Time to get to know a little bit more about a topic at the foundation of your business’ finances: the Chart of Accounts (CoA). What is it? Why is it such a big deal? Lastly, what are some tips to get the best out of your business’ CoA? I will answer all of these questions, as well as provide you with a free Chart of Accounts Reference Guide to adapt and adjust to fit your business needs.
What is the Chart of Accounts?
The Chart of Accounts is a list of all the accounts a company uses to record transactions to its General Ledger. Your company can tailor this list as it sees fit to best suit its needs.
A Chart of Accounts offers the ability to assign each business transaction to a particular category so you can see exactly where your company is making and spending money.
I like to think of these accounts as “folders”. When you define a business transaction as an expense or income, you must assign it to the correct expense or income “folder.” As property or cash moves in and out of the business, it too must be moved to (and from) the appropriate “folder.”
Why is the Chart of Accounts important?
The Chart of Accounts helps you organize how your business is making and spending money. Knowing which avenues of income are performing better allows you to make smarter business decisions about all of your revenue streams. Realizing where your money is being spent, gives you insight into where you could save or better allocate your funds. The more organized and accurate your Chart of Accounts is, the better equipped you will be to make sound business decisions.
What are some tips for Chart of Account success?
Most accounting software comes with a standard Chart of Accounts. Customize these to fit your business needs. No business is exactly the same. While businesses will have some of the same accounts in their CoA, there will be differences.
Be detailed yet concise when naming your accounts. There should be no guesswork behind which “folder” you should put a business purchase into. Simultaneously, you should not be so detailed that every purchase has its own “folder”.
Make sure to have good definitions as to which account is used for what. This should be clear to anyone who is involved in categorizing transactions in your business books. Your bookkeeper should be on the same page defining any transaction.
Be consistent. The point of the Chart of Accounts is to make sound business decisions and to accurately see where your money is coming and going. The only way you can be accurate is to stick to your definitions.
Some Basic Terminology…
Now, before I give you the basic Chart of Accounts example, let’s take a look at each different type of account that will find its way into your business books. For simplicity, I broke them into categories according to the financial report in which they will appear.
Balance Sheet Accounts
- Assets - These track the resources your business owns. This includes cash (both on hand and in the bank), land, equipment, inventory, or even trademarks and software.
- Liabilities - This is debt your company owes. Most of the time you will see “payable” in the account name. Notes payable, wages payable, accounts payable, etc.
- Equity - This is the owner’s stake in the company. Typical small businesses will see Owner Contribution (money or assets the owner gives to the business) and Owner Draw (money or assets the owner received from the company).
Income Statement Accounts
- Income (Revenue) - These accounts show how the business generates income. You will see accounts like Retails Sales Income, Service Income, etc.
- Expenses - These are costs that have been used by the companies as part of its main operating activity. Utilities, Telephone, Rent, etc. all fit under this category.
- Other Income (Revenue) - This is income outside normal operations of the business. Dividends Earned, Interest Earned, Credit Card Cash Rewards, etc.
- Other Expenses - These are costs the company used outside normal business operations. Home office expenses, Loss on Sale of an asset.
Each of these categories will have sub-categories. This is where being clear, concise, and consistent is key. You want to make sure your Chart of Accounts is accurate and detailed but also ensure it is not exhausting.
The big giveaway!
Here it is! The moment you’ve been waiting for: your free Chart of Accounts Reference Guide. This PDF is a great foundational tool for organizing and understanding your finances. Keep in mind, your business’ CoA will likely grow and change over time to perfectly fit your company needs.
Please note, next to each account title, I defined how to increase the balance of the account. You will also see a definition of what type of transaction would be assigned to this “folder.”
Feel free to name accounts as you see fit. You can add and remove accounts for relevancy. However, as you do so, set guidelines as to what should be assigned to each account.
Click Here —> Free Download: Chart of Accounts Reference Guide PDF
Important message!
There is one last important piece of info I would like to share in regards to bookkeeping and the use of your Chart of Accounts. In order for books to stay balanced, there should always be at least 2 accounts from the CoA affected with every business transaction: something leaving the business and something coming into the business. Here’s an example:
Let’s say you purchase some business cards for $50 out of your business bank account.
You know that two accounts must show the transaction for your books to be balanced. One for the money leaving the business and one for the business taking on an expense.
The two accounts affected would be “Advertising/Marketing Expense” and “Bank”. Advertising/Marketing Expense goes up $50, Bank goes down $50.
It’s just that easy!
Parting words.
So there you have it folks, your business’ Chart of Accounts explained. I encourage you to analyze your business transactions. From there, create expense and income categories that will allow you to accurately track your finances. Use the free Chart of Accounts Reference Guide provided as a jump-off point and make it your own. Once you have these areas defined, you will be better equipped to budget your business expense allocation, set more accurate and achievable income goals, and have an overall better understanding of the health of your business.
If you’re not quite ready to tackle your books on your own or need some help with your existing books, feel free to reach out or schedule a free consult. I’d be glad to assist.