Episode 36: Is Your Chart of Accounts Telling the Truth? Part Two

Common Mistakes, Warning Signs, and What to Review

Your Chart of Accounts in QuickBooks is the foundation of your entire accounting system. It determines how transactions are organized, where they appear on your financial reports, and whether those reports accurately reflect what is happening inside your business.

In Part One of this series, we discussed the six essential questions your Chart of Accounts should help answer:

• What does the business own?
• What does the business owe?
• What belongs to the owners or shareholders?
• How does the business make money?
• What does it cost to deliver the work and operate the business?
• What may the business owe in taxes?

In Episode 36, we take the next step.

Lee Davis and Erica Northrup explain how the QuickBooks Chart of Accounts controls what appears on your Profit and Loss and Balance Sheet. They also walk through six common bookkeeping mistakes, warning signs that your accounts may need attention, and what you should review before changing anything inside QuickBooks.

The goal is not simply to make your QuickBooks file look cleaner. The goal is to make sure your financial information is accurate, useful, and organized in a way that helps you make better business decisions.

Why This Topic Matters

Your Profit and Loss can look reasonable while major problems remain hidden somewhere else in your QuickBooks file.

For example, you could have:

• An incorrect loan balance
• A credit card that has not been reconciled
• Duplicate customer payments
• Old bills that still appear unpaid
• Owner transactions recorded as expenses
• Equipment purchases categorized incorrectly
• Income duplicated by a connected payment app
• Multiple accounts that serve the same purpose

These problems matter because your financial reports are only as reliable as the Chart of Accounts supporting them.

The account type determines where a transaction appears. An expense categorized as an ordinary operating expense will be presented differently from an expense categorized as cost of goods sold.

That difference can directly affect your gross profit and the way you evaluate the performance of your business.

You can enter the correct vendor, date, amount, and bank account and still produce misleading financial reports if the account classification is wrong.

What You’ll Learn

In this episode, you will learn:

• How the Chart of Accounts builds your Profit and Loss and Balance Sheet
• Why QuickBooks account types matter
• How net profit connects the Profit and Loss to the Balance Sheet
• Why credit card payments are normally not new expenses
• Why loan proceeds should not be recorded as sales income
• How owner draws differ from operating expenses
• Why customer payments can accidentally be counted twice
• When a major equipment purchase may belong in fixed assets
• Why creating more accounts does not always improve your bookkeeping
• How QuickBooks classes can be used to track divisions or locations
• Which warning signs deserve closer attention
• What to review before changing or cleaning up your accounts
• When to seek help from an experienced QuickBooks advisor

Episode Timestamps and Chapters

00:00 – Welcome to QuickBooks Mastery

Meet Lee Davis and Erica Northrup and learn how the podcast helps small business owners simplify QuickBooks and understand their financial information.

00:56 – Episode 36 and Part One Recap

Erica reviews the six questions every Chart of Accounts should help answer and introduces the focus of Part Two.

02:35 – How the Chart of Accounts Builds Financial Reports

Lee explains how the setup and account types in the Chart of Accounts determine what appears on the Profit and Loss and Balance Sheet.

04:19 – Problems That Can Hide Behind a Reasonable Profit and Loss

Incorrect loans, unreconciled credit cards, duplicated payments, unpaid bills, and owner transactions can remain hidden even when income and expenses look believable.

05:44 – Why the Account Type Matters

A correctly entered transaction can still create an incorrect financial report when it is categorized to the wrong type of account.

08:26 – Six Common Chart of Accounts Mistakes

Lee and Erica begin breaking down mistakes frequently caused by moving too quickly or blindly accepting bank-feed suggestions.

08:52 – Mistake 1: Recording Credit Card Payments as Expenses

Learn the difference between recording purchases made with a credit card and recording the payment that reduces the credit card liability.

10:42 – Mistake 2: Recording Loan Proceeds as Income

Receiving borrowed money increases the bank balance, but it also creates a liability. It is not the same as generating business revenue.

12:06 – Mistake 3: Recording Owner Draws as Expenses

Lee explains how owner draws affect equity and why the correct treatment depends on your business and tax structure.

13:29 – Mistake 4: Recording Customer Payments as New Income

Learn how invoices, accounts receivable, customer payments, deposits, and the Match feature should work together.

16:09 – Mistake 5: Expensing Major Equipment Purchases

Vehicles, equipment, and other long-term purchases may need to be recorded as fixed assets rather than ordinary operating expenses.

18:05 – Mistake 6: Creating Too Many Accounts

Discover why more accounts do not always create better financial information and when classes or separate company files may be more appropriate.

20:22 – Warning Signs Your Chart of Accounts Needs Attention

A significant difference between the QuickBooks balance and the actual bank balance is one of the clearest signs that something needs to be reviewed.

21:29 – Red Flags and Yellow Flags

Lee explains why a negative balance is not automatically wrong but should prompt you to investigate whether the balance makes sense.

23:15 – What to Do Before Changing Anything

Write down your concerns and begin with only two or three priority issues instead of trying to overhaul the entire file at once.

