out this video to learn how to turn on account numbers. Note that it’s best to work with your accountant to decide which accounts will give you the best insight into your business. Now let’s look at a report. Select Reports. As you categorise transactions, QuickBooks builds your financial statements behind-the-scenes. These are powerful tools that let you and your accountant know how your business is doing. Let’s take a look at the Profit and Loss statement. The Profit & Loss shows all your income, costs of goods sold, and expenses for a specific period of time. These are the same accounts you see in your Chart of Accounts. The total for Income is a sum of all the transactions you categorise as Sales income during this period. The total for Expenses is a sum of all the transactions you categorise as Expenses during this period. And the Office Supplies total includes the stapler expense we recorded earlier. The final line subtracts all your cost of goods sold and expenses from your income to show you the Net Income. If you want to learn more about how to read Reports in QuickBooks Online there is a video at the end of this one with more details. Now you have a basic understanding of what the chart of accounts is and how it affects your transactions and financial statements. If you want to learn more, we have a free Accounting 101 webinar that you can sign up for here.