How to Set Up the Chart of Accounts in QuickBooks 2019 – Part 2

During this QuickBooks 2019 video tutorial, we will show you how to set up long-term liability and credit card account, how to create an expense account with a sub-account, and editing an account into a sub-account. We will also talk about equity, income, and cost of goods sold.

Welcome back. We’re working in module three where we’re talking about customizing the QuickBooks environment. We’ve just completed section three where we started talking about setting up your Chart of Accounts. That was part one.

This is part two. Let’s go ahead and continue down the list!

I want to talk to you a little bit about your liabilities. A liability is something you owe. You may have a car payment, you may have a mortgage on a building.

It could also be something as simple like a line of credit that you have. Each one of these should be set up separately so that you can track the balance you owe on each one.

I want you to notice one quick thing before I show you how to set these up. You’ve got this account called Opening Balance Equity right here. And notice it has a positive number in it right now.

That’s because so far we’ve only set up a few bank accounts and those are positive numbers. When you have a loan that’s a negative number, it’s something you owe, and that’s going to affect the opening balance equity. So we’ll look at that once we get our loan set up.

In accounting, you’re going to hear two different terms. There are short-term liabilities and long-term liabilities.

QuickBooks calls them Other Current and Long-term. Your Other Current or short-term liabilities are things you’re going to pay off in like 12 or 13 months. Whereas the long-term liability would be the five-year car note, the 30-year mortgage, those types of things.

I’m going to go ahead and set up an automobile payment just to show you how it works. I’m going to right-click and choose the New option.

And for the type notice, they have Loan as an option. I want you to notice that if you choose this option you are assuming a short-term liability. If you want the long-term option you have to come down here and drop the list down and pick it from here.

I’m going to go ahead and hit Continue here. Again if I picked the wrong type on the previous screen I get a chance to go back and change it from this dropdown right here.

Let’s go ahead and name this. I’m going to call this Auto Payment. Remember that if you have multiple auto payments. Then, you’re going to want to make sure that you do something like maybe put the first few letters of the account number at the end of it, maybe you have different names for these. But name that something so you’ll know what each one represents.

This would not be a subaccount of anything else and description and account number are totally optional. You will need an opening balance.

You’re going to get this from your actual statement of the month you’re starting your company file. If you’re starting in January, for example, you want to find out how much you owed on the car as of January start date. We’ll say we had $14,000 as of the start date of our company file.

Once you click OK and then you hit Save & Close you’ll notice that when you go ahead and tell it that your transaction is more than 90 days in the past.

What you’re going to notice is now you have an Auto Payment set up. It is a long-term liability, and you owe $14,000 on that particular vehicle.

Now notice the opening balance equity I was just mentioning. Now you can see this is a negative number because our positive number is less than our negative, what we owe.

Each time you make a payment to that particular automobile you need to put it to this account. What I see often is people will make an expense account down here and they’ll call it Automobile Payment.

But, you have no idea of knowing where you are on the process. How much you have left to pay, that sort of thing. All of your liabilities should show up this way and that way you can see what you owe on that particular vehicle.

Now you might notice something that didn’t happen. It didn’t ask you anywhere what were the term in months for the loan, what was the interest rate.

That’s because there is a whole different feature in QuickBooks called the Loan Manager that we’ll talk about in a later module where you can set all of that up.

This basically just allows you to have an account where you can actually put those payments and track it that way.

The next thing you’re going to notice when you go down the list is that there aren’t any credit card accounts. I want to show you how to set up a credit card account.

I’m going to right-click and choose New and if you’ll notice Credit Card is on the list. I’m going to go ahead and hit Continue and now you’ll notice that you can set up your credit card. I’m going to call this one Visa.

Again, you can call it anything you’d like. Description and credit card number are totally optional but you do want an opening balance.

You’re going to pull out your statement for the month that you’re starting your company file and plug in whatever that ending balance happens to be on your credit card at that time.

I’m going to go ahead and click OK and hit Save & Close and now you’ll notice that we have a credit card account set up.

