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Understanding chart of Accounts in QuickBooks

Understanding chart of Accounts in QuickBooks

Chart of Accounts can be of a great asset for those of you who have an inclination about shifting towards accounting software.

A clear understanding of the Chart of accounts helps in the better understanding about the various aspects of implementation, advantages and applications of the same as and when required.

This is further applicable for those people who are working in the field of accounting in offices, have a business of their own or are freelancers who offer accounting services for individual clients.

This shift is all the more better as it will offer the user a better interface and a smooth transition when trying to move from basic software tools like MS OFFICE or Excell to more Accounts-based software like the QuickBooks.

Chart of Accounts: What this is all about?

Once you have made up your mind about shifting to an accounting-based software, there are a few aspects of the same that you need to be aware of before hand. Hence, the ‘CHART OF ACCOUNTS’ is one of the most basic and fundamental concept of this software that one needs to know of. So, what is the Chart of Accounts all about and what are its applications?

Simply put, the Chart of accounts is defined as the ‘chart’ where in all the business and financial activities are accounted for at. On a wider level, this is the basic structure of the financial accounts of any  Organization that offers the user with the various overview of the different financial transactions. Basically, this is a list, of all the accounts related activities of an organization over a certain period of time. This includes: electricity bills, the salaries of the employees, the income of the business, are all recorded within the Chart of Accounts. It helps is the assessment of the financial performance of an organization and helps know of all the profits and losses over a period of time. It is the basis of being able to display or showcase the various financial aspects or performance of an organization for any purpose, individual or application.

Understanding The Terms in the Chart of Accounts

Now, as the sample of the Chart of Accounts has been displayed above, let us further understand what each term in the table implies to:

    This is the unique ID, of the Number head offered to each ACCOUNT HEAD that is created at the time. This explains the account number of a specific account activity, much like the unique account number offered.
    This is the name of the account given to the specific account number created at the time for the specific Account Number.
    This is the group into which any of these chart of accounts fall into at the time of creation. This is the category under which the Account head falls into as and when created.
    This is the automatic category under which the nature of the account falls into. Most people with basic knowledge of accounting will know that there are two basic categories: the BALANCE SHEET and the ‘PROFIT AND LOSS’ category or also known as the INCOME AND EXPENSE ACCOUNT.

The Different Account Types

The chart of accounts usually comprises of five separate account types: ASSETS, LIABILITIES, EQUITY, REVENUES, EXPENSES. One can also state that the founding basis of the Chart of Accounts is based on these five accounts types. Now, let us know a bit in details about each of these types in details:

Basically, the CHART OF ACCOUNTS comprises of the BALANCE SHEET that comprises of the following group and order:


These are the main and the fundamental groups within the chart of the accounts and this is where, all the major aspects of the financial issues take place.

Likewise, the other main aspect under the CHART OF ACCOUNTS is the INCOME STATEMENT ACCOUNTS

This comprises of the following groups and order:

  • The operating revenues.
  • Operating expenses.
  • Other revenues like: Non-operating revenues and Gains.
  • Other expenses like: Non-Operating Expenses and Losses.

Let us know a bit more about each of these categories:

  • The Operating Revenues:
    This is the revenue, income or the profits that are being made directly by a certain business at a certain time. This can include the raw material or the goods that a shopkeeper own at a time, from which his business generates the revenue directly.
  • The  Operating Expenses:
    This includes the expenses that are directly due to the cost of maintaining the business. This can include various aspects like the electricity bill, the salary of the employees,
  • The Other Revenues:
    This includes the revenues that are not directly related to the operating revenues. This includes the indirect income sources like a certain asset that can be sold for a profit or interest generated from the savings at the bank.
  • The Other Expenses:
    This is the expense that is a result of any indirect sources other than the main expenses. This can include the loan that you need to clear out or the losses that you need to bear for a wrong business deal done.

One has to bear in mind that the Chart of accounts is subjected to the nature and function of one’s business and what it deals with.

