It’s that little box below the new account you just entered. The box is labeled ‘subaccount of’ and gives you the opportunity to create a more organized chart of accounts. Hardly anyone ever uses it though. When is a good time to use it? This article will address that issue.
On Fixed Assets
The creation of a fixed asset account involves sometimes as many as five different accounts for the same item. Using a vehicle as an example we will look at what subaccounts to create. First, create an account for the vehicle; it is a fixed asset so name the first one Vehicle Value as your main account.
Next create a subaccount under that main one and call it ‘Vehicle Cost’, the beginning balance of that account will be the amount you paid for the vehicle, not counting any deposit or trade in amounts. Let’s say it’s a $20,000 vehicle that would be the balance on the ‘vehicle cost’ subaccount.
Next, create a subaccount under ‘vehicle value’ and name it ‘Accumulated Depreciation – Vehicle’ (you may have to abbreviate). The beginning balance on this will be zero in the first year but it is recorded in the negative. So after the first year, there will be a – $5000 in this subaccount. When you subtract the cost from the accumulated depreciation, the vehicle value is now at $15000. In order to record this negative amount you need an expense account to take it from. Create a subaccount of Depreciation Expense and call it ‘Vehicle’ any subsequent fixed assets with depreciation expenses will be subaccounts under the Depreciation Expense category with the total of all of them showing on the main Depreciation Expense category.
Most companies though don’t pay cash for a vehicle so they use financing. To do this you need to create a Long Term Liability account for the vehicle in which the opening balance is the amount of the loan used to purchase the vehicle. This amount could differ from the value in that the value doesn’t take these deposits or trade ins into account.
Create a subaccount under Long term liability; name it ‘vehicle loan’. Create yet another subaccount under Interest expense and name it ‘Vehicle Interest’. When you receive the first bill, the monthly payment amount should be divided between the ‘vehicle interest’ and the ‘vehicle loan’ categories. Assigning the total payment to the loan will result in QuickBooks showing a debt that is paid off that hasn’t been.
If there is more than one vehicle, it is good to have a separate expense category for each one so you can have an accurate picture of what you are spending on each vehicle. Under the Auto Maintenance account, create the subaccount ‘Fuel – vehicle 1’ and ‘Maintenance – vehicle 1’ (As well as vehicle interest 1, vehicle loan 1, etc.)
Other Expense Accounts
There is a general catch all category called ‘utilities’. Create subaccounts for ‘telephone’, ‘water’, ‘power’ etc and make ‘utilities’ the parent category. This will help you break down individual utilities to more carefully manage your spending.
If your business has a two or three pronged revenue stream, you may want to create separate subaccounts under sales income. For example, a lawn maintenance company may have income from simple lawn maintenance, sprinkler installations, pest control, etc. A separate subaccount for each will help you with this situation. With only one account for revenue, it makes it difficult to decide if you need to focus on the most profitable aspects of your business.
A word of caution about using subaccounts. If you didn’t start out using them and you have several years’ worth of income and expenses that are tied to what would be parent accounts, you would need to back track and assign each of those to the new subaccounts. This is why it is important to get those accounts right from the beginning and have some help installing your QuickBooks software.