Bookkeeping for Contractors: Why Your Chart of Accounts Matters

For your chart of accounts, when you are setting up, that is the first thing you want to review if you haven't yet set up your QuickBooks. But it is great to review your chart of accounts on a regular basis so that you can consolidate the numbers that you actually want to see. Sometimes there are companies that have too many different categories. We have different types of categories. We have assets, which are going to be your bank balances. It is what you own, so your banks, your equipment, your savings account, and investments. It can also be your inventory if you have that. It can also be receivables, so perhaps there are people that owe you money, accounts receivable, but if you also have loaned money out to others, that is where these assets land. You have liabilities, which is what you owe. This is going to be potentially any credit cards, bank loans, or perhaps you have personal or other business loans that are on here.

Then you have your equity, which is going to be kind of what the owner has put in or taken out, or what partners have put in or out of the business. And then you have retained earnings. Retained earnings is a bucket of what has been put into your net income over all the years, your profit and loss piece, but this retained earnings is a catching pool kind of for all of that that can get broken down to everyone's partnership percentages. You have your revenue, your income, so any different line items that you have for your sales. We like to keep these in more general pockets. So if you have a service, we like to see that, and then if you have products, we like to see that. And then there are other reports that you can drill down further into. In your services, you might offer one-on-one calls or a speaking engagement, so you are breaking those down into different areas.

Then you have your expenses side, which is going to be all-encompassing of your cost of goods sold, so directly related to you providing that service or sale that you have for your revenue. And then you also have your overhead, so payroll, rent, insurance, and all these other things. Like I mentioned, there are a lot of companies that have a conglomerate amount of items. QuickBooks used to have you put in your industry and then it would give you an itemized example of what to use for your chart of accounts. Although that is helpful, at the same time, it just creates a lot of different accounts that you may or may not use. So you may have dues and subscriptions in one area and software and apps in another area, and those are kind of the same thing. These buckets can really be consolidated into one instead of different line items. The chart of accounts is not on the granular side. There are other reports and ways that you can utilize QuickBooks in order to see finer detail, which is important, but when you are looking at the health of your company, you really want to see an overarching idea of how your company is doing. Then, if you are seeing numbers that aren't matching or are really low or really high, you can drill down further in other reports to get the why and see exactly what is showing that variance.

Another really great part within QuickBooks is making sure that you are linking your bank or credit card. It is really great with being able to work with pretty much all platforms. Unless it is a small town bank, you will be able to link those. And if you are unable to do that, you can also import them through downloading a CSV file and then uploading it there. We like to do these imports because there are fewer errors in a transaction getting missed. It is a very nuanced area, perhaps if your bank got unlinked, and those all can be reflected back in the reconciliations, which is why reconciliations are so important because they are able to catch those nuances. Linking the information brings in all of the data that the bank has, including the memo, and QuickBooks has a new AI tool that begins to remember what you do in your categorization. It takes information from other businesses as well and says, "Okay, this Home Depot is usually categorized as the cost of goods sold," and it will kind of automatically put that in.

Categorization is within your bank feed. Once you have done the categorization, this ties into both the bank syncing and your chart of accounts. Categorization is linking every single transaction, whether it is money flowing in or out, to that chart of accounts. It is going to put whatever that transaction is onto your balance sheet or your profit and loss. Your profit and loss is your regular income and expenses, and your balance sheet is the assets, liabilities, and owner or shareholder information that hits those areas. A lot of times, we see the classification of owner draws as expenses. Let's say you are a single member LLC using a Schedule C for your taxes, or you are a sole proprietorship. We see a lot of times that your draws are put on your profit and loss as an expense. Actually, your owner draws should go on your balance sheet because it is put onto your equity side. It is really great to make sure that you familiarize yourself with your chart of accounts, what they do, and what they are, by printing them off so when you are going through your bank account or credit cards, you can see all of your options. Once you get in there and familiarize yourself more, you have a drop-down menu that shows the different accounts you have, or you can begin typing to see what options you have. That is why having a simplified chart of accounts creates less headache down the road, because you only have a few buckets where you can put this and really understand where things are.

Sometimes transfers come in. If it is an owner putting in money, sometimes we see that put in as income. It is not; you are just making sure there are funds to pay the bills, so that is a balance sheet item. We don't want to show it as revenue, unless you were paid and you accidentally put it in your personal side, so you need to throw it over to your business. In general, no, it should go on your balance sheet. Perhaps you are looking at your cost of goods sold and making sure that your expenses are categorized as cost of goods sold or your overhead expenses. It is important to distinguish those because when you are looking at your invoicing and making sure you are posting things correctly, we want to look at your profit margin. Your profit margin is going to be that revenue and invoicing you are bringing in and then your cost of goods sold. So anything directly tied to you doing that sale, we want to make sure those are in the correct category. A lot of times this can reflect within payroll. If you have someone doing your office work or administrative work, although they are sending out invoices or calling customers, this is an administrative task, so it is just part of business. If you have someone that is going out and directly selling something to a client or doing a service for them, that is your cost of goods sold.

