Some of you may not be aware of the Class and Location categories in QuickBooks Online (QBO). Many more may be aware of them and know they’re different but may not be completely clear on how they’re different or what to consider when you’re contemplating how (or if) to use them. Here’s some information on what they do, how they can be used, and some things you’ll want to consider as you decide how to use them.
Q: What are Classes and Locations?
Q: How are Class and Location different from one another?
A: In a nutshell, the Class field can be assigned to a transaction at a line item level1 (for example one line in an expense transaction), while the Location field (or other labels that the Location field can become by changing them in your settings) is only assigned at a transaction level (i.e. in the header section of an expense transaction). That Location is then automatically applied to all line items of a transaction.
Q: OK, fine, but how does that affect the accounting and reporting?
A: First a bit of background and an accounting 101 refresher. While most accountants are familiar with processing one side of most QBO transactions, such as assigning expense accounts on a bill or assigning products and services on a customer invoice, they may not stop to think about that being only one side of the accounting transaction that is ultimately generated. In the world of double-entry bookkeeping (debits and credits), though, that’s all it is. But all QBO transactions do have two sides to them, it’s just that in most cases the second side happens behind the scenes. Take a customer invoice for example. In QBO when you create an invoice, you select a product or service that you’ve sold to your customer. That’s revenue, of course (there are some things going on behind the scenes there, too, but let’s save that for another day). But the other side of the transaction automatically gets recorded to the Accounts Receivable account. You can see that when you look at a Transaction Journal for the transaction. If you have Classes and Locations enabled, then the revenue gets attached to a Class and a Location (assuming you select them when you’re processing), but the Accounts Receivable account is automatically assigned only to the Location that you’ve selected in the header – it doesn’t get a Class assigned. For that reason, when you’re thinking about how you want to use those fields you’ll need to know if seeing them on a balance sheet is important. If you ever want to do full financial statements (Balance Sheet and Income Statement) for a portion of your Company, you’ll probably want to use the Location category to organize that portion.
Q: Can you give me a real world example?
A: Sure, let’s take Real Estate. Let’s say you own multiple commercial properties and want to have a balance sheet and income statement for each property because you want to see not only your revenue and operating expenses for each property, but also your capital expenditures, accounts receivable, accounts payable, etc. In that scenario you’ll probably want to set up your properties by assigning them each a unique Location, not a unique Class. If you do that and assign all your transactions to the correct Location (in this case your Property), you’ll be able to get a balance sheet AND profit and loss statement for each of your properties. Not everything works perfectly even with Locations, though, so you’ll need to keep some things in mind to make sure you get a clean, balanced balance sheet by property.
Q: OK, so what doesn’t work perfectly with Locations?
A: I’m glad you asked. Cash transactions, such as transfers and bank deposits, seem to create the most problems. For some reason the “Transfer” transaction doesn’t even include a place for Location (or Class for that matter), so if you use Transfer transactions for any banking activity you’ll always have some cleanup to do to get the cash assigned to the correct location. “Bank Deposit” transactions have a similar quirk. You can force a bank deposit to post to the correct Location if you apply the filter “Show payments for this location:” to a single location in the Bank Deposit screen, but if you can’t do that or just don’t, the cash will not be applied to a specific Location.