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QuickBooks Subaccount Rules

How to Use QuickBooks Bank Subaccounts Properly

We receive many questions from readers who are trying to figure out how to interpret the numbers they see on QuickBooks reports when they’ve created subaccounts. They complain that the arithmetic doesn’t make sense, the reports are confusing, and nothing seems to be working properly. Most of the questions involve subaccounts of bank accounts, but the problems and solutions are the same no matter what type of account you want to track with subaccounts. There are rules to follow when you create and use subaccounts, and we’ll explain them in this article.

When to Use Subaccounts

Create subaccounts in QuickBooks when you want to track transactions by a subcategory of a general ledger account.

For example, you have accounts for payroll liabilities and payroll expenses whether you do payroll in-house or have a payroll service. However, you can create subaccounts for each payroll liability and each payroll expense in order to track the individual liabilities and expenses in QuickBooks. These totals can be handy if you have to answer questions from a government agency about your remittances.

It’s common for businesses to track categories via QuickBooks subaccounts for the Insurance Expense account (vehicle, liability, workers compensation, etc.), the Interest Expense account (loan interest, mortgage interest, credit card interest, etc.), and the Utilities Expense account (heat, electric, etc.). This makes it much easier to see subtotals if there’s a question about these expenses.

For proprietorships and partnerships (including LLCs), it’s a good idea to have a parent account for owner or partner capital and then create subaccounts for contributions and draws. You can see at a glance what the totals are for each type of transaction, which is better than looking at a net amount and then having to run QuickBooks reports to see the ins-and-outs of your equity transactions.

QuickBooks subaccounts of bank accounts make it easier to separate funds that require special treatment from funds that are available for day-to-day operations. For example, if you have a professional office that collects retainers from clients, or a business that requires up-front deposits from customers, those funds shouldn’t be used for general operating expenses until you earn them. The solution is to use subaccounts to separate operating funds from customer/client funds.

Never Post to the Parent Account

When you have subaccounts in QuickBooks you only post transactions to the subaccounts; you never post any transaction to the parent account. Think about the meaning of that statement, because it means there’s an inherent rule you must obey:

You can never create just one subaccount!!

Because of the rule forbidding you to post to the parent account, you have to create a subaccount for the category you thought you’d leave in the parent account.

Funding Bank Subaccounts

If the parent bank account already exists and has transactions, you have to create the subaccounts and then move funds out of the parent account into the appropriate subaccounts.

 For example, let’s say you decide to separate retainer funds from operating funds in your bank account to avoid spending down into retainer funds. (You don’t need to open a separate bank account for retainers; that rule only applies to escrow accounts.)

You must create two subaccounts under the QuickBooks parent account: A subaccount for operating funds and a subaccount for retainers. The operating funds subaccount assumes the same role as a single bank account—it holds your operating funds. The retainer subaccount is where you deposit retainer fees, and then move the appropriate amounts to the operating subaccount as the retainers are earned and turned into income.

QuickBooks NOTE: I’m assuming you set up a liability account for retainers or customer deposits as well as a QuickBooks Item that points to the liability account.

You must know the total amount you’re holding as retainer funds in your bank account. Technically, the amount you’re holding as retainer funds is the current amount in the liability account you created for retainer funds. However, not all QuickBooks users do this properly; sometimes these records are kept outside of QuickBooks, in spreadsheets or on paper, instead of posting money received to a liability account. (Those users have higher accounting bills than users who follow good bookkeeping practices.)

When you have the total, you’re ready to begin transferring money to your QuickBooks subaccounts. Create a journal entry to transfer the funds by choosing Company | Make General Journal Entries. In the Make General Journal Entries transaction window, credit (remove) the entire current balance of the parent bank account, and debit (add) the appropriate amounts for each subaccount.

QuickBooks NOTE: Remember that this is a virtual exercise; the money is in your real bank account even though you are emptying that bank account of funds in order to fund the subaccounts.

If you created more than two subaccounts because there are additional categories of funds you want to track, add those subaccounts and their balances to the journal entry.

Make General Journal Entries

Hereafter when you open the QuickBooks chart of accounts window, the balance displayed for the main bank account is the total of the balances in the subaccounts. The Balance Sheet (and reports on the bank account) display the balances of the subaccounts and the total for the parent account.

  • If the total displayed for the parent account is not equal to the total of all subaccounts, you used the parent account for a transaction. Find the transaction and change the bank account to the appropriate subaccount.
  • If reports on the parent account list a subaccount named Other in addition to listing the subaccounts you created, you used the parent account for a transaction. Find the transaction and change the bank account to the appropriate subaccount.