24:37 – Finding Duplicated Income From Connected Apps

Lee shares a real-world example of Square sales being recorded through an app and then added again through the bank feed.

28:00 – One Simple Review You Can Perform Today

Start with one bank account, credit card account, month, or customer transaction process.

29:36 – A Five-Step QuickBooks Review

Run your reports, review the major balances, compare outside documents, identify suspicious accounts, and write down questions.

32:07 – When to Stop and Ask for Help

Learn when it is time to work with an accountant, QuickBooks ProAdvisor, or trusted advisor who understands your business.

34:02 – Why Business Owners Must Take Ownership

You can delegate bookkeeping tasks, but you should still understand the financial information being used to make business decisions.

36:07 – Getting Back to the Basics

Lee compares improving a tennis serve to strengthening your Chart of Accounts by returning to the fundamentals.

37:16 – This Week’s Challenge and Free Scorecard

Run your Profit and Loss and Balance Sheet, write down your questions, and download the QuickBooks Clarity Scorecard.

40:00 – Closing and Additional Resources

Six Common Chart of Accounts Mistakes

1. Recording Credit Card Payments as Expenses

The purchases made with the credit card create the business expenses.

The payment from your bank account normally reduces the credit card liability. If both the individual purchases and the credit card payment are categorized as expenses, your spending may be counted twice.

2. Recording Loan Proceeds as Income

Money received from a loan increases your bank balance, but it also creates an amount your business owes.

Loan proceeds should normally be recorded as a liability rather than sales income.

Never assume that every deposit appearing in the bank feed represents revenue.

3. Recording Owner Draws as Expenses

An owner draw is generally an equity transaction rather than an ordinary business expense.

The proper treatment depends on your business structure and tax classification, but money paid to an owner should not automatically be placed in a general expense account.

4. Recording Customer Payments as New Income

When you create an invoice, the sale is recorded and the amount is placed in accounts receivable.

When the customer pays, the payment should be applied to the invoice. When the deposit appears in the bank feed, it should normally be matched to the payment already recorded.

Adding the deposit as new income can cause the same sale to be counted twice.

5. Expensing Major Equipment Purchases

Vehicles, machinery, computers, and other long-term equipment may need to be recorded as fixed assets rather than ordinary expenses.

Save the invoice, purchase agreement, financing paperwork, and other documents so your accountant can determine the proper tax and depreciation treatment.

6. Creating Too Many Accounts

A separate account is not always needed for every location, division, service, or project.

QuickBooks classes or other tracking tools may give you the detail you need without creating an oversized and confusing Chart of Accounts.

Separate legal businesses with separate tax identification numbers may require separate company files rather than being combined into one QuickBooks account.

Warning Signs Your Chart of Accounts Needs Attention

Watch for these warning signs:

• Your QuickBooks bank balance does not match the actual bank balance
• Credit card balances do not match the statements
• Loan balances appear incorrect
• Income seems unusually high
• Customer payments appear twice
• Paid invoices or bills still appear open
• Expense accounts contain owner transactions
• Multiple accounts have nearly identical names
• Large amounts sit in the Uncategorized Income or the Uncategorized Expense
• Accounts contain unexpected negative balances
• You cannot explain what an account is used for
• Your reports change dramatically after year-end adjustments

A negative balance is not automatically wrong. It is a signal to stop and determine whether the balance makes sense for that specific account.

Five Practical Action Steps

Before changing, merging, deleting, or deactivating accounts, complete this five-step review:

1. Run Your Profit and Loss and Balance Sheet

Review both reports for the same reporting period and place them side by side.

2. Review the Major Sections

Ask whether your income, cost of goods sold, operating expenses, cash, loans, credit cards, receivables, payables, and equity balances make sense.

3. Compare Balances With Outside Documents

Compare QuickBooks with:

• Bank statements
• Credit card statements
• Loan statements
• Customer records
• Vendor statements
• Payroll reports

4. Look for Suspicious Accounts

Identify duplicate accounts, vague account names, miscellaneous balances, uncategorized transactions, and accounts that do not seem connected to your business.

5. Write Down Your Questions

Do not try to fix everything at once.

Begin with the two or three issues that could have the greatest effect on your reports. Good QuickBooks cleanup begins with understanding.

Frequently Asked Questions

What is a Chart of Accounts in QuickBooks?

The Chart of Accounts is the organized list of accounts QuickBooks uses to classify assets, liabilities, equity, income, cost of goods sold, and expenses.

How does the Chart of Accounts affect financial reports?

The account type determines where each transaction appears. Incorrect account types can cause balances to appear on the wrong report or in the wrong section.

Why does my QuickBooks bank balance not match the bank?

Possible causes include missing transactions, duplicate entries, outstanding items, incorrect opening balances, deleted reconciled transactions, or activity assigned to the wrong account.

Is paying a credit card considered an expense?

The purchases made with the card are the expenses. The payment normally reduces the credit card liability created by those purchases.

Are business loan proceeds considered income?

