The account type of each account has to be correctly specified when you create it. QuickBooks uses the account type to form financial report; below is a sample structure of a Profit & Loss report.
Sales
Less: Cost of Goods Sold
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Gross Profit
Less: Expenses
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Net Ordinary Income
Add: Other Income
Less: Other Expenses
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Net Income
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The presentation of the report gets affected when a wrong account type used. For example, Transport allowance will group with Cost of Sales if you created it as a Cost of Goods Sold account type instead of Expenses; hence, affecting the Gross Profit. QuickBooks does allow the user to edit the wrongly created account type such as from Cost of Goods Sold to an Expenses account type but not from a Bank type to an Expense. You may have to pass journals to rectify the transactions when a mistake made on a non-editable account.
You get a “You cannot change the type of a subaccount. It must be the same type as its parent account” warning message if you try to amend an account type of a subaccount. For example, Transport Allowance has accidentally created under Purchases (which is a cost of goods sold account), to change the type to an Expenses you need to remove Transport Allowance as a subaccount of Purchases first, then change the account type. You should not change the account type if it affects the previous year or prior month’s financial report which you have already filed; instead, you may consider reclassifying the account with a journal.
Traceability and accountability should be the priority before consider making any amendment to the account.
