Chart of Accounts, the Backbone of your Accounting System
When you think about accounting, the first thing that comes to mind is probably “financials statements,” such as the balance sheet, income statement and statement of cash flows. But to get to these financial documents (the end-product), you first need to think about your chart of accounts (COA).
The chart of accounts is comprised of the various accounts used in your business. Some may describe the chart of accounts as “the backbone” of your accounting system. Is a chart of accounts that important? Yes!
According to AccountingTools.com, the chart of accounts is described as “A listing of all accounts used in the general ledger of an organization. The chart is used by the accounting software to aggregate information into an entity's financial statements.” (The Chart of Accounts, n.d.)
As you begin your small business and start incurring costs, I recommend you start thinking about how you will keep track of these costs and, later, your revenues. The COA will be the starting point to build your financial statements and also can be used by your tax accountant to prepare your returns.
Your COA will need to include the basic building blocks of accounting: assets, liabilities, equity, revenue, expenses, gains, and losses:
Assets: Item owned by company, provides an economic value in future periods.
Liabilities: Amount owed by the company, presents an obligation to pay a third party.
Equity: Net of assets and liabilities; net funds invested in company.
Revenue: Money earned by providing services/products to customers (generated via main business activity).
Expenses: Costs incurred as part of main business activities, such as cost of sales, general and administrative expenses.
Gains: An increase in value of an asset (not part of main business activity, such as from a sale of a fixed asset).
Losses: A decrease in the value of an asset.
Once you have created your COA with these building blocks, you can modify the line items within these major categories to meet your unique business needs.
If you are starting out and need help creating a COA, most accounting software packages come equipped with canned COA templates. Use the standard COA template as your starting point. Then you can tailor the line items in the COA to meet your needs.
When I prepared my COA for my business (and personal accounting), I thought about my cash inflows and outflows, and how each will be captured for financial reporting purposes. I created specific line items for accounts that are needed specifically to complete my tax return. I also included specific line items for accounts that require special attention during my monthly budget analysis. Thinking about how you will use the financial information will guide you as to how to structure your COA.
If you have questions, please schedule a call with me at GritForce Bookkeeping here. I would love to talk with you to discuss your business processes.I would love to sit with you to discuss your business needs and develop that best COA structure for your business.
Chart of Accounts - AccountingTools. (n.d.). Retrieved from http://www.accountingtools.com/chart-of-accounts-overview