The basic difference
A class marks a business segment, such as consulting, product sales or a particular program. A location marks where something happened, such as a store, a city, or a property. A transaction can carry one of each, so you can ask how much a certain service earned at a particular location. These features may depend on your plan, so check what is included.
Turn them on and choose a method
In the Account and settings area, open Advanced, then Categories, and enable tracking of classes and locations. You can choose to assign a class to each transaction or to each line, and ask QuickBooks to warn you when one is missing. Per-line tracking is more flexible for bills that serve several segments, but it requires more care.
Design the list before you use it
Keep the list short. Five to ten classes is typical. Use names that people recognize and avoid overlapping meanings. Sub-classes can group related items, but too many levels make reports unwieldy. Write down the rule for each class, such as All wedding photography revenue and direct costs. That rule is what a bookkeeper will follow when you are not around.
Reports that use them
The profit and loss by class report shows income and expenses for each class in columns. The same exists for location. Run it with a total column to confirm that all the amounts add to the usual profit and loss. If the unspecified column is large, many transactions have no class. Fix those first, since a report with big unassigned amounts misleads.
Common problems
Balance sheet items are not assigned to classes in the same way as income and expenses, so do not expect asset balances by class. Overhead costs like rent are not tied to one class, so decide whether to allocate them using a percentage or leave them as unallocated overhead. Bank rules and recurring transactions can carry the class automatically, which prevents gaps. Journal entries can allocate shared costs at month end. If you find you have outgrown classes, projects or separate companies may fit better, but changing later means cleaning history, so decide carefully now.
Allocating shared costs with a journal entry
If rent should be shared among three classes, many businesses make a monthly journal entry that moves a percentage from one class to the others. Use a consistent basis, such as revenue share or square footage, and document it. A recurring journal entry can handle the repetition. Review the percentages once a year, since the business mix changes.
This keeps class reports honest without forcing someone to split every bill by hand.
Worked example with numbers
A shop earns $30,000 from repairs and $12,000 from retail in a month. Tag each invoice with a class, repairs or retail. Rent of $3,000 is shared. Split it by revenue share: repairs are 30,000 / 42,000 = about 71%, so repairs carry roughly $2,143 and retail $857. A simple 70/30 split gives $2,100 and $900.
Record the split with a journal entry that credits rent and debits rent again with each class, so total rent stays $3,000 while each class shows its share.
Check your work
Run profit and loss by class. The class columns plus the unassigned column must equal the company total.
Common questions
Can I add classes to old transactions?
Yes, by editing them or using the batch edit options where available, but check your plan and take care with locked periods.
Should a small business use both?
Only if you have a real need for both views. One is often enough.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.