Sometimes we see sales tax categorized as an expense, so that is just ensuring that everything is mapped correctly within QuickBooks and that it is putting things in the right buckets, because sales tax is not actually spent on a regular basis, but you are holding those funds to pay it out for someone else. So, just make sure those are categorized, and simplify that chart of accounts. Owner draws, distributions, and equity are minor nuances, but when you are reviewing your chart of accounts, that is where we want to look. I definitely prefer if you have a credit card and a bank account, when you are making that credit card payment, that within the system you are actually doing a transfer and not what is called a credit card payment. I like to do that only because there are limitations within the software in case there are errors in fixing it; transfers are a lot easier. We talked about the cost of goods sold, making sure they are direct costs and not overhead, sales tax, and avoiding excessively granular categories. Thank you for joining me for these bookkeeping basics in QuickBooks. I am going to be trying to utilize tutorials and walkthroughs, and I want to start doing them in the lives as well to get more hands-on. QuickBooks does change so often, and it is one of the most important tools that you can use to make sure that your numbers are correct. Please reach out if you want a deeper dive with your numbers, if you need cleanup work, or if you want an accountability buddy to meet on a regular monthly or quarterly basis so that you can sit down and talk about your numbers. Make sure that things are actually tied in correctly within your QuickBooks. Maybe you feel like everything is mapping correctly, but just having a second set of eyes can be really useful. Make sure to reach out to us at our website, and we look forward to seeing you next Friday. Have a great weekend.

Today we're going to be talking about QuickBooks and highlight some high-level items for you to review in QuickBooks Online. The first thing when you're in there, perhaps you've already set it up, is a products and services item. These are actually there. So there's two different reports that you can pull within QuickBooks and actually a plethora of other ones. But there are on your profit and loss. We like to really see the higher level of you are selling services and you're selling products. We don't like to see the detail of it. And that's kind of where products and services really come into play is we even though on our profit and loss it says this is just a service, our products and services give that finer detail. So we will list if you are a construction-based, perhaps you are working on roofing and then flooring and then materials and products and change orders and so you can see these different detailed items on your products and services.

And then these are then you can standardize them. So you can set a price specifically. Let's say that you charge by the hour. Perhaps you have a rate of, you know, $60 an hour for your project manager and you have $20 an hour for a general labor. So you can specifically put those in so that you have a standardized rate for whenever you're pulling up invoices and you don't have to remember what you charged the last person. It's just these are your set prices. And then you can also go ahead and you'll tag them to that profit and loss line item so that again your profit and loss has a higher level and then you can run a different report of your products and services with that more detail of what you're actually charging.

You'll also when you are setting up your customers for invoicing that's kind of the first question that it's going to ask you when you are creating an invoice is who is this invoice for? Best practice is going to be middle ground of information. You want the customer name, first and last name, or perhaps they're a business. And you'll want to, this is a great spot to put the email and phone number. Email especially because that's going to be where you send out your invoicing from QuickBooks. So, that integration is great. You don't have to print or mail anything. Um you can just send it through email. And then phone number is also helpful. You can put multiple phone numbers that are attached to different people. If you are using a CRM, this can house that information as well, but perhaps you're not and you're just utilizing QuickBooks. So, you can have that quick at hand.

Having the physical address, remember that when you're construction that it is where the service is provided. So, you may have a billing address and a service address. Those can be different. And then of course, if you have any invoicing payment terms, you can highlight that in there as well, so that you don't have to remember what each customer is if there are differences between what you do one person versus another. So once you have the customer information, you're then going to drill down of, you know, putting in your products and services. You're going to list out what you are actually charging the customer, the products and services. You're going to put a small description. This is where you can give even more detail if you want. Perhaps you have supplies and materials as your products and as one of your products and services, but then you want to give even more detail to the client. So you'll say, you know, 24x4s or roofing material. And so that way you're not bombarded with all of these like hundreds of different categories for your supplies.

And perhaps you choose to make it so it is maybe you have supplies but you really want to have roofing materials, landscaping materials and so then you can give you know finer detail there. You can set up AC and debit card or credit card merchant account through QuickBooks. They are very reasonable with their fees. And when you integrate with that, they can pay directly online with your invoicing, which makes the process a lot simpler. And yeah, so that will help with kind of categorizing things and making things making sure that the software is working with you and not against you. And then you can pull different reports within your invoicing and receivables to really see, you know, who still owes you money, who is going do you need to charge a late fee for over items that haven't been paid yet? So yeah, so different areas within the invoicing and receivable, but very robust system that can no matter what level you are for your company, you can set those up. Head on to our next page here.

