Your Independence Solution
844-884-3766
.
.

How Should We Structure Our Profit & Loss Accounts?

Profit and Loss Structure
The Account:Subaccount structure is incredibly powerful because it facilitates both high-level strategic planning and more frequent tactical decision-making.
One issue is how to group accounts. For example, in the construction industry, does it make more sense to have Labor be a parent account and Drywall and other types of labor be subaccounts? Or does it make sense to have Drywall be the parent account and Labor and other drywall expenses be subaccounts?
It depends how you think, how you make decisions
You can have the best of both worlds if you set up your file cleverly.
More about that second point: In general, I believe that it makes more sense to group items differently than the COA o you can have 2 different ways of looking at the data.
In systems like QuickBooks Desktop, QuickBooks Online, and Xero, you can create an account structure for Profit & Loss (a.k.a. Income Statement) one way, and create items mapped to those accounts with the opposite hierarchical structure.
A few pointers:
[1] Anytime you use a parent:substructure, never EVER use the parent. And in the case of items, make the “Description on sales transactions” and the “Description on purchase transactions” to pop up by default as “DO NOT USE; SELECT SUBITEM”
[2] If you’re going to allocate labor to drywall and other services, remember to also allocate payroll taxes, union costs, workers’ comp, and the like. It’s extra work, but this is a policy that can and will impact profitability. See my next point.
[3] One of the great ways to use this information is to roll it up and see the major areas in which a project is most and least profitable and make changes accordingly. The owner could adjust pricing, have better leverage in negotiations, decide where to subcontract and where to have in-house people handle it, even decide to specialize in areas that are most profitable and not deal with other areas but partner up with another company for those…or learn techniques that other companies are doing to be more profitable in certain areas.
[4] it’s still useful to group other items such as meals, permits, & travel. If everything is grouped, then you get extra insights upon rollup.
Leave a Reply

Contact Us

CFO and controller services for small and mid-sized businesses in Naples, FL as well as throughout the U.S.

www.tieroneservices.net

844-884-3766 | david@tieroneservices.net

Connect with Us

ZenDesk Chat