If you’re new to the business owner world, there are probably a million new terms being thrown at you at once. The accounting side of the business may raise the most questions and might be a little intimidating at first but learning this side of your business can offer a better understanding of the health of your business’s finances. While I wish I could give you all the answers and definitions in 1000 words or less, let’s start with a basic: the chart of accounts.
So, what is a chart of accounts?
If you’ve just started your business and maybe aren’t in the position yet to hire a bookkeeper (I know some great ones, btw) you probably have heard of or have signed up for QuickBooks. Part of getting started in QuickBooks is setting up a chart of accounts. A chart of accounts is a list of all your businesses financial accounts altogether in one place. Think of it like a filing cabinet that houses and organizes all your business’s transactions. This organizational tool is the best way to keep track of the money coming in and out. These accounts are typically broken into 5 different categories: assets, liabilities, equity, expenses, and revenue. Let’s dive deeper into the ins and outs of a chart of accounts and what it means to your business.
How Do I Use a Chart of Accounts?
Every time your business has some sort of transaction like an invoice payment or a purchase of office supplies, it should be recorded in your chart of accounts. But how do you know which account to record it in? In general, there are different financial statements that each account corresponds to the balance sheet and the income statement.
A balance sheet shows the big picture of your business. This holds the businesses assets, liabilities and equity. The income statement on the other hand houses the revenue and expense accounts. Let’s break these accounts down a little further.
The 5 Primary Accounts
·Asset accounts: these hold record of any resources your business owns that adds value to your business. They can be physical assets such as land, equipment and cash, or intangible things like patents or trademarks.
·Liability accounts: this one is not so fun. This account holds record of all the debts your business owes. Liability accounts usually have the word “payable” in their name like accounts payable or invoices payable. “Unearned revenues” are another kind of liability account—typically cash payments that your business has received before services are completed.
·Equity accounts: this type of account is a little more complex. It represents what’s left of the business after you subtract all your business’s liabilities from its’ assets. It basically measures how valuable the business is to you or any shareholders.
·Expense accounts: this one is pretty simple. This account represents all of the money you spend on your business to keep it running such as rent, payroll, office supplies, etc.
·Revenue accounts: this account keeps track of any income your business brings in from its services.
Important To Note
Let’s go over a few practices to keep a smoothly run chart of accounts...
Deleting Old Accounts
It’s usually best to wait till the end of the year to delete any inactive accounts. Merging or renaming accounts can also create a headache when tax season comes around.
Creating Too Many Accounts
While the goal is to keep everything as clear and organized as possible, it’s best to not get too carried away when creating different accounts. For example, if you have multiple utilities such as water, gas and electricity, these can all be housed under one account since they’re all considered utilities.
Be Specific But Not Too Specific
With that being said, it’s also best to not be too generic when categorizing either. All account names should have a clear title so anyone that looks at the books can understand what’s going on. Titles should be generic enough to house similar transactions but not too specific such as “Microsoft subscription.”
Why is The Chart of Accounts So Important?
The goal of the chart of accounts is to have your businesses financial records organized and mapped out to their correct categories. Keeping it well organized, can help you down the road if you ever need to track down any transactions. You’ll hear about consistency a lot when it comes to accounting so keeping items consistent in their accounts is important as well when mapping out transactions. Having an accurate and organized chart of accounts can give you a better idea of where your business is at financially and can help you better plan for the future.
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