Loan proceeds normally create a liability because the money must be repaid. They should not ordinarily be categorized as sales income.

Why are customer payments duplicated in QuickBooks?

Duplication can occur when an invoice records the sale and the bank deposit is later added as new income instead of being matched to the existing customer payment.

Should an owner's draw appear on the Profit and Loss?

An owner draw is generally recorded in equity rather than as an operating expense. The proper treatment depends on your business structure.

Can a business have too many QuickBooks accounts?

Yes. Too many accounts can make reports difficult to understand and increase categorization errors. Classes, locations, projects, or separate company files may be better tools.

Should I delete an account that looks incorrect?

Do not delete, merge, or deactivate an account until you understand its balance, transaction history, and connections to other QuickBooks features.

When should I ask for professional QuickBooks help?

Ask for help when you do not trust your numbers, cannot reconcile important accounts, find duplicated income, or need to make an important business decision using your financial reports.

Resources Mentioned

Free QuickBooks Clarity Scorecard

Use the Scorecard to evaluate whether your QuickBooks file is providing reliable financial information or whether certain areas deserve a closer look.

https://lee-davis-and-company.aweb.page/unlock-clarity-free-scorecard

Lee Davis & Company

For additional QuickBooks education, training, and support:

https://leedavisandcompany.com

Contact Us

Have a QuickBooks question or business challenge you would like us to cover in a future episode?

[email protected]

Your Challenge This Week

Run your Profit and Loss and Balance Sheet, and place them side by side.

Write down any accounts or balances that raise questions, but resist the temptation to start clicking buttons until you understand what you are looking at.

Then download the free QuickBooks Clarity Scorecard to evaluate the overall health of your QuickBooks file.

Your Chart of Accounts should not simply hold transactions. It should help your financial reports tell the truth about your business.

Welcome to QuickBooks Mastery for small business success. I'm Erica Northrup.

And I'm Lee Davis.

I handle the tech, and he handles the numbers. And together, as a father-daughter team, we bring decades of experience helping small to medium-sized businesses thrive.

We know that as a business owner, your time is best spent mastering your craft and growing your business, not getting lost in QuickBooks.

Managing finances can be confusing, and you don't have hours to waste sorting through spreadsheets or fixing bookkeeping mistakes. That's where we come in, helping you streamline QuickBooks so you can focus on building your business.

Each week, we break it all down into simple, actionable steps so you can focus on growing your business, not fixing your books.

Let's embark on this journey together

Welcome back to QuickBooks Mastery for Small Business Success. I'm Erica Northrup. I'm here with my papa, Lee Davis and this is episode 36, Is Your Chart of Accounts Telling The Truth, Part Two: Common Mistakes, Warning Signs, and What to Review. So guys, if you remember, we got quite carried away with a very intense episode last week that was gonna run probably two hours if we had kept on recording.

So we paused it right there at a really good junction. And so part one, we talked about the six questions your chart of accounts should help answer, and those questions were, what does the business own? What does the business owe? What belongs to the owner or shareholders? How does the business make money?

What does it cost to deliver the work and operate the business? And what may the business owe in taxes? Those six questions give you the basic framework for understanding what your chart of accounts is supposed to do. So today, we're taking the next step. We are going to talk about the common mistakes that can cause your reports to tell the wrong story, the warning signs that your chart of accounts may need attention, and what you should review before you begin changing anything.

Because the goal is not simply to make QuickBooks look cleaner. The goal is to make sure your numbers are accurate, useful, and organized in a way that helps you make better decisions. So Papa, let's connect everything we've talked about to the two reports business owners hear about the most often, which are the profit and loss and the balance sheet.

So Papa, how does a chart of accounts determine what appears on each report?

The chart of accounts, based on the setup in the chart of accounts- It orders what goes on the profit and loss and the balance sheet. So it's exactly in that same order that the chart of accounts is set up. Mm-hmm. So that's the first piece that, you know, you need to understand that if something is set up incorrectly in chart of accounts, it's also going to be incorrect on the profit and loss and the balance sheet, and it's all driven by the account type and the description of that account.

So that, that's critical in, as we've talked about in the setup. When you're looking at the profit and loss, for example, you will only wanna see the income and expenses that, of course, are recorded and initially set up in the chart of accounts, and that filters over to when you get down to net profit.

That's going to be reflective of income minus all the expenses, and you're going to get to net profit. And that ties right back to- Yeah an equity account that's also on the balance sheet. So it all ties together like a neat package-

Love it...

if indeed it is set up correctly and the package is wrapped nicely.

And with a nice little bow on top, huh? Is that how we want- Maybe, yeah like our, our packages here? Maybe. Nice

bow. Nice bow.

A green

bow maybe.

Yeah. Oh, I love that. You know, I think that's something many business owners, they don't realize when looking at these two different reports, you know, a profit and loss can actually look pretty reasonable, right, while there are still major issues hiding elsewhere.

