What is The Chart of Accounts? (eBook excerpt chapter 2.04)

A free sample from chapter 2 Accounting Fundamentals of our Landlord Accounting in QuickBooks guide. Section 2.04 What is The Chart of Accounts? We hope you’ll become a customer today, or sign up for the free e-course.

In QuickBooks, your “Chart of Accounts” lists all of the accounts that money can me recorded into. Quicken users are used to calling them categories. Each “Account” does not need to have a corresponding bank account, many of them are purely used for accounting purposes.

The chart of accounts contains all accounts used in your business. Combined, the accounts capture all the financial information regarding your company. Each account in the chart is classified into one of five categories: Assets, Liabilities, Equity, Income and Expenses.

Some Frequently Asked Questions:

Wait a minute, you just added Income and Expenses to the list of Asset, Liabilities and Equity – does that mean the accounting equation does not contain all accounts?

Good question. The accounting equation (Assets = Liabilities + Equity) does contain all accounts. Income and Expenses are closed into equity at the end of a year. They decrease to zero, and if you made money and keep it in the company, you increase equity. If you made money, you could also withdraw it as an owner’s draw.

You see some accounts are like a bath tub: you can look in them at any time and see how much water (or money) they contain (this includes Assets, Liabilities and Equity). Other accounts (Income and Expense) are good for a period of time. They answer the question, “How much rent did I earn this year?” So if these accounts were a bathtub, they get emptied at the end of every year. And where do they go? They get closed into the Equity account. Why do we empty them? That’s just part of the accounting jungle, and it will all come together for you with practice.

So how do I close an Income and Expenses into Equity?

Take a deep breath, when you use QuickBooks this happens automatically. QuickBooks figures out what your net income was for the year (Income minus Expenses). If you made money, the Equity account will increase; if not, it will decrease. You can of course take that increased equity right out of the company, as a draw. And remember, you’re not doing this alone—right? You have an accountant.

 

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One thought on “What is The Chart of Accounts? (eBook excerpt chapter 2.04)

  1. Pingback: Managing Investment Property Mortgages in QuickBooks | Property Management in QuickBooks

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