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How to Structure and Number Your QuickBooks Chart of Accounts

A chart of accounts is the file cabinet every transaction gets sorted into. Give it a clear structure and a numbering system, and your reports start telling a story instead of listing raw data.

Hello. Hi guys. Thank you for viewing today. Have you ever wondered what your chart of accounts is and what that actually means, and where each line item within your QuickBooks file, what it's doing and what statement it's going to? This video is going to help break down that information for you so that you can really understand where to put things, why it matters. Let's go.

So what is a chart of accounts? It's basically this file cabinet in which you are putting all of your transactions. Accounting is what's called a double-entry system, and so every single transaction that you have has two different line items. When I say line items, this is what in your file everything is going to turn into. It's just organization, because the raw data doesn't really tell us anything. So we create these line items, these chart of accounts, in order to make sense of it and really get us good data to tell us the story we want to see. This could go on forever for why you have your profit and loss, why you have your balance sheet, and where and why everything falls in line, but that's basically the nuts and bolts of it. It's just the very backbone of how things are viewed and looked at within your software. Every bank feed has a rule and line item, and everything gets categorized to your chart of accounts.

So what are the basic accounts in which you're going to input things? This is going to be your assets and liabilities. This is your balance sheet area. Think of cash, your current cash, current assets, perhaps you have equipment, and loans, your credit cards. Those are going to be your liabilities. And then you also have your owner's equity. This is also on the balance sheet, and it's going to represent money flowing in and out of what the owner has, or their partners or shareholders. It's also a giant bucket for what happens with your net income at the end of your year or fiscal year, it throws it into this equity holding tank. And then a lot of your items, where most people see everything, is going to be on that revenue and expenses, or profit and loss. This is going to show your sales, your cost of goods sold, your indirect, your direct expenses, payroll, all of the normal expenses you tend to hear about.

A lot of times you may see a numbering system within your file that can be helpful. This is not a hard rule and you don't necessarily need to use these, but it's a good idea as you line up things. A lot of times you can sort things alphabetically, but it's a little bit easier when you have them numbered and you can force that listing to be how you want to view it. That's a lot of times where people dive into numbering systems. But in essence, if you don't have a ton, let's say most of your chart of account line items, maybe there's like 20 different ones on your profit and loss and maybe like eight or so on your balance sheet, maybe numbering isn't for you, maybe that's just complicating it. Your assets and liabilities classifications, this is your balance sheet area, and these you want to set up for your current assets. These are going to be your bank, your accounts receivable, any inventory. Current assets are things that are going to turn over within a year or are very quick to change, liquid resources. These are going to be your 1000s to 1499s. Your non-current assets, this is going to be longer-term items, so think about actual vehicles or machinery, your accumulated depreciation, this tax thing against these assets that you have. You can list these as 1500 to 1900.

And then on our liability side, still on our balance sheet, we're going to include things like if you have a credit card, or maybe a short-term loan, or sales tax that you owe. These are all going to be in your current liabilities. That's going to be your 2000 to 2499. And then your long-term liabilities, think of these like building mortgages, or maybe you have bank notes, or perhaps you have funding from the previous owner if you purchased your business, these long-term note payables that will take longer than a year to pay off. We have that category as well. And then we have our equity side, and these are going to be our 3000s. We don't have a ton in this area, as most of the time you're not really touching equity. Equity is more something that just is filtered in. But if your owner tends to put money into the business more often, maybe you have some harder months, we'll put those as owner contributions and owner draws. And another thing to highlight is our fundamental accounting balance. All of our assets equal our liabilities plus equity. And that's just on our balance sheet.

So then we're going to hop over to our profit and loss side. When we are reading these, we want to see what kind of information is on here. The top line is going to be our operating income, and that's going to be in our 4000s. This is going to be key things in your business that create revenue and why you're doing the job. Is this construction? And you can break these things down. We don't want to get into too much detail, but we do want to have enough detail where when we go back a year later we know what it is. On your income side you typically don't have a giant breakdown, because there are other reports in which you list your products and services and you can run a report specifically for that. So when you're looking maybe on your profit and loss, maybe you just have one construction income and maybe discounts. Then when you go view a different area within your QuickBooks and reporting, you can pull your products and services. This would look like window treatments, roofing, decking. And so you can very specifically see what products or services you offer are doing better or not. But in general, when we're looking at the profit and loss, a lot of times that's mumbo jumbo that we don't necessarily want. We just want that higher level on your profit and loss.

And then we have our cost of goods sold. Again, we want some detail, but not a ton. We're going to probably get this to be our direct labor and direct expenses for cost of goods sold. This could be your materials and supply, rental equipment that you regularly use, or permits, things that are very directly related to your operating income. And then you have your indirect area. This is going to be generalized for your business, the 6000s. You want somewhat of a hierarchy, but not too much. We do have subcategories that you can create. I like to see administration, and then advertising, so sales and marketing. And then maybe you have a category like facilities that will incorporate subcategories like water and rent and repairs and maintenance. And then payroll, make sure that it's not your direct item, it will be your office managers or owner payments or your sales reps. Even though sales are not exactly directly related to getting the income, you can create the product without that person, so they are an indirect item and just a cost of your business. So we would do payroll and have those, and again the payroll taxes that are involved with those people. We want to make sure that you're not doing hyper-specific. Don't do a vendor item as a line item. You're going to keep it very hierarchy of office supplies, not Office Depot and Staples and Fred Meyer, because there are a lot of other reports we can pull in filtering and categorization. We just want to leave the profit and loss and all of our categories pretty generalized.