I think that's important to remember. You know, maybe an old loan balance is wrong, a credit card doesn't reconcile, customer payments- Mm-hmm are duplicated, bills still appear unpaid, or owner transactions are sitting in expense accounts where they don't belong. Does that- Yeah does that happen often, Papa?

Oh, exactly. So I think you have to understand- There are some checks and balances that will- Mm-hmm help you know that your accounts are all what I would consider recorded properly and in balance. Because when you reconcile a bank statement, for example, that's one of the key elements to know- Mm-hmm that you don't have any outstanding transactions that haven't been recorded properly in QuickBooks, because if there are some transactions, they will show up in- Mm

both the deposits and the expenses that are outstanding. And so that's why it's important to run that report after you reconcile your bank statement to see that it's totally clean. Mm-hmm. And if not, what's going on with it.

I suppose something to also keep in mind, the account type really truly determines which report receives the transactions, right?

So if the account type is wrong, the reports become misleading, and you can have the correct date, the correct vendor, the correct amount, even the correct bank account, and still end up with incorrect financial reports because the transactions were categorized incorrectly. Is that something that

you see often?

The transactions

certainly would be categorizing correctly because account, it starts with the account type. So that if you have the wrong account type in for, let's say, an expense, if you have an account type just as a, a regular expense- Mm-hmm opposed to cost of goods sold-

Yeah...

then you're not going to be getting your gross profit correct.

Mm-hmm. So that you want to make sure that you have things categorized correctly from the beginning- Yeah when you set up your chart of accounts. And I was just working with somebody last week that says that she didn't trust her chart of accounts. Mm-hmm. That when it got set up, they weren't involved, so when they're using an account, they were not sure what should go into cost of goods sold versus what should go into an expense account.

Mm-hmm. And so we reviewed again that cost of goods sold is a account that's used directly for expenses relating to invoicing the customer. All right, so if you are providing, uh, let's say you are a, provide well services, okay, so all of your well parts, all of them, your, the pump and all of that, that would be cost of goods sold.

And so it's important to understand that you can, and we've discussed this before, that you feel when you look at your expenses, you look at your profit and loss, you've identified those accounts, and you're comfortable with where they sit on the profit and loss. And if not, you go back to the chart of accounts and say, "Oh, I can correct that as to where I want it reported on the statements."

Makes so much sense. And I suppose, and we've talked about this before, when you talk about the profit and loss versus the balance sheet, but the profit and loss tells you how the business performed over a period of time, where the balance sheet tells you what the business owns, owes, and has accumulated as of a particular date.

Correct. Yeah, that's really one of the main differences between- Yes those two different reports. Okay, love that. So let's make this really practical, Papa. You know, these aren't rare accounting issues. These are mistakes we see all the time, especially when someone is moving quickly or simply accepting whatever the bank feed suggests, right?

We never wanna just blindly accept what the bank feed- Mm-hmm is telling you, right? Never, ever do that. No,

no.

So let's walk through these common mistakes. So mistake number one, recording credit card payments as expenses. So why isn't paying a credit card normally a new expense, Papa?

Because when you record a credit card payment, remember, let's go back and figure out what type of account is a credit card.

Mm. It's a liability. It's not an expense.

Right. Right.

All right, that's number one, right? Yeah. So when the payment comes through, if you're using the bank feed and you make a credit card payment, and you want to make that, just record that as a expense, then that would be incorrect. Because when the credit card is used, you generate an expense And that expense, it usually sits in the credit card file within the bank feed.

You have a separate credit card file. Yep. Right? It lists- Yep all your expenses.

Yeah.

That is where you will classify those expenses, and those expenses will then get recorded in the credit card account within the- Right general ledger. So if it's Chase, and you will add that expense, you've now recorded that, and you've broken it down as to what type of expense that is.

Mm. Whether that's cost of goods sold, whether that's advertising, fuel, whatever you use that credit card for is an expense of the business. Then once you use it, it becomes a liability. So you pay it out of your bank account, reduces your liability, and that's the whole process for how you would manage the credit card payment.

Absolutely. Okay. So mistake number two, recording loan proceeds as income. So receiving loan money isn't income, is it, Papa?

No. It would be nice if that were the case. Yeah. People would be rich. And as one of my clients says when I go and pick up their bundle of bills to record for the month- Mm-hmm he says, "I wish, Lee, this were a pile of money"-

Right.

instead of being all the money I've paid out. So it's important when you look at a loan- Mm that the proceeds you get from the loan, meaning you took out a loan minus bank fees, that that has to be recorded as a liability. Mm. And sometimes people don't keep track well of their deposits, and we've seen this- Mm

where they just would accept the bank feed because it came through as a deposit into their bank account, okay? Yeah. So they recorded it as income, because they accepted the bank feed. The bank feed says, "Oh, this is sales." And- Yeah So again, no. A loan is a liability, and the proceeds you get from the loan, while they will increase your bank account, the flip side of that is you owe.

Mm. You owe that loan, and it has to be set up appropriately-

Yeah...

so that it reflects more the balance sheet as opposed to the profit and loss.

