In this lesson, we’re going to cover how to customize advanced settings in QuickBooks Online. These settings affect what shows up on your financial reports, including your profit and loss statement, balance sheet, and cash flow statement. In addition, the advanced settings fine-tune your QuickBooks Online company account to capture all the information you need while making the process as simple as possible.
We’re pleased to provide you this tutorial for QuickBooks Online, our best overall pick for small business accounting software. You’ll get the most from this lesson by following along in your own QuickBooks account. If you don’t already subscribe to QuickBooks, you have the choice of a 30-day free trial or 50% off for three months.
This is one of our longer lessons but also one of the most important in our entire series of Free QuickBooks Tutorials. You can watch the video below or read the step-by-step instructions that include illustrations. The video was made with a slightly older version of QuickBooks Online. While the process of customizing your advanced settings in QuickBooks Online is essentially unchanged, the layout of the screens is slightly different. The step-by-step instructions are from the most current version of QuickBooks Online.
Why Advanced Company Settings in QuickBooks Are Important
Advanced company settings in QuickBooks Online provides options for your financial reports, including your profit and loss statement, balance sheet, and cash flow statement. If you do not set up this area, reports will use the default settings for your fiscal year, accounting method―like cash or accrual―and chart of accounts. If these default settings do not match your actual business information, it could result in incorrect financial reports and tax returns.
There are also advanced settings that determine whether many of the powerful tools included in QuickBooks Online will be available to your company. You can simplify your QuickBooks by turning off tools you don’t need, but you want to make sure you have all the tools available that will help you manage your company. Customizing your advanced settings requires weighing the trade-offs between simplicity and utilizing powerful tools within your QuickBooks company file.
While this is a long lesson, it is an extremely important one that you shouldn’t skip.
How to Customize Advanced Settings in QuickBooks Online
The advanced settings are located in your company account and settings. Click on the gear icon in the upper right corner the QuickBooks Online screen and select Account and settings under Your Company in the first column:
Then click on Advanced in the left menu to reveal six of the nine categories of advanced settings:
Scroll down to view the remaining three categories of advanced settings:
1. Select Your Accounting Method & Fiscal Year
Click anywhere in the accounting section to view the full range of options and edit the settings:
A. Fiscal and income tax year: Select the fiscal year and tax year for your business. Most businesses use the calendar year, January 1 through December 31, for both their fiscal and tax year. If you’re a new business, consult a tax professional before choosing a tax year other than the calendar year as there are restrictions on doing so.
B. Accounting method: You also need to set your default accounting method ― cash or accrual ― but you’ll still be able to select either method when printing reports. This is a powerful feature of QuickBooks since many small businesses use the cash method of accounting for their tax return and the accrual method of accounting for their internal reports. If you plan on generating customer invoices and inputting unpaid bills in QuickBooks, then I recommend you set your default accounting method to accrual.
C. Close the books: Closing the books is an important control feature for any bookkeeping system. It prevents inadvertent changes to prior accounting periods, which will cause an error in your beginning balance sheet for the current period. I recommend turning this feature on by entering the ending date of your prior fiscal year. You can select to either view a warning before making a prior-period change or requiring a password to make such a change.
Advanced tip: You should never modify or add transactions in a year for which a tax return has already been filed unless the change is so significant that you are willing to file an amended tax return. Otherwise, record the correction in the current year. You should consult your tax advisor to determine what type of changes justify an amended return.
2. Select Your Company Type
In the second section, you need to select how your company is organized for income tax purposes:
Choose one of the following types of entities from the drop-down box:
- Sole proprietor: A business with one owner that has not filed with a state to be a corporation is a sole proprietor. Also, limited liability companies (LLCs) with one owner report their business income on Schedule C of their Form 1040.
- Partnership: A business with two or more owners that has not filed with a state to be a corporation is a partnership. Partnerships report their business income on Form 1065.
