Episode 9 - What is a chart of accounts and how it works
A chart of accounts is a list of the account numbers and names relevant to your company. There are four primary groups in a standard chart of accounts: 1. Assets. This includes anything of value that your business owns including fixed assets such as property, vehicles, or inventory and liquid assets such as cash and accounts receivable. If you have any confusion related to depreciating the value of fixed assets, please contact our team.
2. Liabilities. Liability accounts include bank loans, mortgages, taxes to be paid, and bills. It is important to note that liabilities which are loan repayments include two parts: a) payment of the capital and b) payment of the interest.
3. Income. At the simplest level, many business owners think about income in two categories: goods and services. However, in order to really have a full picture of your business revenue, profitability, and the financial engines of your business it is much more effective to split your income entries by each product and service your business offers. This allows you to see which parts of your business generate the most revenue so you can maximize them.
4. Expenses. Expense accounts are usually the ones that smart small business owners focus on to reduce overhead as much as possible to generate maximum return on investment. These accounts provide insight into how much it costs to run your business. When creating your expense accounts it’s important to consider adding subcategories so you can get granular information about where you are spending money and make informed decisions about the best possible allocation of funds for the highest possible return. Creating a chart of accounts in Quickbooks helps to maximize your small business revenue. The time spent upfront to create a chart of accounts for your small business is an investment that will pay off every day because it will save you valuable time and make the information necessary to maximize your business revenue easily accessible. It will also make your accounting, financial statements, and tax return much easier to handle because all of your data will be organized. This means that it can be seamlessly transferred into the software systems used for these functions, instead of manually handled each time you need these tasks accomplished. Getting a chart of accounts for your small business set up and using it as your source of truth for your business is fundamental for creating a successful financial foundation. It is also a critical point of control in your business and it is the place when organized effectively, where you can quickly update and analyze your financial standing. Here are some additional tips to set up a chart of accounts the right way for your business from the CPA4IT Team:
We recommend that you use bookkeeping software such as Quickbooks to handle your bookkeeping and accounting. You can utilize this software in conjunction with our expert team of accounting professionals to make the financial organization and management of your small business seamless. Consider taking advantage of our discounted pricing for Quickbooks to implement this bookkeeping in your business. Even with a well-organized chart of accounts, manual bookkeeping can be very time-consuming, this is why carefully planning the subcategories you are going to use for your business bookkeeping is essential. As you setup your chart of accounts, we recommend keeping the following in mind: Use clear and descriptive titles when creating your chart of accounts. Balance the number of line items you create to reduce clutter in your books, if you aren’t sure ask a professional to help you. Use sub accounts instead of line items to keep things more organized and save even more time. Regain your time and peace of mind! Partner with CPA4IT to create your chart of accounts and handle your bookkeeping.