Yeah. No, absolutely. Okay, so mistake number three, recording owner draws as expenses. So what about owner draws, Papa? Let's put this issue to bed. Let's talk about owner draws.

How does that all work into this picture? The

first clue is it's for the owner. All right? So anything for the owner is a equity type of transaction when you think about the draw, okay? I mean, not everything the owner touches is a equity issue, but certainly the owner is involved, and when it comes to getting paid, it depends- Mm-hmm

whether or not you are an LLC or you are a sub chapter, a C or an S corp. Mm-hmm. Those are treated very differently. But when you are a chapter S corp and C, you certainly can be paid, and that turns out into expense. Mm. But when you are an LLC, that is a draw. You have written yourself a check, and it's not an expense.

There's no owner draw expense. Mm-hmm. That is an equity account, and that shows up on the balance sheet. But that's real money that you paid out to yourself, so that's the way the owner draw is handled.

Okay, that makes sense. So hopefully, listeners, that made sense to you. Okay, so mistake number four, recording customer payments as new income.

Yeah, that's a very common mistake, Erica...

this one happens all the time, right? Yeah. Someone invoices a customer and then records the bank deposit as brand new income, which is a big no-no, right?

That's correct, because when you do the invoice, when you send out the invoice, it creates an, an account receivable.

That is money that is owed to you. Yes. And you're waiting to receive payment. That's the key element. You must receive payment, not record it as new income. If you do it that way, it is quite frequently done through the bank feed because the bank feed is brutally honest. The money you deposited- Mm came through.

But the key to it is you need to receive a payment as opposed to enter a new deposit. Mm-hmm. So matching in the bank feed is usually the answer. If you've recorded something correctly, you're gonna have that match button that I love.

Right. I think that's something- Okay we need to really highlight. Match, you guys.

Match. Match those records there so that you're not just importing new information, but you're actually aligning QuickBooks with what is coming from the bank feed. That's

correct.

That, that's correct, right?

And, yeah, I was working with a client a couple weeks ago, and they were overwhelmed with their bank feed and their credit card- Yeah

feed, and unfortunately, they just decided to start entering without paying attention to date- And accounts and expenses because that's all time-consuming work to correct.

Right.

If you're looking to have your data correct. So when you have a case where you are looking at the bank feed, just stop and think about when you click enter what you're doing and what's happening.

Yeah.

Because while you could feel like you're overwhelmed because the number of transactions, whoever brought over the information into the bank feed could be just overwhelming, so you wanna start entering and get rid of it.

Yeah.

And but you've- Yeah you've traded one problem for another because up underneath the hood is the chart of accounts that has all that information.

Remember the topic we're talking about today, chart of accounts. Yes. The chart of accounts. Why it's so important. Yeah. Okay. Yeah. So let's move on to mistake number five, expensing major equipment purchases. So large purchases deserve another look, don't they, Papa?

They certainly do. I find in our practice, Erica, when we manage several companies, and so when they're purchasing, whether it's vehicles or equipment, it's best really to stop, get the bill, or get the purchase and sale agreement.

Yeah.

And we have a philosophy here that we like to scan all of those documents, whether it's the general ledger that we're entering- Mm-hmm the general journal, if we're entering that transaction, which is usually the key, that transaction belongs to a fixed asset, whether that's equipment, whether that's vehicles.

But so again, the IRS rule is 2,500 or greater. That's the key, but it must have a greater than one year useful life.

Right. So it's gotta be something that you're gonna- So- use long term.

That's correct, and just understand that if you document it correctly, then it can be utilized by your accountant at year-end's tax time, because they can look at the bill- Mm-hmm

and they can see where it falls in the whole depreciation rules with the IRS. It becomes important that you just don't think you're going to expense it.

No, definitely not. But

so you look at the right account that your accountant will run a report at the end of the year in your fixed assets to see what's changed, and let them do their job, and you just get it recorded properly.

Yeah. Yeah. Absolutely. Absolutely. Allow your accountant to do his job, and- Yeah you do your job, and everyone... It, it all comes together quite nicely. Okay, so moving on to our last mistake, number six, creating too many accounts. I think this one surprises people, Papa. Most business owners assume more accounts mean better bookkeeping.

What would you have to say to that one, Papa?

I'd say they have to go back to the beginning-

Right....

and, and understand that their chart of accounts is not meant to be broken up by units, so if they have more than one unit, meaning if they have divisions, like they might have a, uh, restaurant number one, restaurant number two, restaurant number three.

Mm-hmm. And if they think they need to have a separate account, an expense account for, let's say, food for restaurant one, two, and three, their accounts would be massive and- Right they can't possibly keep it organized- No in any way, shape, or form that they could use the profit and loss effectively.

QuickBooks uses classes to track all of that. Mm-hmm. And a class report would break it down by the various units. And I have seen where companies have... They've got several companies under the same umbrella, but the key to all of it is asking yourself, "Do I need to have a separate company file? Is there a separate tax ID?"

If that is the case, then you don't need multiple accounts with companies.

Right.

multiple tax IDs and multiple QuickBooks accounts that you track each separately. So-

Right...

