 Naming and Numbering Accounts

 

If you’ve just started running a business and keeping your company’s books, all this talk of accounts, credits, and debits might have you flummoxed. Accounting is a cross between mathematics and the mystical arts. Its goal is to record and report the financial performance of an organization.

The end result of bookkeeping and accounting is a set of financial statements but the starting point is the chart of accounts. In accounting, an account is more than an account you have at a financial institution; it’s like a bucket for holding money used for a specific purpose. When you earn money, you document those earnings in an income account, just as you might toss the change from a day’s take at the lemonade stand into the jar on your desk.

When you buy supplies for your business, that expense shows up in an expense account that works a lot like the shoebox you throw the receipts into. If you buy a building, its value ends up in an asset account. And if you borrow money to buy that building, the mortgage owed shows up in a liability account. Accounts come in a variety of types to reflect whether you’ve earned or spent money, whether you own something or owe money to someone else, as well as a few other financial situations. Your chart of accounts is a list of all the accounts you use to track money in your business.

Neophytes and experienced business folks alike will be relieved to know that you don’t have to build a chart of accounts from scratch in QuickBooks. This chapter explains how to get a ready-made chart of accounts for your business and what to do with it once you’ve got it. If you want to add or modify accounts in your chart of accounts, you’ll learn how to do that, too.  â•‰Acquiring a Chart of Accounts

 Acquiring a Chart of Accounts

The easiest—although probably not the cheapest—way to get a chart of accounts is from your accountant. Accountants understand the accounting guidelines set by the Financial Accounting Standards Board (FASB—pronounced “faz bee”), a private-sector organization that sets standards with the SEC’s blessing. When your accountant builds a QuickBooks chart of accounts for you, you can be reasonably sure that you have the accounts you need to track your business and that those accounts conform to accounting standards.

Note: Don’t worry—getting an accountant to build a chart of accounts for you probably won’t bust your budget, since the accountant won’t start from scratch. Many financial professionals maintain spreadsheets of accounts and build a chart of accounts by importing a customized account list into QuickBooks. Or, they may keep QuickBooks company files around to use as templates for new files.

Importing a Chart of Accounts

If you don’t want to pay an accountant to create a chart of accounts for you, how about finding one built by experts and available at no charge? A quick search on the Web for “QuickBooks chart of accounts” returns links to sites with predefined charts of accounts. For example, if you run a restaurant, you can go to www.rrgconsulting. com/restaurant_coa.htm and download a free .iif file with a restaurant-oriented chart of accounts that you can import into QuickBooks as explained in the next section. In the not-for-profit world, the National Center for Charitable Statistics website (http://nccs.urban.org/projects/ucoa.cfm) includes downloadable QuickBooks files that contain the Unified Chart of Accounts for nonprofits (known as the UCOA). You can download a QuickBooks backup file of a nonprofit company file complete with chart of accounts an .iif file that you can import into QuickBooks, or a backup file for the Mac version of QuickBooks.

 Importing a downloaded chart of accounts

 If you download an .iif file with a chart of accounts, you can import that file into a QuickBooks company file. Because you’re importing a chart of accounts, you want to create your company file with basic info about your company and as few accounts as possible in the Chart of Accounts list. Here’s how you create a QuickBooks company file with bare-bones information so you can import a chart of accounts from an .iif file:

1. Choose File➝New Company; in the EasyStep Interview window that appears, click Skip Interview. QuickBooks opens the “Enter your company information” window. Enter your company’s name. You can also enter the legal name, tax ID, and other info about your company, or wait until later.   

╉Acquiring a Chart of Accounts

2. Click Next. QuickBooks takes you through data entry screens where you select the type of business entity (LLC, corporation, and so on), and the start of your fiscal year. See Chapter 1 for details.

 3. When the “Select your industry” screen appears, scroll to the bottom of the list and choose Other/None. Then click Next. Choosing Other/None tells QuickBooks to create a company file with only a handful of accounts. The .iif file you’re going to import in step 7 will create the rest of your accounts.

4. In the “Create your company file” screen that appears, click Next to create your company file. The “Filename for New Company” dialog box appears. 5. Choose a folder and filename for the company file, and then click Save. QuickBooks creates your new, bare-bones company file.

6. Click Finish to open your company file. If the QuickBooks Setup window opens, just click the Close button. With your new company file open, you’re ready to import your chart of accounts.

7. Choose File➝Utilities➝Import➝IIF Files. QuickBooks opens the Import dialog box to the folder where you stored your company file. It also sets the “Files of type” box to “IIF Files (*.IIF)”.

8. Navigate to the folder that contains the .iif file, select the file, and then click Open. A message box appears that shows you the progress of the import. If all goes well, QuickBooks then displays a message box that tells you that it imported the data successfully. Click OK. If QuickBooks ran into problems with the data in your .iif file, it tells you that it didn’t import the data successfully. In that case, you have to open the .iif file in a text editor or Excel and correct the account info. To admire your new chart of accounts, in the QuickBooks Home page’s Company panel, click Chart of Accounts (or press Ctrl+A). Now that your chart of accounts is in place, you can add more accounts, hide accounts you don’t need, merge accounts, or edit the accounts on the list. The rest of this chapter explains how to do all these things.