The Balance Sheet Categories: Further Details

Let us take a look at some of the main details of each category:

ASSETS: This is further categorized into:

  • CURRENT ASSETS: This comprises of the following and is common for almost all organisations:
    • Cash and Bank Balances
    • Accounts Receivables
    • Inventory Assets
    • Advances, Deposits, and Prepayments. 
    • Land and Building
    • Plant and Machinery
    • Office equipment
    • Furniture and fixture
    • Vehicles 

LIABILITIES: This is categorized in to:

    • Accounts payable
    • Accrued Expenses
    • Short Term loan
    • Taxes Payable
    • Security Deposits from Customers/Retainers 
    • long term loans
    • Mortgages 
    • Equity- Money Invested in
    • Drawings- Money taken out
    • Retained Earnings- the accumulated Profit/loss

The Income Statement Accounts

This is further categorized into the following:

  • Operating revenues 
    • Product sales
    • Service sales
    • Discount to customers
    • Sales Returns 
  • Other Revenues or the Non-Operating Revenues and Gains 
    • Dividends Income: this includes the dividend we gain from the Shares
    • Interest Income: This includes the profit we gain out of the money we save in the banks
    • Insurance Reimbursements: This is the reimbursement that we gain from the Insurance that we have.
    • Proceeds from Disposal of Fixed Assets: Profits that one can gain from the sale of an asset that we own or have.
    • Exchange Gains: The profit gained out of the fluctuations from a currency exchange rate. 
    • Cost of the goods sold: This is the expenses related to the products that your business owns . This is common in retail, manufacturing and wholesale business and it further includes: 
      • Cost of materials
      • Cost of labor
      • Shipping, freight and Delivery charges
      • Subcontractor payments 
    • Distribution costs- logistics, shipping and insurance
    • Marketing costs- Advertisement and Promotions
    • Selling costs- Salaries/ Commisions of sales staff 
    • Staff Salaries (Non selling staff): This includes the administrative staff, accounts staff, janitorial staff, and any other staff that are not related to the sales.
    • Utilities, Communications, Office Rent, Travelling and more
    • Any other non-selling expenses 
  • Other Expenses
    • Interest Expenses: something like the interest on a loan taken by you.
    • Exchange Losses: fall in the rate of the currency in the current times, in case you possess a foreign currency.
    • Loss on disposal of Fixed Assets: sale of an asset that results in the losses

These are the main categories that comprise the ‘design’ of the Chart of Accounts. Hence, one must have a clear picture about the main categories, the groups and the sub-levels in order to have their Chart of Accounts in a proper order. These need to be ‘fed’ into the proper headings within the Chart of Accounts in order to be able to generate the Balance sheet, Profit and Losses and the Trial sheet. So, you see the Chart of account is very important to implement the accounting software for any organization.

The Advantages of The Understanding of Chart of Accounts

Let us take a look at the main benefits of the understanding of the chart of accounts:

  • The Chart of Accounts is one of the most beneficial tool for the immediate visibility of the overall financial health of a company or the organization.
  • The chart of accounts is as important as the foundation of your home. Hence, if the chart of accounts is organized and practical, better results will be produced by the accounting software at any given point of time. 

 Tips on How to Use Chart of Accounts

Here are the main tips on how to be able to use the Chart of Accounts in a better way for your organization:

  • Ensure that the chart of accounts remains as relevant you your business as possible at any given point in time. This implies to the fact that the Chart of Accounts should be well linked to the everyday activities of your business. Avoid the ‘copy paste’ method when it comes to generating the chart of accounts for your business. In a nutshell, your Chart of Accounts must be specific to your business alone.
  • Next, you must ensure that the Chart of Accounts is well maintained, consistent, well-detailed and also practical, as this helps in the proper decision making. This means that the ‘groupings’ must be done in a proper manner so that there is not problems with the results. This also means that the details offered into the Chart of Accounts should be precise and proper. All these steps helps ensure that the results fetch you the decision making strategies you want to benefit you.
  • It is advisable to ensure that you create a specific rule to create COA, be it accounting numbers, or accounting groupings. This includes aspects such as coding, numbering, and the relevant grouping. Overall maintain the proper sequence with in the chart of accounts to be able to generate the required results. This also includes the proper use of uniform FONT style for typing in the required data into the charts.
  • It is also required for you to remain updated and relevant with respect to the changes in the current business trends. This also includes the changes in the business financial transactions, new ventures and the latest trends occurring. This helps in being able to control the financial reporting in a manner that it fetches you the desirable outcome. This helps in being able to make the right decisions for your business.

So, there you have it people. These were a few facts, features and aspects of the Chart of Accounts and why it is so important to understand it. Lastly, we all know that a good book-keeping requires the user or the owner to be able to remain updates, consistent and most importantly well-organized. When using any accounting software, it is first and foremost important to be able to have a basic and fundamental understanding of the Chart of Accounts.

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