Part 4: Managing the Chart of Accounts
The Chart of Accounts is the backbone of your accounting data. When the Chart of Accounts is set up correctly your Balance Sheet and Profit & Loss information can be used to give you a truthful snapshot of your company’s financial health.
The Chart of Accounts is composed of five major types of accounts: Assets, Liabilities, Equity, Income and Expenses. Unfortunately, if you are not versed in accounting basics, your chart of accounts may have loans (liabilities), fixed assets (equipment, vehicles, and computers), or owner draws categorized as expenses. You may also have added so many sub-accounts to your list that your chart of accounts has become long and unwieldy. Cleaning up your chart of accounts, like other lists in QuickBooks, can make a world of difference in helping you understand your financial reports.
First, if an account has never been used in a transaction, then you can delete the account. In the Chart of Accounts (Lists/Chart of Accounts), highlight the account you wish to delete. Click on the Edit drop-down menu and choose to “Delete Account”. QuickBooks will warn you that you cannot delete this account if it has been used in a transaction so don’t worry that you will delete transaction history.
If you have used the account in a transaction, attached it to an item, or it is tagged in the 1099 set-up, then your next option to get it off the list is to de-activate it. In the Chart of Accounts, highlight the account you wish to delete. Click on the Edit drop-down menu and choose to “Make Account Inactive”. Now the account will no longer be on the Chart of Accounts when you display or use a drop-down list. If you wish to see the accounts you have de-activated, in the Chart of Accounts, choose the pull-up menu in the lower left and click on “Show Inactive Accounts”. You may always reactivate an inactive account. Any financial reports that include activity that posts to the deactivated account will display the account regardless of it being deactivated. Deactivating closed bank accounts, old loans, etc. can keep your list up to date.
The third option, merging accounts, is a great tool for cleaning up duplicate accounts, say “Office Supplies” and “Office Expenses”. In order to merge accounts, be aware of the following rule: the accounts you wish to merge must both be the same Type (bank, current liability, expense, etc.). Remember that the transaction history for both accounts will be merged together under the remaining account – all activity going back to the creation of your QuickBooks data file (there is no way to merge only some data based on a cut-off date).
If Account A and Account B need to be merged together and Account A is the one we want to keep, we will change the “Account” name of Account B to match that of Account A exactly (case sensitive, spaces and punctuation). Note that if you use Account Numbers, all you need to do is make Account B’s number the same as Account A’s – no need to match the account names. Once you have changed Account B and try to save it, QuickBooks will tell you that an account already exists with that name/number and asks if you want to merge them. If you say “yes” there is no “undo” button, so be sure!
If you need to move a group of accounts and subaccounts to a different Type, you cannot move the main account and have all the rest come with it. You must first edit the subaccounts and detach them from the main account (uncheck the “subaccount of” box and re-save). Once the main account is unencumbered by subaccounts, you can change its type. Then you can change the type for each of the subaccounts and reattach them to the main account.
Finally, if you use Account Numbers and the numbering scheme seems illogical or messy, you can change the numbers of the accounts to order them as you wish to see them on your reports. Using GAAP standards, usually that means that all Assets begin with a “1”, all Liabilities begin with a “2”, Equity accounts start with “3”, Income with “4”, Cost of Goods Sold (a sub-class of Expenses) with “5”, and all Expenses with “6”, “7”, “8”, or “9”. It may start as a Shell Game if you have to renumber an account to 9999 to free up a number you need for another account. But soon your list will be numbered succinctly and in the order that makes the most sense to you and your company.
Photo credit: Intuit QuickBooks Support