Now let me go ahead and close this bank feed option real quick. And here, is your credit card account right back here. I want to give you a little scenario on credit cards and why they should be set up this way.

What I see often is that people will receive their credit card statements in the mail and they will put them in as a bill, which is not the right way to do this but let me tell you what happens if you do this.

If you put in as a bill then you’re going to have to get onto the bottom of the bill and tell QuickBooks how much of the charges were for gas, and how much were for meals, and how much were for these other expense accounts that you have down here.

Your total will have to match the exact total of the bill. You’re fine at this point. But what if you only make a partial payment towards that? Then what QuickBooks will think is that you will owe that partial amount that was left over plus whatever is charged next month on the statement.

And there will be no way to break those expenses down at the bottom and have them match equally. It’s a big snowball that just never works and it’s not the correct way to do things.

The correct way is to set up your account like we did here and every time there is a charge for that particular account then what’s going to happen is when I go back to the Home screen you’re going to notice right here it says Enter Credit Card Charges.

That’s where you put each charge. You actually went to Office Depot and you purchased office supplies. That way all of the charges get put to the correct accounts. And by the way, if you don’t have at least one credit card set up you will not see this button here at all.

All right let me go back. When you make a payment to the credit card you always put it to this account.

The next thing I want to mention going down the list would be your equity accounts. Often what you’ll see with small business owners is that they take draws from the business, that’s their way of paying themselves.

We call that an owner draw. Sometimes it’s called a shareholder distribution. Also sometimes a small business owner will put money into the business.

We call that an owner contribution. Sometimes we’ll call it owner capital. And that’s what equity would be.

You also see Income Accounts here. And income is just when you make a sale for the business. You need some way for QuickBooks to track those sales so that you can pay taxes and know how much your sales were for the year.

You can have one of these or you can have as many as you need.

Underneath that, you’ll have your Cost of Goods Sold. If you have to purchase a particular product or materials to make a product to sell in your business that’s called a Cost of Goods Sold.

The next type I want to talk to you about, are your expense accounts, you’ll see from here down. And there are quite a few of these but you will end up adding a lot on your own that aren’t on the list already.

For example, if you notice going down this list you’ve got the automobile, bank service charges, insurance, you’ve got office supplies. You don’t have office expenses.

You don’t have general liability insurance. So those might be some things you would add.

When you see fuel right here you’ll notice this is a subaccount of the automobile. General liability insurance might be a subaccount of insurance expense. Let me show you how to add a subaccount.

I’m just going to right click and choose New. The subaccount has to be the same type as the main account. So I’m going to choose Expense and hit Continue.

Now, I’m going to give my account a name. I’m just calling it General Liability and it is a subaccount of in this case Insurance Expense.

I’m going to hit Save & Close and now you see it looks like it’s indented underneath. And, you can add as many of these as you like.

Something else you may want to do. If you notice they have utilities and they have telephone expense as a subaccount. Many times telephone expense is set up as its own account and you will want to move it underneath utilities.

The way you would do that is you would just right click on it and choose Edit. And in that case you would go ahead and check Subaccount of Utilities and that would put it underneath Utilities like you see here.

You can add as many of these as you want and you can add as many levels as you want as well.

The last one I want to point is Ask my accountant. If you don’t know where to put something just stick it under Ask my accountant and later you can go figure out where to move it to.

That’s a quick overview of how to use the Chart of Accounts. We’re going to see this quite often as we go back through our videos here.

Let’s go ahead and wrap this particular section up and we’ve got one more section, that’s section four, where we want to look at the different sample files that QuickBooks has.

Cindy McGuckin

Cindy McGuckin is an IT trainer with over 20 years of experience. Cindy currently manages the IT Training Department at Trident Technical College, she's a Member of the Association of IT Professionals, Charleston, SC chapter and the Treasurer of the South Carolina Association of Continuing Higher Education.Cindy is a Microsoft Office and QuickBooks expert and her online courses have received hundreds of 5-star reviews. Her no-nonsense approach to teaching complicated topics makes her classes engaging and interesting.