 

Naming and Numbering Accounts

 Accountants and bookkeepers tend to refer to accounts by both numbers and names. This section explains why you should set up naming and numbering conventions— and suggests some rules you can follow—but it won’t explain the meaning of all the different names you’ll find in your chart of accounts. If you accept the accounts that QuickBooks recommends in the EasyStep Interview, your accounts already have assigned names and numbers, as shown in Figure 3-1. You might think that lets you off the hook. But by taking the time to learn standard account numbers and names, you’ll find working with accounts more logical, and you’ll understand more of what your accountant and bookkeeper say.

Accounts that QuickBooks adds to your chart of accounts during the EasyStep Interview come with assigned names and numbers. If you don’t see account numbers in the Chart of Accounts window (open it by pressing Ctrl+A), choose Edit➝Preferences➝Accounting, and then click the Company Preferences tab (you have to be a QuickBooks user with administrator privileges to open this tab). When you turn on the “Use account numbers” checkbox and then click OK, the numbers appear in the Chart of Accounts window.

Setting Up Account Numbers

 Companies reserve ranges of numbers for different types of accounts, so they can identify the type of account by its account number alone. Business models vary, so you’ll find account numbers carved up in different ways depending on the business. Think about your personal finances: You spend money on lots of different things, but your income derives from a precious few sources. Businesses and nonprofits are no different. So you might find income accounts numbered from 4000 to 4999 and expense accounts using numbers anywhere from 5000 through 9999 (see Table 3-1).   chapter 3: setting up a chart of accounts 45 ╉Naming and Numbering

Note: Most types of businesses use the same account-numbering scheme up until the number 4999. After that, things can differ because some companies require more income accounts, but in most businesses, expense accounts are the most numerous.

Account numbering conventions don’t just carve number ranges up for account types. If you read annual reports as a hobby, you know that companies further compartmentalize their finances. For example, assets and liabilities get split into current and long-term categories. Current means something is expected to happen with it in the next 12 months, such as a loan that’s due in 3 months; long-term is anything beyond 12 months. Typically, companies show assets and liabilities progressing from the shortest to the longest term, and the asset and liability account numbers follow suit. Here’s one way to allocate account numbers for current and progressively longer-term assets:

• 1000–1099. Immediately available cash, such as a checking account, savings account, or petty cash.

• 1100–1499. Assets you can convert into cash within a few months to a year, including accounts receivable, inventory assets, and other current assets.

 • 1500–1799. Long-term assets, such as land, buildings, furniture, and other fixed assets.

• 1800–1999. Other assets.

 Companies also break expenses down into smaller categories. For example, many companies keep an eye on whether their sales team is doing its job by tracking sales expenses separately and monitoring the ratio of sales to sales expenses. Sales expenses often appear in the 5000–5999 range. QuickBooks reinforces this standard by automatically creating a “Cost of Goods Sold” account with the account number 5001. (In fact, you can create as many Cost of Goods Sold accounts as you need to track expenses that relate directly to your income, such as the cost of purchasing products you sell as well as what you pay your salespeople.) Other companies assign overhead expenses to accounts in the 7000–7999 range, so they can assign a portion of those expenses to each job performed.

Tip: When you add new accounts to your chart of accounts, increment the account number by 5 or 10 to leave room in the numbering scheme for similar accounts that you might need in the future. For example, if your checking account number is 1000, assign 1010 or 1015 to your new savings account rather than 1001.

 In QuickBooks, an account number can be up to seven digits long, but the program sorts numbers beginning with the leftmost digit. If you want to categorize in excruciating detail, slice your number ranges into sets of 10,000. For example, assets range from 10000 to 19999; income accounts span 40000 to 49999, and so on.

Note: QuickBooks sorts accounts by type and then by number, beginning with the leftmost digit. For example, account 4100020 appears before account 4101.

Standardizing Account Names

Your accounts should be unique in name and function because you don’t need two accounts for the same type of income, expense, or financial bucket. For example, if you consider advertising and marketing two distinctly different activities, create an account for each. But if advertising and marketing blur in your mind, then create one account with a name like Marketing & Advertising.

QuickBooks does its part to enforce unique account names. Say you try to create a new expense account named Postage, but an account by that name already exists. QuickBooks displays the message “This name is already in use. Please use another name.” What QuickBooks can’t do is ensure that each account represents a unique category of money. Without a naming standard, you could end up with multiple accounts with unique names, each representing the same category, as shown by the following names for an account used to track postage:

·         Expense-postage

·         Postage

·         Postage and delivery

·         Shipping

If you haven’t used QuickBooks before, here are some rules you can apply to help make your account names consistent:

• Word order. If you include the account type in the name, append it to the end of the name. You’ll spot Postage Expense more easily than Expense Postage.   

• Consistent punctuation. Choose “and” or “&” for accounts that cover more than one item, like “Dues and Subscriptions.” And decide whether to include apostrophes, as in “Owners Draw” or “Owners’ Draw.”

• Spaces. Decide whether to include spaces for readability or to eliminate them for brevity; for example, “Dues & Subscriptions” vs. “Dues&Subscriptions.”

 • Abbreviation. If you abbreviate words in account names, choose a standard abbreviation length. If you choose a four-letter abbreviation, for example, Postage would become “Post.” With a three-letter abbreviation, you might choose “Pst.”

 Warning: QuickBooks won’t enforce your naming standards. So after you set the rules for account names, write them down so that you don’t forget what they are. A consistent written standard encourages everyone (yourself included) to trust and follow the naming rules. Also, urge everyone to display inactive accounts and then scan the chart of accounts, looking for synonyms to see if such an account already exists, before creating a new one. These rules are easier to enforce if you limit the number of people who can create and edit accounts.