The chart of accounts is a systematic way of categorizing financial business transactions. Every transaction for your business can be categorized into one of five primary categories: Income, Expenses, Assets, Liabilities, and Owner's Equity.
Here is a brief description of each category, with an example:
- Income: Proceeds from the sale of products, such as T-shirts, or services such as photography or consulting services.
- Expenses: Payments made to maintain daily business operations. This includes, but is not limited to, rent, utilities, payroll, and office supplies.
- Assets: Assets are items that your business owns. For example, the money in your business checking account is an asset, and the inventory that you have on hand is an asset.
- Liabilities: As discussed, liabilities consist of money that you owe to creditors. This includes loans, lines of credit, and the money owed to vendor suppliers (for example, A/P).
- Owner's Equity: Equity is everything the owner has invested in the business. For example, any money that you invest in your business is equity.
When setting up your QuickBooks company account, you don't have to worry about creating a chart of accounts from scratch. Instead, QuickBooks will create a default chart of accounts, based on the industry your business falls into.