I've seen messes of all kinds where people- Right would add, you know, different companies within one company account. Mm-hmm. That's the way they were gonna track their expenses.

Got you.

That's more than a cleanup in aisle nine. That's start over.

That's start over. That's wipe out the whole building.

That's starting over.

I feel like it just creates so much confusion, and then on top- Yeah of the confusion, there's all this extra work that you're doing that you don't actually have to do, and then you're adding more work because then you have to go back and try to unravel this disaster that you've created or this implosion or...

that you've created.

Mm-hmm.

So crazy. Okay, so now I wanna just shift our attention a little bit. I wanna move on to the warning signs. Here are the warning signs that your chart of accounts needs your attention. So if someone's wondering whether their chart of accounts might need attention, what are some of those warning signs that people might see, Papa?

They're definitely gonna see when they look at their bank feed and they look at what QuickBooks says- Mm is in their account versus what the bank has, if that's a significant difference, you know you have a problem there because the transactions that are going into your chart of accounts will be what QuickBooks says you have in the bank.

And if the bank says you have significantly less-

Yeah...

then right there is your first indicator that you have some transactions in your chart of accounts that could be duplicated.

That's a huge red flag.

Yep.

Massive. So what are some of the other red flags that people might see and might know that their chart of accounts needs some attention?

I

think a red flag, and I think say it, it might be maybe more of a yellow flag, is that-

Okay. We'll go with yellow...

if you are using a numbering system for your chart of accounts, it becomes easier- Mm to record journal entries and adjusting entries- Mm so that the entries go to the correct account, because I've seen more accounts that have a negative balance.

Let's say it's an asset account. It should not have a negative balance, so that if you have a negative balance in an asset account, it may be that something was not recorded properly- Mm that it should have gone to another account. So I think it's important when you're working in your accounting system to feel comfortable when you make an entry- Mm

that you know it's going to the right account. And because QuickBooks is not a system necessarily of a double entry except in the general journal, but the general journal is still important in the whole transactions business. So understanding that a negative balance in an asset account or a liability account could create a image or a warning that the, there's something wrong with that account.

It's that yellow flag.

Mm-hmm.

Right. Yeah. Absolutely. You know, I really appreciate what you said about negative balances. A negative balance isn't automatically wrong. Like you said, it's not necessarily a red flag, but it is a yellow flag, and it's simply a signal to ask whether that balance makes sense for that specific account.

That's correct.

Yeah. Absolutely. Okay, so let's say someone opens their QuickBooks after listening to today's amazing episode and immediately finds duplicate accounts, strange balances, and things they've never noticed before. What's the first thing that they should do, Papa?

What I would do, if it were me, is I'd get out a yellow notepad, and I would make some notes on what are some of their concerns in the whole red flag business, and then just jot them down.

And then just take maybe two or three. Just look at two or three- You know, your main concern. And then go in and look at the chart of accounts And you can run a report right in the chart of accounts. But chances are you're going to need to get some help with that, either from your accountant or a trusted advisor, to be able to say, "Well, what's going on here?"

It could very well be that somebody set up your chart of accounts for you- Mm-hmm and you're not familiar with the way the account should work. Just start with some basic accounting. Right. And just take one or two of those issues and see if you can make some progress.

I guess it comes down to don't just start slashing and dashing and, you know, don't burn your QuickBooks down, but just kind of take one thing at a time and look at it and understand what is actually happening.

Yeah, because I believe that it doesn't take oftentimes a major overhaul. It can be looked at and it can be corrected. And a good example of that is if you have an app that you are using to record sale, for example, and I've seen this, we just picked it up with another client, that the income was getting duplicated.

It was coming through the bank feed, and the person was clicking on the bank feed and said, "Yeah, that's income." But the Square payments were also coming through the profit and loss. Mm-hmm. And they didn't come through the bank feed. Mm-hmm. That all that came through the bank feed was just a Square payment, okay?

And those Square payments through the app don't go through the bank feed. They go right into the chart of accounts- Mm-hmm because they're connected to the sales receipt, and you want that connected to the sales receipt. So you just have to be a bit of a detective to say, "What should I do? What's going on here?"

And you definitely pick that up when you're doing your bank reconciliation. Mm-hmm. That, but people, somebody says, "Do I have to? What is a bank reconciliation?" We'll get to that.

We'll get there.

Let's get this cleaned up first, and then we'll- And- the bank reconciliation.

I suppose it's important to understand, don't throw the box away before you understand what's inside of the box.

That,

that's right.

Because an account may look wrong, but it could contain years of history or connect to another QuickBooks feature. So it's important to understand what's happening inside of that box before you just What's the saying, right? Don't throw the baby out with the bath water. Fun fact, I did find out where that saying comes from.

Back before we had indoor plumbing, oh, thank you for indoor plumbing, indoor showers- large families would have one essentially bucket of water that everyone would wash out of, and basically it would start the dad and everyone moved down in order from oldest to youngest. And so the last one to get washed would be the baby, but by the time- Yeah

the baby gets the water, it's pretty dark. It's pretty filthy, so you might throw out the baby- with the bath water. So-

Right...

don't throw out your QuickBooks before you've really looked at things.

