Expense Accounts

Understanding and managing expense accounts in QuickBooks Online

Expense accounts are essential components of your Chart of Accounts. They track the money your business spends, helping you prepare accurate financial statements and tax returns. In QuickBooks Online, you can manage these accounts in various ways to fit your business structure, whether you are purchasing fixed assets, paying employees, or tracking costs by department.

The role of expense accounts

Your Chart of Accounts is the backbone of your financial reporting. In the United States, the organization of your accounts typically aligns with the tax form your business files (such as Schedule C, Form 1065, or Form 1120). The list is yours to control, but it generally follows this order:

• Balance Sheet accounts: Assets, Liabilities, and Equity.
• Income accounts: Money coming into the business.
• Expense accounts: Money going out of the business.

To ensure accurate reporting, remember the principle: “You cannot report what you are not tracking.” Avoid over-complicating your list with too many sub-accounts unless necessary for specific reporting needs.

Using expense accounts for purchases

When you enter transactions like Purchase Orders or expenses, you must categorize where the money goes. You generally have two options for tracking purchases:

• Product/Service items: Use these for inventory or items you buy and sell.
• Expense/Asset accounts: Use these for direct costs.

For example, if you purchase a company vehicle (an asset) rather than inventory, you would select the appropriate Asset Account in the Account details section. This flexibility allows you to post transactions to any account type required, including specific Expense or Asset accounts.

Tracking expenses by department or division

If you need to track income and expenses by specific business units (such as divisions or departments), we recommend using Classes.

1. Turn on Class tracking by going to the Settings (gear icon) and selecting Account and settings.
2. Go to the Advanced tab and select the Categories section to edit your preferences.
3. Create a class for each division in your Class list.
4. Tag transactions or specific line items with the appropriate class.

Once set up, you can run reports like Profit and Loss by Class to see financial performance for each division. Note that in QuickBooks Online, classes are assigned to transactions, not directly to the accounts themselves.

Handling payroll expenses

When processing payroll, the paycheck itself is recorded as a single transaction. You cannot split a single paycheck across multiple expense accounts manually. However, you can control where different types of pay are recorded by setting up specific expense accounts for different pay types.

For example, you can assign one expense account for regular hourly wages, another for salaried employees, and a separate account for bonuses. These mappings are managed within your payroll settings to ensure the costs post to the correct ledgers automatically.