The chart of accounts is essentially the backbone of your financial records – having a good account list can be the difference between your business succeeding or not. This seems extreme, but if you’re not using a proper chart of accounts, you might not even be aware of huge mistakes that can be made when running and reviewing your financial reports. If you’ve only ever used the preset accounts created by Quickbooks Online (QBO) or you’ve downloaded a “custom” set of accounts from the internet, you are probably making one of these mistakes.
Mistake #1 – Not mapping accounts to the proper detail type
Whenever you make a new account in QBO, you get an option to select a “Detail Type” as well as a name, number, description, etc. In order to get the most out of your reports, it’s best to spend a few extra seconds reviewing the available detail types and selecting the option that best fits this new account. Why? Because these detail types are often used by your tax accountant to map your income and expenses to the correct lines of your tax forms. If you do not map these items correctly, your tax accountant will definitely have to spend more time (i.e. more cost to you) reviewing your accounts and making sure they are mapped to the correct lines.
Mistake #2 – Not utilizing parent/sub accounts
Accounting is all about organization – the easier it is to find your information, the more likely you’ll succeed! Using parent and sub accounts can be an extremely helpful way to organize and visualize your data better. For example, let’s say you have a parent account called “Insurance”, but you pay three different types of insurance (car, general, and health). You should make your other insurance categories sub-accounts of the parent “Insurance” account so that you can easily see your totals and breakdowns on your Profit & Loss. Not only will this help with clearer reporting, you’ll also have an easier time creating budget reports, making projections, comparing yourself to industry standards, and general analysis.
Mistake #3 – Creating accounts based on vendors
DO. NOT. create accounts using vendor names! I cannot stress how incorrect this is and how often I see this (and all the problems it causes). Here is an example: if you have an expense for $260 for your internet service, you should enter the vendor name into the Payee field and the account category should be an expense account called something like “Utilities – Internet”. You should not create an expense account category called “Verizon” because you are already tagging this expense as paid to the Payee Verizon using the vendor name fields. If you enter your transactions using the proper fields, you’ll have access to many more detailed reporting features as well as a much easier tax time.
This post is intended to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Greenspace assumes no liability for actions taken in reliance upon the information contained herein.