I think it's pretty- Daunting for many owners because it stresses them out.

Yeah.

Somebody said to me the other day, "I'm nervous," when they started talking to me about working on their QuickBooks.

I says, "Oh, don't be nervous." I said, "We'll tackle this, and you're gonna be fine."

Just something new, right? And there's-

Yeah, don't be nervous...

there's nothing that you can't figure out. Everything is truly figureoutable. Right, yeah. I love Marie Forleo. I love how she says that. I love that book. Yeah. 'Cause that concept that you can figure- everything out is so true, and it's just about breaking things down into small bite sizes.

Just do a little bit at a time. Yeah. Before you'll know it, you'll understand it. Like this podcast, even for me, for the non-accountant who knows not a whole lot about QuickBooks, I have learned so much over this last year of just sitting here, just talking about these topics, looking at these different topics with inside of QuickBooks, in business, and all of this.

It has helped me tremendously, so I know if it's helping me, it's definitely helping you. So just bite size, take it one little bite size at a time. You know, here's another, another good pun. How do you eat an elephant? You eat him one bite at a time. So.

Mm-hmm.

Okay, so moving on. There's just so much to this, and we do have a training we are developing around the chart of accounts that's just gonna be so helpful for you.

But what's one simple review people can perform this afternoon, Papa, that would help them, to perform right now that would help them tremendously?

I think one thing that they could look at is their bank reconciliation. And quite frankly, while it could be a bit daunting, they would know what they might be up against.

If you take one account, just take a small account, maybe your credit card account, or maybe it's your bank account, and you haven't reconciled it for six months or seven months or a year, just take one month. Just take January.

Yeah.

And see what it looks like.

Yes.

And I think maybe even a step before that is they could just look at the process that they go through on invoicing- Mm

their customer and see that when that invoice comes in, where did it go? It's in accounts receivable. All right. And when the payment came in, where did it go? Did it go to the customer account? So what does your customer account look like? Right. Those are two very easy transactions because they're all, obviously, they're in accounts receivable in the balance sheet, but they're also, if you've invoiced, it's gonna be in your accounts receivable on your customer account.

So start to just feel comfortable with what your accounts receivable looks like.

That is so good. Such good insight. Papa, you always have such good insight. I do wanna present maybe these five steps that people could really tune in. So I think one of the first steps that people could do, just from what I've gleaned from you, is just run both your balance sheet and your profit and loss.

Start there, right? Mm. And then second, ask whether the major sections make sense. Look at the major... You know, I'm always talking about what are the three big rocks? If you took care of these three rocks, what little rocks, little problems is it gonna solve down the road, right? So then third, compare important balances with outside documents like bank statements, credit card statements, and loan statements.

Four Fourth, look for duplicate accounts, miscellaneous balances, vague account names, uncategorized activities, or accounts that don't seem to belong. If it looks like a bird, it probably shouldn't be in the pond, and if it looks like a fish, it probably shouldn't be in a tree. So, you know, you know your businesses, guys.

You know them. Act like it. Show up. You can figure this out. I believe in you. I'm always telling our almost 12-year-old, "I believe in you. You can do this. You can do this." And then finally You know, write down your questions before changing anything. You talk about this all the time. You've mentioned this in this episode, maybe just a couple minutes ago.

Get out your legal pad. Get out your yellow notebook, the journal that you write things down in. Write questions down. Write things down that aren't making sense. Sometimes just looking at it on, on paper, and there is this whole thing between your brain and your hand, right? So if you write something down, sometimes it's gonna click here up in your brain in a way that you couldn't just kind of glancing at it or just looking at it.

So love that. Love that. Good cleanup always starts with understanding. I think that is it, you know, getting at the root- Mm-hmm cause. You know, I really believe in root cause health. We were just talking about kind of some of your health stuff before we recorded, and where my brain goes is what is the root?

What's the root issue? Where are you at? So I think that's important to think about with your QuickBooks, what is the root? What's the root issue here? Because you get at the root and you solve the root, it's gonna make a massive difference inside of your QuickBooks all the way down. Love that. Okay, so today's episode gives everyone the framework, but working confidently inside QuickBooks is another step altogether.

So good. Okay, so before we wrap up, Papa, when should someone stop trying to figure it out themselves? When should they lean into the resources and the people that are around them that know what they're doing? When should they ask for help?

I guess it depends. If you think you're way over your head, then you need to start speaking with your trusted advisors, whether that's your accountant.

Mm. They may have some insight, although they may have been part of the problem. Mm-hmm. So again, if you are trying to sort out where you are, then you need to seek a trusted advisor. And what I find sometimes is sometimes people who have their own bookkeepers are not all that comfortable with QuickBooks.

They may have used some other software, or they may have been using Excel or... So th- they're not real familiar, so get someone who is QuickBooks certified, who's had experience, uh, maybe with your industry. Mm. Or definitely with understanding your business and who can bring solutions.

