In running your business you've probably learned there are some important things to track in your accounting software. Between booking customer sales, paying bills, running payroll, and categorizing transactions to name a few, you know that proper recordkeeping leads to accurate financial reports and a better understanding of your business. But did you know your chart of accounts is pretty vital too?
What is a chart of accounts and why is it important?
The chart of accounts is an index within your accounting system. It is used to categorize all transactions within your business. Why is this important? Well, because categorizing transactions into appropriate categories gives you a better understanding of your financial health. That financial health snapshot is captured on your financial reports, which are used by you, your CPA, and banking institutions.
What are the sections of a chart of accounts?
Accounts within the chart of accounts are separated into the following five categories:
Assets - these are resources your company owns. Examples include cash, equipment, accounts receivable, real estate, etc.
Liabilities - these are monies owed from your company to others. They are typically broken down into two categories:
Short term liabilities - payroll taxes, accounts payable, wages payable
Long term liabilities - loans/notes payable
Equity - the value left after subtracting liabilities from assets. Examples includes retained earnings, common stock.
Revenue - money your company brings in. There are a couple of different kinds:
Operating - income made from the sales of services and/or products
Non-Operating - misc. income like interest and dividends (yes you want to track those separate from sales revenue)
Expenses - money and resources spent by your company. There are often two breakdowns of this:
Costs of goods sold/Direct Costs - These are costs linked directly to a cost object, such as a project you're working on. Examples include labor performed on a job or materials purchased to use on a specific project.
Indirect costs - These are costs associated to the overall business and not linked directly to an object. Examples include utilities, internet, rent, etc.
Tips for making your chart of accounts work for you
Inactivate accounts you don't use - A good way to do this is run a transaction report for the account and inactivate it if it hasn't been used in at least 12 months, or has never been used.
Set up revenue accounts for your actual revenue - If you sell products and services, track those streams separately so you can better track profitability. Revenue bonus tip - make sure your products and services are mapped to your chart of accounts.
Create sub-accounts for related items.
Merge similar or duplicate accounts.
Add account numbers to group and sort like categories.
Ready to tackle your chart of accounts?
If you're still hesitant about messing with your chart of accounts alone, don't worry, we can help! Set up a call with us to get your accounts cleanup and ready to better serve you.