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In accounting and bookkeeping, everything you do with money gets tracked with things called accounts. Money you earn goes into income accounts and money you spent goes into expense accounts, but there are several other types of accounts that you're likely to use. Before you create any accounts, it's a good idea to get to know the different types because you can't always switch types if you pick the wrong one. In QuickBooks, accounts can go by both names and numbers. The good news is you don't have to develop your own naming and numbering schemes.
The accounting world already has some standards for both account names and numbers. The key is to pick a standard and use it consistently. Income is the money you make from your business, selling services, products or both. For nonprofits, income can come from donations, grants and other sources. Expense accounts are for money you spend running your business. Purchasing products to sell, paying subcontractors, rent and telephone bills, and so on. Fixed asset accounts track your major purchases.
Things like equipment or buildings, and typically you depreciate these items to show how their value decreases over time. Bank accounts are easy. They are the real-world bank accounts you have, like checking, savings and money market. If you borrow money, called a Current Liability Account, you create a loan account in QuickBooks for that. Credit card accounts cover your real- world credit card accounts that you have. Equity represent the owner's equity you have in the company and that includes capital that invested at the beginning and earnings that you've retained over the years.
Accounts receivable represents money that customers owe to you. Accounts payable on the other hand is the money that you owe to vendors. And finally, cost of goods sold represents the cost of the products that you sell. The main rule for naming accounts is to be consistent. Besides using unique names, also identify the account purpose in the name. For example, telephone expense represents your monthly phone bills, but telephone equipment could be an asset account for your office telephone system.
Most companies use ranges of numbers for different types of accounts. For example, a balance sheet shows assets, liabilities and equity. So the first three ranges are reserved for those. 1000 to 1999 for assets and that includes bank accounts and accounts receivable. 2000 to 2999 for liabilities including credit cards, loans, and accounts payable. 3000 to 3999 for your equity accounts.
4000 to 4999 is for income, which is the first thing that you see on an income statement or profit and loss report, but from 5000 on, the ranges vary. From 5000 to 5999, you can use those accounts for income, cost of goods sold or expenses. Then from 6000 to 7999, you can use those for expenses or income, depending on which you have more of.
And then finally, from 8000 to 9999, you can use those accounts for different types of other expenses. If you use the Easy Step Interview to create your company file, QuickBooks created a chart of accounts for you and numbered accounts following a standard similar to this. So the new accounts you create in future will fit right in.
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