QuickBooks Clinic Series: No. 1 Chart of Accounts
A little knowledge of a complex topic will often lead you astray simply because you don’t realize what you don’t know. A nugget of knowledge does not endow you with a wealth of expertise. Such is the experience of business owners with the appealing accounting software package QuickBooks. Designed for the non-accountant to use easily, QuickBooks is a great tool to get you started in business and helps you understand where your money is going. What is not so good is when you realize that the simplicity of it also leads to problems when you “get into the weeds”.
In working with business owners to sort out their books I’ve seen many problems with accounting and reporting stemming from poor QuickBooks implementation and practices. In this series I will describe some common problems I frequently encounter and help you understand how to avoid them.
Mapping a Better Chart
The chart of accounts is one of those dull details of accounting that many would prefer to gloss right over. Yet, it’s there for a very good reason – to keep your data well organized so you can generate reports that are useful to you and to anyone else who needs information on your business. Ever taken your reports to a banker and asked for a loan only to be told that your statements make no sense? It’s often because the standard chart of accounts that comes with the package doesn’t reflect the unique activities and elements of your business. The information that an outsider needs to understand your business is either missing or misplaced. That, and non-accountants often don’t understand the relationship of different accounts and how some are grouped for the purposes of producing reports. That’s why you’ve got to pay attention to such details. Think of it like the foundation of a house. If it is not built correctly, problems will follow.
For example, say you’ve used one of the chart of accounts templates in QuickBooks. Some accounts have similar names (Payroll Expense and Accrued Payroll for example) but they should be mapped to different places in the financial statements. If you don’t have accounting experience it may not be apparent to you where they belong. Mapping them to the wrong place (income statement vs. balance sheet) will result in statements that don’t make sense.
Making Sense of Costs
The other problem you will encounter is that you may not have costs segregated or summarized in a way that helps you make decisions about the business. It’s critical to designate correctly from the outset costs that belong in cost of goods sold (COGS) versus those in the selling, general and administrative costs (SG&A) area. When you’re making pricing decisions, it’s important to accurately reflect the COGS. If you include costs that should be categorized as SG&A, you could overprice the product. Similarly it’s important to know the true SG&A costs to determine where money should be spent for marketing and sales. Inaccurate segregation can have a ripple effect throughout the organization. Some experienced QuickBooks pros will add a series of detailed expense accounts to the chart to enable you to pull out summaries that really help you understand where your sales and marketing money is being spent which could lead to a competitive edge.
While it may seem like a time drain, I strongly recommend that you spend time organizing the costs into accounts that flow to the right place on financial statements so you are sure to get the information you need. If the process is not familiar to you, this is the time to consult with an experienced accountant to help you avoid costly fixes later. It’s better to make the effort ahead of time before you discover you have statements that are inaccurate while sitting in front of a banker or investor.
Small business owners have enough challenging demands on their time. Don’t turn your nifty QuickBooks tool into a troublesome demon by rushing the process just to get it done, and failing to pay attention when setting up the chart of accounts.
Chris Reynolds serves as the Accounting Manager for the 2Go Group, supporting clients with a full range of accounting services. As the resident QuickBooks expert, Chris builds robust systems from scratch and is able to decipher and fix poorly built processes, bringing them back to working order.
If you would like to speak with Chris, please use the Comments section to make a request.