A chart of accounts is a complete listing of all financial accounts of a certain business. It is important that you do this list in a very logical and most organized way. It can be very tedious at first but as long as you regularly update it, it will become easier and faster. You will be more efficient and easy when it comes to monitoring and managing all your financial transactions. Read on to learn more about how to properly set it up.
1. Categorize all your business finances to five important classifications in this statement:
- Assets (all tangible and intangible things that are used for business operations and investment activities, anything with value)
- Liabilities (all the things that your company owes to others such as creditors, banks, taxes, etc.)
- Equity (what the company owes the owner after all the liabilities has been fully paid)
- Revenues (business' financial gains)
- Expenses (all the things that the company needs to spend to render income)
For a more structured explanation for each account, you can visit this website Balance Sheet Tutorial.
2. Next, you need to designate unique names for all sub-categories on each type of account. This is so you can consolidate all amounts in one particular sub-category hence, avoiding too much clutter in a page. There is already a standard set of names per classification. Please see below:
- Assets - You can divide your assets into three kinds: current (intangible), fixed (tangible) and other (non-current). Under current assets, you can label each account as Accounts Receivable, Petty Cash, Cash on Hand, Regular Checking Account, Payroll Checking Account, Savings Account, etc. For fixed assets, you can name them as Furniture and Fixtures, Equipment, Vehicles, Buildings, Land, etc. Other assets include Deposits, Organization Costs, etc.
- Liabilities - Current and long-term are the two types of this account. You can label all current liabilities as Accounts Payable, Accrued Expenses, Wages Payable, 401-K Deductions Payable, Health Insurance Payable, etc. For long-term, you can include Notes Payable, Land Payable, Equipment Payable, Bank Loans Payable, etc.
- Equity - Stated Capital, Capital Surplus, Retained Earnings
- Revenues - Interest Income, Finance Charge Income, Shipping Charges Reimbursed, Sales Returns and Allowances, etc.
- Expenses - Advertising Expense, Auto Expense, Bank Fees, Cash Over and Short, Bad Debt Expense, etc.
These are just some of the unique names per category that you can use. For more detailed examples, you can check this website Chart of Accounts.
3. You're almost done. Start assigning reference numbers for all your accounts. This will make it easier and faster for everyone to find which amount that they are looking for. For smaller businesses, three digit numbers will do. For bigger companies, you can use four digit numbers. Here are some examples:
- 100 - 199 : Assets (|100-Petty Cash| |101-Cash on Hand|)
- 200 - 299: Liabilities (|200-Accounts Payable| |201-Accrued Expenses|)
- 300 - 399: Equity (|300-Stated Capital| |301-Capital Surplus|)
It's okay if you don't use up all the assigned number for each account. They might come in handy in the future.
4. Finally, input the amounts that you have segregated in the first step and you just made your own charts of account.
This can simplify all your fiscal reports and responsibilities while making historical comparisons of each account very easy and understandable. This will also prevent you from making errors that can hurt your business in the long run. Follow these steps very carefully to achieve these benefits that can help you manage your business effectively. Good luck!