Understanding Categories and Chart of Accounts in QuickBooks Online

A lot of business owners reach out asking about which categories they should be using in their business, and if their chart of accounts is correct.

Navigating the Chart of Accounts

Your chart of accounts populates your reports.  I am going to explain how each category is pulled from the chart of accounts so you can look at your reports and determine if the categories in your chart of accounts are working as they should.

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Balance Sheet

The Balance Sheet is an excellent tool for managing your business and its finances.

You can watch the video here: Understanding Your Balance Sheet and How to Run it on QuickBooks Online

You can also read the full blog here: Understanding your Balance Sheet in QuickBooks Online

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Profit and Loss Statement

These are the income and expenses from operating your business.

You can watch the video here: Creating a Profit and Loss Statement in QuickBooks Online

You can also read the full blog here: Reviewing your Results: Creating a Profit and Loss Statement in QuickBooks Online

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Customizing Categories for Your Business

One size doesn't fit all when it comes to categorizing your financial transactions. Depending on your business's needs, you may want to tailor your categories to provide more detailed insights or streamline your reporting process. Whether you choose to split out expenses or consolidate categories, the goal is to ensure that the information you derive is actionable and meaningful.

You can watch the video here: Creating and Editing Categories in QuickBooks Online Chart of Accounts

You can also read the full blog here: Creating and Editing Categories in QuickBooks Online Chart of Accounts

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Remember:

The most important user of the financial statements is you.  Yes, they need to be accurate for taxes, taxes are only once a year – you need these regularly to manage your business and make decisions.  The categories need to be useful to you –have as much or as little detail as you need to understand what is going on.

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And let me know if your reports make a little more sense now.  I wish you every success!

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Compare QuickBooks Online plans here

Understanding Categories and Chart of Accounts- Video

[00:00:00] Hi, Kerry here from my cloud bookkeeping. A lot of business owners reach out asking about which categories they should be using in their business. And if the chart of accounts is accurate, your chart of accounts populates your reports. In this video, I'm going to explain how each category is pulled from the chart of accounts.

So you can look at your reports and determine if the categories in your chart of accounts are accurate. are working as they should be. I'll be using QuickBooks Online from example, and what I'll be showing you will work for any accounting software. If you're using Excel, you'll likely only have income and expenses, and you'll not be able to produce a balance sheet.

I have a whole other video about the balance sheet, and it's really important for managing your cash flow, and in order to reconcile your transactions. It may also be required by your bank or any potential funders or investors. I'll be using QuickBooks Online from example, If you don't currently have accounting software, there's a link in the comments below for a comparison of QuickBooks online plans.

You can determine which would be best for your business needs. Here we are in the sample [00:01:00] company. The chart of accounts is found under transactions. You can also, once you get to this page, find it across the top. In this new format of the navigation menu and interface that you're probably a little more familiar with now.

There's normally no reason to go digging around in here. It's a little light looking under the hood of the car. You need to know generally what's going on and how to check your fluid levels. And that's about it. If your reports are giving you what you need, you know your fluid levels are okay. Now I've exported this chart of accounts.

And here we can see those sections that are at the top, which go to make up the balance sheet. So we're going to walk through each section. You can see here at the top are the assets. These are the things the business owns or are going to receive. Down below here are the liabilities. These are things that the business owes to [00:02:00] others.

At the very bottom, we have the equity section. This shows the value to the owners of the business, including any profit or loss from all of the years of operation. Now a quick word on current and non current. If you're not likely to repay or receive something within 12 months, it would be considered non current.

For example, a mortgage on your building or these notes payable, or any machinery, the truck we can see here, that you expect to own for a long time. Anything readily available, such as cash in the bank, an inventory you're going to sell, or your credit card balance are current. I do have a video with more detail on the balance sheet, so I'll click the link, I'll put a link up there for you.

Now here is our actual balance sheet. As you can see, the assets are all grouped together and the total is 23, 436. If we scroll down, you can see the liabilities are also totaled. [00:03:00] And then when added to the equity, equal the total of the assets, the 23, 436. And this is why we call it a balance sheet. Now let's go back to our chart of accounts.

These are the sections in the chart of accounts that are going to flow through and make up our profit and loss statement. The income, the cost of goods sold, and the expenses. So let's have a look at how they flow directly through to our actual profit and loss statement. So this is an activity statement.

You can see what the business has sold, what the expenses were, and at the bottom you can see the profit for the period of that statement. This will show you how the business is doing. Now note that if you had expenses showing up in your balance sheet in error, then the profit won't be correct. And that's why it's.

So important to be sure your balance sheet is accurate and as you review this profit and loss statement, if you, you'll have all the information you [00:04:00] need to manage your business and the categories are fine. You may want to see more categories or even less. In the example earlier, if you had vehicle expenses, you may want to split out repairs, fuel, insurance, et cetera, or you might be happy with the total and this may change and there's no right or wrong answer as long as you're getting the information you need.

You can split out the utilities, you can collapse them. All of these are important just for you looking at your results to manage your business. Let's go back. Here we are in our chart of accounts and as we scroll down the account type, hopefully this makes a little more sense. Top are the things the business owns, the money in the bank, money owed from customers, inventory to sell, some furniture.

Next we see liabilities, what the business owes, followed by our equity account type. Then we get to the profit and loss items, which are sales, cost of sales, and then finally the expenses. Hopefully that removes some of the mystery [00:05:00] from chart of accounts. Check out the link to QuickBooks online plans below.

And also feel free to download my month end checklist. It will help you ensure your numbers are in order each month. Remember the most important user of the financial statements is you. And yes, they need to be accurate for taxes, but taxes are only once a year. You need the information to manage your business and make decisions.

The categories need to be useful to you. Have as much or as little detail as you need to understand what's going on and have fun. Let me know if your reports make a little more sense now, and I wish you every success. Be sure to click like below and subscribe to keep up to date with more QuickBooks Online and bookkeeping tips.

Cheers.

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