Setup Overview

If you have just switched to QuickBooks Online or are just starting a business and signed up with QuickBooks Online, one of the first things you will do is to create your chart of accounts.  There are some basic principles that you should follow to set it up in an organized way.  At a high level, you want to make sure you accomplish some basic goals with your setup:

  1. Stay organized and structured
  2. It should facilitate the reporting that you would like to do
  3. Keep it as simple as possible

This post will help guide you to the promise land of these goals, with a few helpful hints sprinkled in.

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Keep your QuickBooks Online chart of accounts organized and structured

QuickBooks Online tries to help you out with the structure of your chart of accounts by asking you what type of business you are during your setup.  This will help you get started, but should not be fully relied on.  As you probably know by now, there are two types of accounts: balance sheet accounts and liability accounts.  I’m a fan of using the account number feature in QuickBooks Online, which has to be enabled in Account and Settings > Advanced > Chart of Accounts.  Once that is done, I would recommend using something like the following structure:

  • 1000-1999 Assets: This includes vehicles, equipment, buildings, and other assets used for business. Short term should be on the low end of the range and long-term assets should be on the high end of the range.
  • 2000-2999 Liabilities: These are amounts you owe but haven’t yet paid.
  • 3000-3999 Equity: Equity investments that are not debt or liabilities.
  • 4000-4999 Income: This is the money that you get from your normal day to day business tasks such as sales revenue or income for services rendered.
  • 5000-6999 Expenses: This is the money that you spend on expenses related to normal business operations such as advertising and promotion, office supplies, and rent.
  • 7000-9999 Other: things “below the line” like interest expense, other expenses, foreign currency expenses and taxes go here.

Tip: when adding new accounts, space them out a little bit so you can add accounts in between later.  For example, your first cash account might be 1010, and the next one you set up might be 1020 so you can add nine accounts in between the two if needed. Sometimes having that space is helpful down the road.

Set up your QuickBooks Online chart of accounts to enable your Reporting

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The primary goal of your accounting is to basically keep track of what has already happened from a finance standpoint, but reporting on the history activity is only part of it.  Being able to integrate historical activity into other reports and use it in a way that provides the businesses with the information it needs to act strategically is the much more valuable piece.  We recommend thinking about what is important to you from a reporting standpoint – and don’t exclude things that you want to report on that you aren’t doing today.  Then, work backward to make sure you’re chart of accounts provides the structure to support your reporting.

For example, do you have more than one store and need to track different locations?  If so, enable your Locations (you may need to upgrade to QuickBooks Online Plus for that).  Or maybe you want to track expenses at the department level (like engineering, marketing, etc.) which you can do with the Class feature.

Use of Classes and Locations in your QuickBooks Online Chart of Accounts

A note on Class and Location:  They can be used similarly in QuickBooks Online, but there are some slight differences.  For example, you can have multiple classes assigned to one Journal entry or bill, but only one location.  Refer to the QuickBooks Online help articles to go deeper on this issue. 

If you do want to track multiple departments, using classes is a great way to do it and helps to keep the number of accounts you are using to a minimum.  Let me show the differences in an example:

First, here is what your chart of accounts would look like if you want to track expenses in different departments but are NOT using classes:

Sales Department5100 Salaries$500
5110 Commissions / Bonuses$200
5120 Employee benefits$100
5130 Travel and entertainment$150
Marketing Department5200 Salaries$350
5210 Commissions / Bonuses$100
5220 Employee benefits$100
5230 Travel and entertainment$50

We used eight accounts.  They all start with “5” for Expenses, but we differentiated the departments by changing up the second digit (“1” for Sales, “2” for Marketing).  I like to call this a top to bottom chart of accounts.  If you have lots of departments, you need lots of accounts.  However, if we used the Class functionality, we would only need four accounts to cover the same ground:

Sales ClassMarketing Class
5100 Salaries$500$350
5110 Commissions / Bonuses$200$100
5120 Employee benefits$100$100
5130 Travel and entertainment$150$50

This makes your chart of accounts more condense.  It also gives you better reporting and visibility into things like total company salaries, total benefits, etc, which are in one account and easier to see.  Plus you can always break them down more by looking at them by Class.  The same can be true for using Locations, which you can rename to something more meaningful to your business as well.

Keep it Simple

I highly recommend trying to keep your chart of accounts as simple as possible.  If QuickBooks Online set up an account for you during the setup that you know you probably won’t use, then delete it (note: some accounts cannot be deleted due to the built-in functionality).  Don’t add accounts until you are absolutely sure there will be activity.  Deactivate accounts that aren’t relevant anymore.  Always try to follow the rules you set up and don’t deviate. 

Additionally, try to put accounts next to each other if they are related.  For example, if you have two bank accounts with one bank and one more account with another bank, try to put the bank accounts with the same bank next to each other.  This will make it less confusing in the future.  Name the accounts something fairly short and relevant. 

An account should be set up for a specific purpose – don’t be afraid to set up new accounts if it will serve a purpose.  For example, when it comes to the balance sheet, you could set up one account for Accrued expenses.  But it may be helpful for your accounting and reconciliation process to have separate accounts for Accrued Salaries, Accrued Bonuses, Accrued Commissions, Accrued invoices, etc. These could all be “child” accounts of the Accrued Expenses “parent”.  If it helps to set up different accounts, do it.

If you are new to this, ask around.  Talk to an expert.  Phone a friend.

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Good luck! And once you are set up, make sure to sign up for our free trial and get started with AP genie to help automate your bills and payable process.