Starting a small business requires making important financial decisions that help you plan and manage your business properly. Setting up a good chart of accounts is a large part of your business’s financial plan; it will pay dividends by allowing you to access accurate financial data with just a few clicks of a mouse, and it can be done in-house or hired out to bookkeeping services.
Setting up your chart of accounts
Your chart of accounts can be thought of as a file for all of your financial information; it lists your company’s account names and is step one in setting up your bookkeeping system. Which accounts you decide to put in your chart of accounts depends upon your business. For example, an inventory account is only needed for companies that sell products, and not for service businesses.
The chart of accounts will be used to journal all of the business’s transactions and there are five main categories of which accounts can belong: assets, liabilities, revenue, expenses, and owner’s equity. You are setting up your chart of accounts so that it will mirror the format of a company balance sheet.
Your asset category outlines what your company owns. Assets are listed starting at the most liquid assets (cash, accounts receivable, inventory) and then fixed assets (buildings, equipment, vehicles), and a depreciation account that will show reductions in value of those assets.
Liabilities track what your company owes and are listed starting at short term or current liabilities (accounts payable, sales tax, payroll tax, wages owed) and then your long-term liabilities (such as SBA loan).
Owner’s equity denotes the owner’s investment in the business. Later, you might have investors and need accounts for stock and retained earnings for profit that is reinvested into the company.
Profit & Loss
Revenue accounts show sales revenues and other income for your business. You typically need an account for discount and one for sales returns and refunds as well. There will also costs of goods sold or cost of services or direct costs incurred in providing the product or providing the service.
Expenses are the final category. Many companies use the IRS Schedule C tax form to set up this category. Your tax preparers will be happy about this as it makes it much easier at tax time.
That is really all there is to it, though the task may at first seem daunting. This chart of accounts will keep your books clean and your data quick at hand whenever you need it. Outsourced bookkeeping services can help keep you on track and your expenses and other transactions coded perfectly if your chart of accounts is clean and easy to use.
We help you plan, forecast and analyze your financial data
so you can get on top of your finances today to grow your small business big tomorrow.
Healthy Bookkeeping for Medical Practice That Doctors Should Know
While physicians and other licensed medical practitioners think of medical bookkeeping as another administrative task, knowing your practice’s income-generating services and your biggest ex...