- S corporation: A corporation or LLC that has made an election with the IRS to be treated as a small business corporation reports their business income on Form 1120S.
- C corporation: A corporation not electing to be treated as a small business corporation reports its business income on Form 1120.
- Limited liability: Choose this option if your business is an LLC, but you’re not sure if you will file taxes as a sole proprietor, partnership, or S corporation.
- Nonprofit organization: Nonprofit organizations are corporations that have received tax-exempt status from the IRS. They report their annual activity on Form 990.
If you don’t know how your business is organized, choose Not sure/Other/None. Click the green Save button to continue to the Chart of accounts section.
3. Customize Your Chart of Accounts
The chart of accounts is a list of accounts used to categorize business assets, liabilities, income, and expenses. QuickBooks provides you with a standard chart of accounts list based on the industry you selected when you created your company. We’ll cover how to add and remove accounts in a later lesson, How to Set Up the Chart of Accounts. For now, there are a few advance settings you can adjust to customize your chart of accounts:
A. Enable account numbers: Accountants often use account numbers to help organize their chart of accounts. For instance, all revenue accounts might begin with a four and expense account numbers might begin with a five. If you enable account numbers, you can choose whether to have them show on reports. Whether to use account numbers is a personal preference and can be changed later.
B. Shipping account: You can specify which of your income accounts you would like to use to track your shipping income. I recommend using the default account of “Shipping Income.”
C. Discount account: If you provide a discount to customers for early payments, you can specify which account to use to track the discounts.
D. Tips account: Tips collected are a current liability until you distribute them to your employees. You can specify which account to track unpaid tips. If you decide to use an account other than the default of Undistributed Tips, be sure the account you select is a current liability.
Tip: If your screen is missing the options for Shipping account, Discount account, or Tips account, it is because Shipping, Discount, or Tips (respectively) is turned Off in the sales form content settings as discussed in How to Set Up Invoices, Sales Receipts, and Estimates.
E. Markup income account: If you’ve chosen to markup expenses that are billed to customers in How to Set Up Expenses, you can choose which income account to track the markups.
F. Billable expense income account: In How to Set Up Expenses, you had the option to treat customer expense reimbursements as income or a reduction of expense. If you chose to treat them as income, this is where you specify an income account to track the billable expenses.
When you’re satisfied with your settings, click the green Save button and then click anywhere in the Categories section.
4. Create Categories to Allow for Detailed Reporting
A powerful feature of QuickBooks Online Plus and Advanced is the ability to track profit and loss by both classes and locations. For instance, a retailer can examine profit for a particular product (class) sold at a particular store (location). I highly recommend turning on both classes and locations:
A. Track classes: This feature adds a class field to all sales and expense forms to enable the reporting of income and expenses by department or product line. I recommend enabling the warning if a transaction isn’t assigned a class. Finally, I recommend assigning classes to each row of a transaction―rather than one class for the entire transaction―since some transactions will likely involve multiple classes.
B. Track locations: This option adds a location field to all sales and expense forms. The definition of what constitutes a location is very flexible. You can change the label on the location field to business, department, division, property, store, or territory.
Tip: You can add your classes and locations by clicking on the gear icon and selecting All lists in the second column. There is one list for locations and another for classes. Open each list, click the green New button, and type the name of the location or class.
5. Set Options for QuickBooks Online Automations
QuickBooks Online can make your bookkeeping faster by applying certain rules automatically. To turn automations on and off, click anywhere in the Automation section:
I recommend turning on each of these automations to evaluate whether or not it is helpful. You can return to this screen later easily and disable any automations you don’t like. These automations prefill a transaction, but any of the prefilled information can be changed before saving.
A. Prefill forms: This automation will prefill information based on the last form saved for that employee, vendor, or customer.
B. Apply credits automatically: QuickBooks will apply customer credits automatically to a newly created invoice. It’s good business practice to do so, and your customers will appreciate it.