One of the biggest things is to make tax time easier. It's going to be really nice, and to understand the cadence of what is allowed and not allowed on your taxes, most companies are going to follow along with what the IRS has for each line item. So dues and subscriptions, postage, payroll, payroll taxes, rent, there are specific line items within the IRS forms. You don't necessarily need to know that, that's why you have us to help you along with that. When you're looking at your chart of accounts, you want detail. You want to make sure that you're not just putting bank account, because maybe you have three different bank accounts. So you want to put checking, maybe it's Chase, so Chase Checking and the last four digits of that account number, and then Chase Savings and the last four digits, and then maybe you have a different bank account for high-yield savings. Give some detail but not a lot. And then parent and subcategories, they are great. Remember though, when you're categorizing things, and although you can set up a lot of rules within QuickBooks, you don't want too much detail, because remembering every single time, oh yeah, what did I do there, and just closing out your books, you want it to be a simple process. If we have a list of 100 different line items that a transaction could go to, it just complicates it and we don't actually get good information. We're just too much in the nitty-gritty. We want to be able to look at whatever statement we're looking at and just gather information and move forward. And it's also really helpful if you decide that moving forward you actually aren't using certain items, you can deactivate them so that they're just not part of the list in which you are dropping down and seeing what is available.

So in order to get you where you want to go, we're going to enable those numbers if you would like to. That's a setting within QuickBooks. And then you're just going to go to your chart of accounts area and, line by line, see if your business actually is utilizing that account. If you like it, great. If you don't, you can rename things, you can move them around and do all of that. And then one feature I really love in QuickBooks is setting the hierarchy, the parent area. You can actually lock the parent areas. When you're looking at subcategories, you would only pull that. When you run statements and you use that parent company, it will say that parent company and then Other, and kind of put it as a line, but visibly it's messy if you use that parent company. And then mapping all of your products. Like I mentioned, your products and services, you want to make sure that everything is tagged correctly to the line items you want, in order to pull the reports and how they should show up. You don't want your products and services to be touching your cost areas. Unless you are doing some fancy things within QuickBooks, you want to make sure that each line item is hitting appropriately in each area. All right, guys, thank you so much. I hope that you learned some information about your chart of accounts and that you can take this knowledge and review it yourself in your own file. And if you still have no idea what's going on, totally fine, we are here to help you. At All Accounting, Jenn specializes in construction companies and trade-focused companies. So if that speaks to you and you need some help, please give us a phone call or an email and we'd love to see how to help you. Also, if this was really helpful for you and you want to see and hear more from me, hit subscribe on our channel. We would really appreciate it. All right, we hope to see you next time. Thanks.

A chart of accounts is easier to read when it follows a consistent structure, and QuickBooks can number each account so the list sorts the way you want. Assets and liabilities live on the balance sheet, income and expenses on the profit and loss, each in its own number range. The goal is enough detail to be useful a year from now, not so much that the list becomes noise.

This is the structure companion to our overview of what a chart of accounts is and the categorization mistakes to avoid. If the concept is new to you, start there, then come back here to organize it.

Why does the structure of your chart of accounts matter?

Because raw data does not tell you anything until it is organized. Think of your chart of accounts as a file cabinet you put every transaction into.

Accounting is a double-entry system, so every transaction becomes two line items, and those line items are your chart of accounts. Organizing them well is what turns raw data into reports that tell the story you want to see: your profit and loss and your balance sheet. Every rule in your bank feed categorizes a transaction to one of these accounts, so the structure underneath is the backbone of how everything gets viewed.

Should you use account numbers?

Numbering is optional, but it helps. You can sort accounts alphabetically, but numbers let you force the list into the order you actually want to view.

It is not a hard rule. If your list is small, say around 20 lines on the profit and loss and eight or so on the balance sheet, numbering may just complicate things. Once the list grows, numbers make it far easier to keep everything in a logical order. Turning them on is a setting inside QuickBooks.

How is the balance sheet numbered?

Balance sheet accounts, your assets and liabilities, break into ranges.

Current assets, 1000 to 1499. Bank accounts, accounts receivable, and inventory. Things that turn over within a year, your liquid resources.
Non-current assets, 1500 to 1900. Longer-term items like vehicles and machinery, plus accumulated depreciation, the running reduction booked against those assets.
Current liabilities, 2000 to 2499. Credit cards, short-term loans, and sales tax you owe.
Long-term liabilities, typically the 2500s. Building mortgages, bank notes, or seller financing from buying the business, anything that takes more than a year to pay off.
Equity, the 3000s. Owner contributions and owner draws, plus the bucket where net income lands at year-end. You usually are not touching equity much.