There is also areas we'll just kind of chat about these. We have estimates that are available. These are great for construction companies to when you're billing against it. Perhaps you gave an estimate for a job, it's going to be $40,000. Well, you probably aren't charging them $40,000 right away. You can take a deposit, you can do work in progress type of invoicing against that project or against that estimate. It also really helps with change order. So in change instead of changing invoices, it can all be tied to this one estimate or job and then invoiced out from there. So you would have one estimate for a job and then you could have you know and five 10 different invoices against that in that estimate. It's really important in the bank feed that when you are accepting payments, there is a section to receive a payment and specifically highlight what that is. But a lot of issues that I see with some companies are that when you're in the bank transaction and you're categorizing deposits, sometimes they categorize it as a sale where maybe you already have an invoice that's recording recorded in there. So then you're actually showing in your books that you have double income. So just being mindful of matching items whenever possible and to go through those processes of receiving payments so that the bank transactions can go ahead and match that when it sees it.

All right, let's talk about billing and payables. Oops, so finicky. Sorry. Same thing with your invoicing. You can also do all your vendor payments in here. Now, if you're a cash basis company, a lot of times you're going to be doing mostly just expenses. So, going through your categorization of your credit cards and your checking accounts and just categorizing those. Sometimes you have one-off, so where you do have let's say a lumber yard that you are net 30 for payment. So you get invoices throughout the month and then only have to pay them for that once a month. You can enter in bills and then create a payment against those bills so that you still see every single line item and you can categorize them. Especially if you have multiple jobs. Let's say again you're working with the lumber yard. Perhaps you have four different jobs that you're working on. So, you want to categorize each invoice like that. And then the payment just is the swoops up everything and says, "Okay, we're good." Versus breaking out in your bank transaction. Okay. You know, $2,000 was for job A, $500 was for job B. You can do that within the payments section.

If you are using subcontractors, this is a great spot to put your vendor information just like the customer information, putting the email address, the legal name, making sure that you have their W9 on hand so that 1099s are a lot smoother process at the beginning of the year if you collect that information as time goes on. And yeah, so making sure that the vendor account is correctly updated so that that's a smoother process. Now, that's only for those that you really need detail things like Home Depot, you do not need an email, you do not need an EIN, you do not need all of that information. A gas station, do not need that information. But these the idea is to create some vendors if you are utilizing them that you do need information and you have a personal contact utilize QuickBooks. It will help you in the long run. Having a process within your company so that one person is entering in the bills, another second person is paying those bills, really creates security and audit prevention in your business so that not one person is doing all of the money transactions. It really is a great way for balances checks to ensure that your business is protected.

See, okay, we're going to talk about sales tax a little bit. So with sales tax there is an area that you do need to turn it on within QuickBooks and ensuring that that is turned on and you have appropriately put it are you a monthly filer are you a quarterly filer what agency are you reporting to. QuickBooks does do the software itself part of the subscription is for it to calculate what that tax is for wherever you are doing the services. And when you are setting up going back when you are setting up products and services there is an area within there that you can say that an item is taxable or non-taxable. For example, shipping most of the time is not taxable. So, so if most of your products are taxable, you would have that checked and then for the shipping, you would have that non-taxable. And then when you are create, you can create a report at the end of the month to ensure that you're collecting and remitting all of the correct sales tax.

QuickBooks does not remit it on their own. We actually specialize in that. So, we can help you if you have trouble syncing all of that information and knowing, you know, what county or city does need to pay those taxes. QuickBooks can be a little bit nuanced with what report to pay and ultimately seeing some differences between one report, say the profit and loss and your sales tax liability. It is sometimes it's not perfect. So, you do have to be mindful of what you're looking at. There is an area. Oh, I could have just pressed this. That's fine. There is an area for receipts and documentation. Again, documentation is going to help you. So, it really helps in that audit process. If you are ever audited, it is important to make sure that you have retained those documents. Really recommend using either QuickBooks, Dropbox, Google Drive. There's a lot of different services that you can use really keeping that more on a digital surface instead of in a file folder, but when you are audited, it's important to have those receipts because you need to have backup of why you spent money where.

Best practice within QuickBooks is you're going to upload your receipt. You are going to then categorize that receipt. You don't just approve, but you want to make sure that the vendor information is there, that the job categorization is there. And then when you go to your bank transaction holding tank, you will then be able to match everything at that time. So, keeping records in one spot since your accounting software is already there. It is free of charge, which is great. It's all included. So, yeah, really try and utilize that. I'm going to go ahead and skip this section. We have talked a lot about different reportings. So yeah, that kind of brings us to the end here where this is how you reach us. Um I hope that this webinar was useful to you and can kind of guide you through your QuickBooks. It is a software like any other software. The more you are in it, the more you can understand its nuances. And of course it's always ever-changing because you know new and shiny things are always great. That's one great thing about our firm is that because we are in there so often, we know those minor changes or those new processes that can help your workflow and create better systems. And so we are always a call away to see what's going on.

If you are still up in the air of what the heck to do, we also do one-on-ones for reviewing your QuickBooks and making sure that things are tied in correctly and kind of giving you a one-on-one direction of what you should do within your processes. But I hope to see you next week. I hope you have a great weekend and thank you for joining.