Setting Up Chart of Accounts in QuickBooks Online | For Online Sellers

Now this is really important, because great financial statements are built upon well-designed chart of accounts. So if I catch you snoring, I'm going to come through that computer and shake you. Well, I am totally aware that sometimes talking financials can be a dredge. I promise you it's well worth the effort you make to learn and wrap your head around one.

Before I dive in, if you'd like more of the best ecommerce accounting advice, please make sure to subscribe to our channel here.

Here at LedgerGurus we understand that financial statements are often misunderstood and undervalued. We understand the questions they answer, the insights they give you as business owners, and why it's so important to understand what they say. Again, good financials are often built upon solidly well-designed chart of accounts.

1:07 What a chart of accounts is and the five types

All right, so let's dive right into this discussion on how to set up your chart of accounts for your ecommerce business.

So what is a chart of accounts and why is it so important? This is the things we're going to cover today. What makes up a chart of accounts, what problems can you have with creating your chart of accounts and how to avoid them, and how to actually set up your chart of accounts. So we're actually going to go into QuickBooks and show you how this process works.

So first of all, what is a chart of accounts? You'll also see this sometimes abbreviated as COA. Really it's a way for you to kind of take all the financial transactions of your business and sort them out, like laundry into baskets, or like beans into all kinds of different buckets. We're bean counters, so think, take beans and divide them all out into different buckets. That's really what you're doing when you create the chart of your accounts.

So a chart of accounts is basically a list of all of the different types of major categories that a business has, and it's a way to take all of this activity, identify it, and break it out into these different buckets.

1:56

So the first thing you need to know when setting up the chart of accounts is that there are five major types of accounts. Assets, liabilities, equity, revenue and expenses.

When you're actually in QuickBooks and you're setting up your chart of accounts, it gives you a lot more options than that. For example it'll say, is this a bank account, a credit card, short-term loan, long-term liability, current asset. Even though it gives you a lot more options, every single one of those still falls into one of those five major categories.

And the reason why that's important is because depending on which type of these major categories you choose will determine which financial statement those transactions actually flow to, because those different types of accounts fall onto very specific financial statements. So for example, assets, equities and liabilities all flow onto the balance sheet. Revenue and expense categories all fall into the income statement.

So if you haven't watched our video yet on the balance sheet and the income statement, I highly recommend it. It'll help all of this come together a little bit better. You'll understand kind of what you're trying to accomplish at the end of this. So I recommend watching that video.

2:59 Four problems to avoid

So a couple problems that we see people run into when they're creating their chart of accounts is, first of all, too much detail.

So you want to remember, the way that you create your chart of accounts determines how readable your financial statements are. And so if you have really long financial statements with a whole lot of chart of accounts, where everything is just divided up into a million different teeny little subcategories, it becomes very hard to read.

Another thing is your expense categories should not be created for individual transactions. So for example, you should never have an expense category that says something like Mary's new computer, or printer for the office. Instead you should have a major category called office hardware, and then as those transactions come through they point to that. Keeping in mind, you can always click on the amount on your financial statements and it'll open up a report showing you all the transactions that make up that number on the financial statement. So you don't need to create expense categories to that level of detail to be able to still see that level of detail in your financial information.

3:57

Second of all is too little detail. So you want to set up chart of accounts that gives you the level of information that's actually really important to you.

For example, if it matters to you how much you're spending on your cell phone bill, but also you really want to be able to see how much you're spending on internet separately, then you want to have two categories, one for cell phone charges and one for internet bills. But if you want to just combine those into one and call them utilities instead, or if you want to just call that one chart of account phone and internet, great. Whatever level of detail is meaningful to you, and whatever detail does not become too overwhelming.

If you open up your financial statements and you feel overwhelmed when you look at them, you need to simplify your chart of accounts. But if you also feel like you have a lot of unanswered questions, like man, there's a lot buried in this one category, I'd really like to be able to see this broken out better, you need to create more categories to let that happen.

4:50

Another example is poor titles. So you want your titles to be descriptive but not too lengthy. In general a good rule of thumb is that a good chart of accounts should never exceed more than about four words. So you're not going to say utilities in the warehouse, you would say warehouse utilities. Keeping in mind again, just data overload. When you open up your financials you want to be clean, concise, clear and well designed.

And then accounts that are not properly aligned. So QuickBooks allows you to have sub accounts that are subs of other parent accounts. But if you use them poorly it can also create a mess. So let's say for example that I have a parent account called utilities, and under that parent account I have phone bill, gas, garbage, or whatever. But then somewhere else in the financial statement I have internet charges, but I never made it a sub account of utilities, and so it's floating somewhere off in the financials all by itself. You want to make sure that you align all of that correctly.

5:44 Finding it and creating accounts in QuickBooks

So let's dive into QuickBooks and show you how all this actually works.