I suppose something to remember and to think about, the time to ask for help is before you make an important business decision using numbers you don't trust, right?

Mm-hmm. I guess that's something to really think about. Before you're going to really venture out into deeper waters or do something with your business you haven't done before and you wanna have a clear picture of where your business is and you wanna really make sure that you're really looking at numbers you trust, ask for help then.

It's really before you really need it is maybe- Mm-hmm the time to ask for that help. And the right person- Yeah isn't just someone who can enter transactions. They need to understand how QuickBooks works. How the accounting flows through the reports and how your business actually operates. So Papa, as we finish this two-part series, what's the one thing you want business owners to remember?

What I want them to remember is they have to take ownership. You're the owner. Mm-hmm. And don't delegate your responsibility to someone else. As painful as it might be, get the training yourself. And Erica, you've talked about training the kids, right? Yeah. See one, do one, teach one.

Yes.

So if you understand it, then you'll be very comfortable and be able to make better decisions around the whole process of starting from A and getting to Z.

Right. And that's one thing I love about you, Papa. It is really a I do, we do, you do. Mm-hmm. So it's slowing down. It's really getting help from someone who understands what they're doing, so seeing it modeled, and then taking that next step and doing it together so you're shoulder to shoulder. You're not doing it by yourself, and you're really starting to grasp and understand why...

Not just, it's not just click this button because you need to click this button. It's click this button because this is what this button is going to do. There's a deeper understanding there. And then when you're then sitting by yourself in your home office or in your office building or wherever you're sitting doing your QuickBooks And you're doing it by yourself.

You have that confidence that you know, you understand, you get it, but you still are not alone because if you need help, you're just a call away, and that is what it's all about, and th- this is why we are here for sure. Your chart of accounts is the foundation of QuickBooks. It does determine how every transaction is organized.

It determines where those transactions appear on your financial reports. Even if every dollar amount is correct, putting it in the wrong type of account can still produce misleading reports. Your chart of accounts shouldn't simply hold transactions. It should help your financial reports tell the truth about your business, and that is why we are here.

That is so good. Papa, do you have any final thoughts on this, on the topic of chart of accounts as we wrap up this two-part series?

Yeah, this morning I was out working on my tennis serve. Mm. And it occurs to me, I had tennis lessons years and years ago, and so I determined I want to work on my serve again, and it gets back to the basics- Mm

okay, to improve my serve. In the same way with the chart of accounts, get back to the basics, understand what goes into the chart of accounts, and begin to work on your serve. Feel good about... When you make a good serve in tennis, you feel it.

Yes,

absolutely. And, and you'll be hitting a home run when you feel comfortable with your chart of accounts because then you can move on to kind of leave that part of your business behind- Mm

and focus on more advanced work in QuickBooks, using the reports, growing, asking yourself, "How am I going to improve my operations? What can QuickBooks do to help me?" grow my business to a new level, for example.

And that's what it's all about. That is so good. So what a great way to wrap up this two-part series, Papa.

If there's one thing we hope you take away, it's this, your financial reports are only as reliable as the foundation they're built on. So here's your challenge this week, you guys, and I really hope you're up for the challenge and I hope you take this seriously. Run your profit and loss and your balance sheet.

Look at them side by side. Write down the accounts or balances that raise questions, but resist the temptation to start clicking buttons until you understand what you're looking at. Then, you guys, download our free QuickBooks Clarity Scorecard using the link in our show notes or on our website at leedavisoncompany. com.

It's a simple way to evaluate whether your QuickBooks file is giving you reliable financial information or whether there are areas that deserve a closer look. And if today's conversation made you realize you'd like to go deeper, we're developing Papa's complete chart of accounts training. That resource will walk you through QuickBooks screen by screen so you can understand not just what to do, but why you're doing it.

So stay tuned. That will be out very soon, and we will let you know when that is ready for you to consume and help you really move through your chart of accounts. And if you'd like to be notified when it's available, visit Lee Davis and Company or email us at support@leedavisoncompany. com.

So don't let your chart of accounts intimidate you, and take time, understand the accounts.

And frankly, this is the summertime, and lots of times people take a break.

True.

And, but understand that in the fall, you start to get a little more stressed because your numbers have to be right and accurate as tax time will approach.

Yeah. Yeah. So take some time now. If you take some time now, it's gonna save you in the future.

I always tell the kids, "Pick your hard." Inevitably, if you pick the other hard, it's always harder. Yes. So

just do it and do it now.

You know, you guys, if you found value in today's episode, we'd really appreciate it if you would subscribe to QuickBooks Mastery for Small Business Success. And if you know another business owner who could benefit from understanding the story behind their numbers, please share this episode with them.

Thank you so much for listening. We have so enjoyed this journey. We are on it with you guys, and we are gonna keep showing up and keep delivering content that truly helps you move the needle in your business. So thank you so much for spending part of your day with us. We'll see you next time on QuickBooks Mastery for Small Business Success.

Have a great week. Bye for now.

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