Welcome back! We’re continuing our discussion on your business’ Chart of Accounts.
Last week we discussed how to utilize your Chart of Account through the use of income accounts. Today, we’re going to discuss your expense accounts.
Continuing on last week’s example, let’s say you have two herds of cows of equal size. You decide to use two different weaning strategies for each herd and want to determine which method is more profitable. We’ve been through the strategy of differentiating them in your income accounts, and now we want to determine what the expenses for each herd are.
For the most part, these two herds are treated equally. The same feed program, vaccination program and grazing protocols. The only difference is at weaning time, you put a little more input into one herd in the form of supplies and labor. Considering your hired man is paid on a salary, we won’t figure the labor into the actual expenses of the weaning program. Don’t get me wrong, some might consider the more labor intensive protocol a poor fit because of the availability of labor, time, etc. We’re purely looking at profit in this example. Management decisions can be very complicated, so this is just ONE way to break down your protocols and help with decision-making.
So let’s say your normal weaning program takes absolutely no additional supplies. You won’t need to add any transactions to its own account. Your experimental weaning protocol, on the other hand, does require additional supplies. You should create an additional account on your chart of accounts to categorize the transactions. It will look something like Supplies:Weaning Program X. When you run a Profit & Loss Report, you can clearly see what your input into the special weaning program was and if it actually made you more money compared to the other program.
While we’re on this subject, I find it helpful to break your supplies down into other categories as well. You might have one that’s Supplies:Misc Ranch Supplies for anything that doesn’t fit in your other categories. Often times, a Supplies:Fencing account is helpful as well (and should only be used for fencing maintenance, as any new fencing built is a capital improvement and should be categorized as such). Basically anything that is supplies for the ranch that’s not auto expenses or feed, can go into your supplies accounts and you might want to separate it for your management decisions.
You can use this for your vehicle expenses as well. For instance Vehicle Expenses: Truck A, Vehicle Expenses: Truck B. And accordingly, you could break down your fuel expenses by vehicle or equipment as well. So your base account might be: Fuel & Oil. Then you could have several sub-accounts such as: Fuel & Oil: Oil, Fuel & Oil:Fuel:Truck A, Fuel & Oil:Fuel:Tractor A or something similar. You can separate diesel fuel and gasoline, dyed diesel and regular diesel. It all depends on what you need to see in your reports.
Keep in mind if you want your chart of accounts to serve your operation, you need to follow through with this concept. If you intend on utilizing sub-accounts, you will need to ensure that your transactions are categorized to the lowest level of the sub-accounts. If you have a transaction that doesn’t fit into a lowest level sub-account, then create one that does. These are best practices that will keep your accounting file clean and easy to use.
As always, include any comments or questions below. I love to hear your input!
We will continue with this series next week and I have plans to cover QuickBooks Classes in the future as well. Classes are helpful when you have multiple types of operations and need to separate multiple income and expense accounts.
If you aren’t even sure what changes to make or where to start, that’s where your bookkeeper comes in. If you don’t have a good bookkeeper, give me a shout! I’d love to offer you a free no-obligation bookkeeping consultation.
Thanks again for stopping by. Happy bookkeeping!
-Michelle