the frustrating things is how few people are using the
Class function in
QuickBooks. Just in the past few weeks, I've received several QB files from
clients who didn't use it. This obviously makes my job of preparing tax returns
much more difficult. More important, it also makes it much more difficult for
the clients to monitor how each of their businesses is doing during the year,
which is actually in many ways more important than looking back at the previous
A Class should be set up for each business schedule plus one for Personal
things. For rental properties, there should be a separate class for each
property, coinciding with each column on Schedule E. When you have QB prepare a
profit and loss statement, select that the columns are by Class. This will give
you great side by side P&Ls for each schedule. If an entry for an income or
expense items was not assigned a Class, it will show up in the "Unclassified"
column on the right side of the page. Books aren't ready for use until that
Using classes also allows you to have a lot fewer income and expense accounts,
keeping the chart of accounts from getting too large. For example, someone who
has ten rental properties plus a home will only need one "Property Tax" expense
account. Each payment would then be assigned the Class for the appropriate
property and would show up in the proper column, ready to go onto the relevant
schedule. Same thing for income accounts, such as Rents.
When classes are used, it also gives me a better sense of confidence that each
item has been reviewed for deductibility. On their face, it's not readily
apparent whether or not some expenses are for business or for personal things.
As I said, I work with
P&Ls that have their columns by Class. I don't like it when the next to last
column has a lot of "Unclassified." While many people think this is okay to
just leave the nondeductible items with no class, that's not how it looks to
me. I can't tell if the clients have intentionally left the class off as being
irrelevant or if they just forgot to enter one. That's why I like to see every
income and expense item entered with a class. Ideally, there will be nothing
showing up in the "Unclassified" column.
Using classes also makes it possible to
account for several businesses in one QB company file. The way I like to see
things set up is that a QB company file matches up with everything on a tax
return. The corporate file has everything on the 1120. The personal file has
everything, including all of the various businesses that are part of the 1040.
I do have several clients doing things very inefficiently, with a separate QB
data file for each business. One has something like 21 different files. This
makes working on the 1040 extremely time consuming because only one company file
can be open at a time. If they were combined into one file, with classes to
designate the various businesses, it would save a huge amount of time for the
clients doing the daily bookkeeping, as well as for me doing the tax return.
For corporations, partnerships and trusts,
there should not be a class set up called "Personal"
as there is with the 1040 QB file. It is important that the net profit or
loss on the QB matches exactly with the net reported on the 1120, 1065 or 1041.
Since personal expenses paid for the owner are not deductible, those should be
posted to the account that was set up for the amount owed between the
corporation and the owner. I usually use a liability account called "Loans
From Shareholders" to reflect money loaned by the owner to the corp, as well as
repayments. It is generally increased for corp expenses paid from the
owner's personal funds and decreased for personal expenses paid by the corp on
behalf of the owner.
I like to use classes
in QuickBooks in such a way as they tie into the various schedules on the
related tax returns.
For corporations (1120), there aren't as many different schedules as there are
on individual returns (1040). Investing and business activities all end
up directly on the 1120 without having to be shown on preliminary schedules; so
there is no need to worry about using different classes for these kinds of
Classes are needed for corporations when there are rental properties and farm
activities because there are special schedules for those.
It's not possible to
run a balance sheet by class; so those entries normally don't need to include a
class. One exception is for fixed assets. If you enter a class to coincide
with what business schedule an asset relates to, or if it is personal, it makes
it much easier for me to enter those items into the tax return depreciation
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This page was last updated:
Sunday, January 29, 2012