When you first come into QuickBooks, if it's your very first time in it, it's going to take you through kind of like a series of questions where it'll ask you things like, what are you selling, what type of business are you. Part of the reason why it's asking those questions is to help you set up a preliminary chart of accounts. So when you first come in here to edit your chart of accounts there will be about 15 to 20 accounts typically already there, and that's how they got there, is that based on the questions that you answered QuickBooks kind of takes a stab at your chart of accounts. But it's definitely far from adequate, and it's definitely something that I recommend you edit.

So how do you get to your chart of accounts? Two ways. First of all, here on the left where you see this gray toolbar, you can either come down here and say accounting, chart of accounts. Or you can come up here to the gear icon in the top right corner and you can say under your company, chart of accounts there as well. Either one will take you there.

6:41

This is where you're going to come into the full length of your chart of accounts, the full list. Now this is a sandbox we play with all the time, so there's a massive number of accounts in here, but this is not what yours will look like when you first come in.

So down here on the left side you have the name of the account, and this is the name as per the way it shows up on your financial statements. And then you have the account type right next to it.

So remember how I told you that there were five account types. Asset, liability, equity, income and expense. Well within those five account types there's kind of sub-account types, of which bank is a type of asset, accounts receivable is a type of asset, other current assets, fixed assets, those are all examples of types of assets, but they also fall into that category. Just like accounts payable is a type of liability, credit card is the type of liability, other current liability, et cetera.

7:29

So the way that this is laid out is that it basically starts with balance sheet accounts. Assets, liabilities, and then equity accounts. And beyond that everything is alphabetical order. And then it goes into your income statement account, so all of your income accounts, your cost of goods sold, your expenses, and then all the way down to the bottom you have other income and other expenses.

So if you notice here how this is indented, it's because these are all sub accounts, subaccounts right now of this parent account, professional fees.

8:21

So let's say that you get in here and you're ready to set up your chart. Keep in mind, remember, they're basically buckets that are established as a place for you to park transactions and activity of the business. And so you want to set this up in a level of detail that's useful to you but not overwhelming.

So when you want to edit your chart of accounts you're going to come over here to the green button and say new. And here is the most important decision you're going to be making, which is the account type. So again we have assets, liabilities, equity, income and expense accounts, all of these kind of being sub accounts. So bank has a special type of account because a bank account inside QuickBooks behaves a certain way, as opposed to a credit card account that behaves a certain way. Accounts payable, accounts receivable. So most important thing is to make sure you choose the right one here.

8:56

So let's say that I decide to set up an income account. So let's talk about details for just a second. So the next thing I'm going to consider is detail type. Now this is important but not terribly important, because this really doesn't do anything except affect where it falls on your list of chart of accounts sometimes. And also if you ever want to merge accounts, they have to be named the same thing. But other than that, I mean, it just kind of gives you a little bit more information about what you intended for this account to be.

So I'm going to call this eBay sales, and I'm going to say save and close. So now I have an income account called eBay sales, and now when I'm coding income this is an option now for me. Should be right here, eBay sales, based on alphabetical order. Okay, so that's what that looks like.

9:46

Expenses. I want to show you something about that really quick. So when I come in here and I choose expenses, especially when it comes to expenses, there just may not be a great option here. Like the options that are here may have absolutely nothing to do with the name you're wanting to use. For example, there's nothing in here that has anything to do with channel sales or channel expenses or fulfillment costs or anything like that. So just choose the closest thing. For if this was Amazon expenses, I might choose something like other business expenses, and then I would call it channel commissions or something like that. Save and close.

Okay, so don't get too hung up on that expense detail type options, because there's really, it doesn't really matter is what I'm saying.

10:34 Why shorter lists are better

Okay, so let's say that as I'm working on this chart of accounts I'm like, man, I have really gotten this list too big, it's too cumbersome.

Part of the reason why I want you to consider how long this list is, is because when I'm in my banking feed for example and I'm getting ready to code a transaction, actually it's not going to let me do that because I don't have any things synced here, but let's say that I'm getting ready to enter an expense and I'm trying to set up a new expense. When I come in here to category, it literally brings up your entire chart of accounts.

So the longer your chart of accounts is, the more of a pain in the rear end it becomes to do your accounting, because you have to go through this really really long list.

11:15

Also the longer your list is, the easier it is for it to kind of become a mess. So for example, maybe I have a sub account under travel called airfare, but then somewhere else in my chart of accounts, I didn't find this when I went through, and so because my chart of accounts is so long, I created an additional account called something like transportation or whatever. So the longer your chart of accounts is, the harder it is to keep it clean, because the more options there are to pick from. So that's one reason to keep your chart of accounts fairly minimalistic.

Within each individual transaction, after you code it you have the ability to open up your reports and see all the transactions that make up that report. And you can even put memos or details on it that say something like travel for Florida trip for such and such a conference. You can add as much detail as you want and it's easy to see that detail.

12:11

So for example, this area down here that says travel. I wouldn't necessarily break it out this way. I would just have travel. I wouldn't have all of this airfare, hotel, lodging, meals, transportation. I wouldn't have all this broken out this way. I would probably break out meals separately because it's taxed differently, but all the rest of these are taxed exactly the same. I would have one account called travel.