One rule holds the whole balance sheet together: your assets equal your liabilities plus equity. If they do not, something is off.

How is the profit and loss numbered?

The profit and loss carries your income and expenses, also in ranges.

Operating income, the 4000s. The revenue that is the reason you do the work. Keep this high-level. You do not need a big income breakdown here, because your products and services are tracked separately (more on that below). On the profit and loss you might just have something like Construction Income and Discounts.
Cost of goods sold, typically the 5000s. Your direct labor and direct expenses tied to the work: materials and supplies, rental equipment you regularly use, permits. Some detail, but not a ton.
Indirect and overhead expenses, the 6000s. The general costs of running the business. Use some hierarchy: administration, advertising or sales and marketing, facilities (with sub-accounts like water, rent, and repairs and maintenance), and payroll for your indirect people such as office managers, owner pay, and sales reps, along with the payroll taxes on them.

The line between the 5000s and 6000s is the same distinction between direct job costs and overhead that makes job costing work, and it is why keeping the two ranges separate matters.

How much detail is the right amount?

Enough to know what something is a year later, and no more. Too much detail buries the information you actually need.

Do not turn vendors into line items. Use one Office Supplies account, not separate lines for Office Depot, Staples, and Fred Meyer. Other reports handle vendor-level filtering.
Give bank accounts enough detail to tell them apart. Chase Checking with the last four digits, Chase Savings with the last four, a separate high-yield savings. Some detail, not a lot.
Use parent and sub-accounts, but sparingly. A list of 100 possible line items makes closing the books painful and gives you worse information, not better. You want to glance at a statement and move forward.
Deactivate accounts you do not use so they are not cluttering your dropdown when you categorize.
Line up with the IRS categories. Most companies follow the line items the IRS uses (dues and subscriptions, postage, payroll, rent), which makes tax time easier. You do not need to memorize the forms, that is what we are here for.

How do you set this up in QuickBooks?

Once you know the structure you want, the setup is straightforward.

Enable account numbers in your QuickBooks settings, if you want them.
Review the chart of accounts line by line and decide whether your business actually uses each account. Keep what fits, and rename or move what does not.
Set your hierarchy with parent accounts, and lock the parents. Post transactions to sub-accounts rather than the parent, because when you post directly to a parent it shows on statements as "[Parent] - Other," which reads messy.
Map your products and services to the right line items so your reports pull correctly. Keep products and services from touching your cost accounts, unless you are doing something advanced, so each line hits the right area.

What's the difference between the chart of accounts and products and services?

They answer different questions. The chart of accounts is the high-level structure behind your statements. Products and services are tracked separately, and they are where the detailed revenue breakdown lives.

So on your profit and loss you might just see Construction Income. Then in a separate products and services report you can see window treatments, roofing, and decking broken out, and tell which offerings are performing. That separation is exactly why you keep income high-level on the chart of accounts: the detail already lives somewhere better suited to it.

Key takeaways

The chart of accounts is the file cabinet every transaction is sorted into, and its structure drives your reports.
Account numbers are optional but keep a larger list in the order you want. Enable them in QuickBooks settings.
Balance sheet ranges: current assets 1000 to 1499, non-current assets 1500 to 1900, current liabilities 2000 to 2499, long-term liabilities in the 2500s, equity in the 3000s.
Profit and loss ranges: operating income 4000s, cost of goods sold typically 5000s, indirect and overhead 6000s.
Assets always equal liabilities plus equity.
Aim for enough detail to be useful, never vendor-level line items, and deactivate accounts you do not use.

Frequently asked questions

Do I need to use account numbers in QuickBooks?

No, they are optional. You can sort alphabetically instead. For a small list they may add complication, but for a larger chart of accounts, numbers let you control the order. You turn them on in QuickBooks settings.

What do the number ranges in a chart of accounts mean?

They group accounts by type: the 1000s are assets, the 2000s liabilities, the 3000s equity, the 4000s income, the 5000s cost of goods sold, and the 6000s overhead. Numbering within those ranges keeps related accounts together.

How much detail should my chart of accounts have?

Enough that you will recognize an account a year from now, but not so much that closing the books becomes a chore. Never make individual vendors their own line items. Use one Office Supplies account rather than a line for each store.

Should I use parent and sub-accounts?

Yes, but sparingly. Lock your parent accounts and post to the sub-accounts, because posting directly to a parent shows up as "[Parent] - Other" on statements and looks messy.

What is the difference between the chart of accounts and products and services?

The chart of accounts is the high-level structure behind your financial statements. Products and services are tracked separately and hold the detailed revenue breakdown, so you keep income high-level on the chart of accounts and pull the detail from a products and services report.

Want your chart of accounts set up right?

Getting your QuickBooks file structured correctly is a core part of our bookkeeping and cleanup work for contractors. At All Accounting, Jenn specializes in construction and trade-focused companies, so if this speaks to you and you want help, email help@allaccountingllc.com or reach out to All Accounting.

Know your numbers. Own your future.