Depositing Transaction Funds into Subaccounts

Your QuickBooks company file configuration should specify the Undeposited Funds account as the default depository of monies. This means when you create transactions for received funds (customer payments of invoices, or cash receipts), the money is deposited into the Undeposited Funds account.

To deposit the funds in the bank use the Make Deposits feature. This is the best way to manage bank deposits; because it matches the way your bank statement reports deposits.

However, if you’re using subaccounts you have to separate regular income from retainer income so the monies are deposited into the appropriate subaccount. First, select all the regular income and deposit that in the operating funds subaccount. Then select all the retainer receipts, and deposit them in the retainer funds subaccount.

Often, this isn’t an easy task, because you can’t tell which income is for regular earned income, and which is for retainer payments. The QuickBooks Payments to Deposit transaction window doesn’t provide any clues about which receipts are for retainers, and which are for regular income.

The way to resolve this dilemma is to come up with a solution that announces itself in the Payments to Deposit window. Using the Memo field in a customer payment transaction window doesn’t work, because memo text isn’t displayed in this window.

Solve this problem with a new QuickBooks payment method, named Retainer, which you create using the following steps:

  1. Choose Lists | Customer & Vendor Profile Lists | Payment Method List from the QuickBooks menu bar.
  2. Press Ctrl-N to open the New Payment Method dialog.
  3. Name the new payment method Retainer.
  4. Select the Payment Type Other.
  5. Click OK to save the new payment method.

When retainers arrive, either as a payment against an invoice you sent for retainer funds, or as a sales receipt for retainer funds that arrived without an invoice, be sure the transaction window is marked with the Retainer payment type.

When you use the new Retainer payment method in QuickBooks transactions, the Payments to Deposit window is much easier to work with because the retainers are clearly discernible.

Depositing the receipts in the proper accounts requires the following steps:

  1. Select all the Retainer payments you deposited into the bank and click OK.
  2. In the Make Deposits window select the Retainer Funds bank subaccount.
  3. Select the date on which you took the receipts to the bank.
  4. Click Save & New to return to the QuickBooks Payments to Deposit window.
  5. Click Select All to select the remaining (non retainer) receipts.
  6. Click OK.
  7. In the Make Deposits window select the Operating Funds bank subaccount.
  8. Click Save & Close.

You can automate the way you select payment types in the QuickBooks Payments to Deposit window, which is important in either of the following scenarios:

  • You have a very large list of receipts in the window and you don’t want to click off the retainer methods one at a time.
  • You have other types of payment methods that have to be deposited separately (such as credit card payments which your bank handles separately on your statement).

To deposit different payment types in groups, use the following steps:

  1. Click the arrow next to the View Payment Method Type field at the top of the Payments to Deposit window, and choose Selected Types from the drop-down list.
  2. In the Selected Types dialog, choose Other.
  3. Click OK to return to the Payments to Deposit window, where only your retainer payments are displayed.
  4. Select the retainer deposits you took to the bank and then click OK to open the QuickBooks Make Deposits window.
  5. Select the Retainer bank subaccount, and click Save & New to return to the Payments to Deposit window.
  6. Deposit the remaining funds to the operating funds subaccount.
  7. Click Save & Close.

Writing Checks from Subaccounts

When you create payments, be sure to select the appropriate subaccount in the Bank Account field of the transaction window. If you’re entering a payment directly into the register, be sure to select the right QuickBooks subaccount. Usually, it’s the operating funds subaccount that’s used for payments, but the nature of your subaccount category (not retainers or another liability) may permit you to send payments directly from the appropriate subaccount.

Transferring Funds Between Subaccounts

When you invoice a retainer client you apply the retainer (or part of the retainer) to the invoice. At that point you’ve earned the money and can use it. If your subaccount(s) are tracking something other than retainers, when those funds become “spendable”, that means the same thing: The funds are available for general operating costs.

To move funds from one QuickBooks subaccount to another, choose the Transfer Funds command from the Banking Menu and move the funds FROM the special subaccount TO the operating funds subaccount.

Reconciling Bank Accounts that have Subaccounts

When you reconcile the bank account, you’re reconciling the parent account. Because your subaccounts are virtual bank accounts, instead of real separate bank accounts, the parent account actually maintains all the activity in the bank register.

Select the QuickBooks parent account for reconciliation, not a subaccount. After you fill out the Begin Reconciliation dialog and click Continue, the Bank Reconciliation window displays all the transactions for both accounts. In fact, the parent account doesn’t pay any attention at all to the fact that there are subaccounts; this is just a regular bank reconciliation and no transaction shows any indication of being located in a subaccount.

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