And then when I run a report that shows me, run a report in here, let's just see what we get. Let me show you what this looks like. When I run this report I can see, oh, SunPass, this is probably parking. American Airlines, this is all probably airfare. The memos show me, whoa, this is hotel, this is hotel. So when I run the reports I can see the detail and I can see what it was. So I don't necessarily need detailed accounts that are accomplishing that same thing.

So just a word to the wise, keep your chart of accounts as minimalistic as possible, and then add additional detail in the descriptions. All that stuff, when you have your bank accounts synced it all feeds in anyways. And so just keep this clean.

13:23 Merging accounts

So let's say that I decided for example that I wanted to merge these, that I wanted to call airfare travel instead of having it be separate. I want to merge all these into one.

So what you do to merge them is, first of all I want you to pay attention to detail type. So when you get ready to merge, you do have to make the detail type the same. So let's say that I want to turn transportation, airfare, into the same account. I want to simplify this. So you see right now they have two separate detail types, so I'm going to have to fix that.

So I'm going to come in here to this and I'm going to say edit. And first thing I'm going to do is I'm going to change this to be the same as what the other one was, which is travel. And now I'm going to name it exactly what the other one was named, and it was named airfare. Okay, so name it airfare, and I'm going to say save and close.

And it's going to tell me that it's going to affect my accounting and reporting. Yes, I'm sure I want to do that. And then it's going to say this name is already being used, would you like to merge the two, and then I'm going to say yes. So when I do that, it takes all the transactions from both of them and it merges them both into the same account. And so now I have a simplified, cleaned up chart of accounts.

14:32

Now one of the reasons I want to bring this to your attention is because if you look up here it says you are using 133 of 250 accounts included in your plan. If I go over this 250 accounts, I'm going to end up having to upgrade to Advanced, which is significantly more expensive than the QuickBooks subscription I have right now. And what a waste to do that just because of messy chart of accounts.

So one of the things I recommend is, when possible, instead of inactivating or deleting accounts, merge them together when it makes sense, because then you have historic views that just look better and the data is just cleaner. So just keep your chart of accounts clean and simple as much as you possibly can.

15:10 Class tracking and the downloadable template

One of the ways that we recommend doing that is using class tracking. So instead of, see where we have income here, instead of having one account that would say eBay sales, another one that says Amazon sales, another one that says Walmart sales, instead I'm going to use class tracking.

Now I'm not going to go into a lot of detail about class tracking here, but if you watch our profit and loss video, I talk a lot about class tracking there and how it works.

So come up here to the gear icon. I'm going to show you how to at least turn on classes. So you're going to come here and say all lists, and then you're going to click on classes. And this is where you're going to basically create new classes. And instead of having to use chart of accounts to break all this out, you can use classes to be more specific about things instead, and it'll give you a much better result.

Again, like I said, go watch the profit and loss video, you'll see exactly what I'm talking about, why I recommend this. And this is how you add classes, is click new, indicate a new class. Same thing here, if you want to merge classes you just name them the same thing. And you can inactivate classes. But anyways, that's how you edit chart of accounts inside QuickBooks.

16:15

As an additional resource to those of you who watch our YouTube channel, we have created an Excel file, or CSV, I don't know what format it's saved in, on our website. You can just download it from our downloads page, the link is down below.

It's a great chart of accounts start for an ecommerce business that'll help you get started, save you some of the hassle of thinking through all of this. It's a chart of accounts that we've established after all of our time working with ecommerce businesses from an accounting perspective.

But I wanted to show you real quick how you use that file on the download after you've saved it. So you're going to go to our website, download it, save it somewhere on your computer, and you're going to come up here to the gear icon and you're going to say import data. And it'll take you to this screen here, and you're just going to click on this, says chart of accounts, you're going to browse to wherever that is and upload it. You're just going to hit this button that says next, and it'll import into your chart of accounts all of the accounts that we recommend as a starting point for ecommerce businesses.

17:08

You know that figuring out your chart of accounts can be stressful. Let us know what stresses you out the most about your chart of accounts, or what you have questions about, by commenting below and we'll see if we can help you out. Oftentimes I know it could be confusing, but we'd love to answer any questions you guys have.

If you'd like some indicators if your chart of accounts is set up well, if your financials are giving you the information that you need, you can go download our PDF, 5 Signs of Bookkeeping Trouble with an Ecommerce Business. The link is in the description below. Our download page is also where you find that chart of accounts Excel or CSV file, whichever one it is, that you can upload into your QuickBooks. It's a good starting point on that. The link for that is also below.

And if you're approaching about a million dollars in annual sales and you're struggling with staying on top of this financial information and getting good visibility, that's exactly what LedgerGurus does. We support the management accounting of ecommerce businesses. So contact us at ledgergurus.com. We're happy to talk to you about what it would look like, what it would cost to work with us, and we can get you on the right track.

If you like this video, please hit the like button, be sure to subscribe and share this video with any of your friends, whether they're doing ecommerce or whether they're just running different types of businesses. Anybody benefits from good financial information and good visibility into what's going on with their business. And thanks, and have a great day.