Our review of the QuickBooks chart of accounts is almost complete. We've worked through the assets, liabilities and equity sections so far. This post will provide insight on the income, cost of goods sold and expense sections of the chart.
First, the income section - income is the money your business makes when you sell products or services to your customers. In many cases, there will be only one income account in the chart of accounts called "Income from Customers", and that is perfectly fine. Other businesses will have more than one account, with each one providing more insight into where the revenue from the business is coming from. For example, it might list "Income from Products", "Income from Labor", and "Income from Warranties" or something similar.
Bonus Tip - You do NOT want to have a separate income account in your chart of accounts for EACH product or service you sell! All that does it make things far too complicated for your needs - your "Sales by Item Summary" report will provide the details you need relating to the specific sales of products and services.
Cost of Goods Sold - if your business does not work with inventory, this type of account in the QuickBooks chart of accounts won't mean anything to you. In fact, you can just skip it.
However, if you do track inventory, you will want to have at least one cost of goods sold account. The purpose of this account is simply this - to capture the direct costs of the items you sell that are showing up in the income section as mentioned above. In our example, you could have a "Cost of Goods Sold - Products" account that tracks the cost related to the "Income from Products" account suggested earlier.
Expense - This category allows you to set up categories to track the money flowing out of your business. Travel, office supplies, and legal/professional fees are perfect examples of various types of expense accounts listed in the chart of accounts of many businesses.
Other Income/Other Expense - These account types are designed to be "catch alls" for any income or expenses that don't fit elsewhere in your chart of accounts. Use these options sparingly - chances are pretty good that you can find a fit into an existing account and not use these "other" types. A classic example of an "Other Income" account is something called "Gain on Disposal of Asset".
Keep it Simple!
There is no need to have a long and complicated chart of accounts (even if your accountant says you need one!). All that does is increase the likelihood of mistakes and misclassification of transactions in QuickBooks. A short, compact chart of accounts should provide all the information your business needs to help you understand what you own (assets), what you owe (liabilities), what is left over (equity), what you made (income) and what you spent (expenses).
My next post will talk about the predefined chart of accounts listings that QuickBooks provides when you start a new company data file.