C. Invoice unbilled activity automatically: I recommend setting this option to “Remind me to create invoices” vs allowing QuickBooks to generate an invoice automatically. Perhaps once you are proficient in QuickBooks and confident that unbilled activity should always be invoiced, you can change the setting to allow automatic invoices.
D. Apply bill payments automatically: As you’ll learn later, most expenses are first inputted as bills and then paid for with a special check referred to as a bill payment. This option will apply a bill payment to the oldest outstanding bill automatically.
6. Turn on Projects in QuickBooks Online
QuickBooks Plus and Advanced users can track all income and expense items by Project. This is especially helpful for contractors or other businesses that have multiple jobs for the same customer and want to track each job separately. Click anywhere in the Projects section to enable project tracking:
I highly recommend turning on projects to at least evaluate the feature. By turning this option on, there will be a “Projects” item in the left menu of your dashboard that you can explore.
Example: Paul typically works on multiple projects for a single customer. He would like to see all income and expenses during and after the project so he can determine if the project was profitable.
7. Set Time Tracking Options in QuickBooks Online
It’s important to track employee time in QuickBooks even if you don’t use QuickBooks to process your payroll. This is especially true if you bill customers according to time spent on a job. By tracking the details of the time spent by your employees, you can analyze expenses and profitability by class, location, customer, or project. Click anywhere in the Time tracking section to set the available options:
Employee time can be input through either weekly time sheets or single-time activity forms.
A. Add service field to time sheets: This option provides a field when inputting employee time via a weekly timesheet to designate the service from your list of products and services that the employee was performing. I recommend enabling this option as it provides valuable information to help manage your employees.
B. Make single-time activity billable to customers: This option must be activated to designate a time entry as billable on either a timesheet or single-time activity form.
C. Show billing rate to users entering time: You have the option to show the employee’s billing rate to whoever is inputting the hours.
D. First day of workweek: You can designate the first day of the week shown on weekly time sheets. This should match the first day of your weekly payroll periods, if applicable. If you don’t have weekly payroll, it’s a personal preference, but most people pick either Sunday or Monday.
Advanced tip: Employees and contractors can input their own hours by setting them up as a time-tracking only user as we explain in the lesson How to Set Up Multiple Users. If your company requires robust time management and reporting, such as professional service firms or contractors, I recommend adding Tsheets to your QuickBooks Online subscription.
8. Set Currency Options in QuickBooks Online
QuickBooks Online Essentials, Plus, and Advanced can record transactions in multiple currencies. Click anywhere in the Currency section to explore your options:
Click on the drop-down box next to Home Currency to select your currency. You cannot change this selection once multicurrency is turned on.
Turn on multicurrency only if you have customers or vendors that you deal with in a currency other than your home currency. Once turned on, multicurrency cannot be turned off, so I recommend learning more about multicurrency before making a decision. If you decide you need multicurrency, you must click the box next to Multicurrency as well as the box to confirm you understand it cannot be turned off.
9. Set Other Preferences in QuickBooks Online
Click anywhere in the Other Preferences to set your final group of advanced options:
A. Date & number format: Select your preferences for how dates and numbers appear by making selections from the drop-down boxes.
B. Customer label: Select how you would like customers referred to on your forms. For instance, professional service firms usually refer to customers as clients and hotels refer to customers as guests.
C. Warn if duplicate numbers: I recommend turning on the warning for whenever a check, bill, or journal entry number has already been used. A good accounting system should have a unique number for each transaction, and these warnings will alert you to potential problems. There may be circumstances where you want to use a number twice, which you will be allowed to do after acknowledging the warning.
D. Sign me out: You can choose to be signed out after one, two, or three hours of inactivity. I recommend choosing one hour unless your computer is in a secure area where nobody else has access.
You’ve now set all your advanced options in QuickBooks Online! The next lesson in our QuickBooks Online Training Course is How to Import Banking Transactions. That lesson will cover both how to connect a bank account to update transactions automatically and how to import transactions from a comma-separated values (CSV) file.