A Quick Guide for Your Clients on Accounts and Sub-accounts

Rachel Blakely-Gray
Posted by Rachel Blakely-Gray on Dec 16, 2021 8:49:59 AM

For a large portion of the population, accounting is hard. You’ve got transactions to track, accounts to separate transactions into, and—to make recordkeeping a bit easier—sub-accounts that nest under the types of accounts in accounting.

For clients who aren’t familiar with sub-accounts, this brief guide (and using cloud accounting, which we’ll get into) can help.

What are accounts and sub-accounts?

In accounting, there are five main types of accounts in a Chart of Accounts (COA) and general ledger. Businesses record each transaction under the corresponding account to track financial activity and get account totals. By categorizing transactions into accounts, businesses can craft financial statements, create more accurate budgets, apply for funding, and more.

So, where do sub-accounts come into play? For a more detailed view of COA, a business can further categorize transactions into sub-accounts. Sub-accounts are accounts that nest under main accounts. Businesses can use sub-accounts to group transactions into more detailed categories for tidier, more understandable books.

The five types of accounts include:

  • Asset
  • Expense
  • Liability
  • Equity
  • Income (revenue)

Read on for a look at the five types of accounts and what each does.

Asset

Assets are physical and non-physical property that adds value to a business. Asset accounts track the money a company deposits and withdraws from bank or cash accounts.

General asset accounts include Checking, Savings, and Petty Cash.

Expense

An expense is a cost that a business incurs while operating. These accounts track outgoing money.

Expense accounts include cost of goods sold (COGS), advertising, insurance, and payroll.

Liability

A liability is an incurred—but not yet paid—expense. Liability accounts track the debts and obligations a business owes to other individuals or businesses.

Common liability accounts include accounts payable, sales tax collected, and payroll tax liability.

Equity

Equity shows how much a business is worth by finding the difference between a business’s assets and liabilities. These accounts track owner investment and withdrawals, along with net income or loss.

Equity accounts include owner’s equity and retained earnings.

Income

Income (revenue) is the money that a business receives. These accounts track incoming money.

Common income accounts include product sales and service revenue.

Sub-accounts example

To see sub-accounts in action, let’s take a look at an Expense account example.

Expense sub-accounts show a business exactly how much they’re spending on each group of expenses, like insurance, payroll, and cost of goods sold.

For example, your client might have multiple insurance policies they pay for each month. They can use sub-accounts to group each policy under the Insurance category. Here’s how it would look:

Insurance sub-accounts:

  • General liability insurance
  • Business interruption insurance
  • Errors and omissions insurance

Likewise, your client can use sub-accounts to group each type of utility expense under Utilities.

Utility sub-accounts:

  • Gas
  • Electric
  • WiFi
  • Phone
  • Water
  • Sewer

Without sub-accounts

What would your client’s books look like without these sub-accounts? A pretty disorganized mess that doesn’t give as clear a picture of where they’re spending their money.

For example, a general ledger without sub-accounts would include the following as Expense accounts without order:

  • Gas
  • General liability insurance
  • Electric
  • WiFi
  • Business interruption insurance
  • Phone
  • Water
  • Sewer
  • Errors and omissions insurance

With sub-accounts

Through sub-accounts, you and your clients can avoid having each type of insurance (e.g., general liability) and each type of utility (e.g., water) freely floating around under the Expense main account.

For example, a general ledger with sub-accounts would group the following as Expense accounts, nested under the applicable parent account:

  • Insurance
    • General liability insurance
    • Business interruption insurance
    • Errors and omissions insurance
  • Utilities
    • Gas
    • Electric
    • WiFi
    • Phone
    • Water
    • Sewer

Through this type of setup, you and your clients can have a clearer picture of their financial activity.

Using sub-accounts in cloud accounting

Manually setting up a Chart of Accounts—complete with the necessary accounts and sub-accounts—can be time-consuming and confusing. For a streamlined process, turn to cloud accounting software.

Some cloud accounting software programs make it easier for users to set up a COA by automatically adding commonly used accounts. And in some accounting software systems, like Patriot Software, users can add and manage sub-accounts with ease.

Keep in mind that there may be limitations to how many levels of sub-accounts a user can add per account type, as well as other restrictions related to using sub-accounts.

Thinking about partnering with an accounting software company to bring your clients an easier way to manage their day-to-day transactions? First find out what kind of functions the software has, like the ability to add sub-accounts.

Topics: Cloud Accounting


 

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