Most small-business owners don't know what a chart of accounts is or why it's a helpful financial tool. But if your business is growing and you are planning for the future, this simple bookkeeping idea can help you reach many financial goals. Here's why.
What Is a Chart of Accounts?
Simply put, the chart of accounts is a numbered list of different types of business activities. It includes your assets, your revenue, your expenses, and your liabilities. Think of a chart of accounts as a sort of index guide to the different parts of your business. Rather than thumbing through a book to find information, you can skip straight to what you want to know.
Generally, a chart of accounts groups items together according to the way accounting reports do. So you would likely start with accounts listing your assets (account numbers beginning with a 1), liabilities (account numbers beginning with a 2), and owner's equity (account numbers beginning with a 3).
Following these permanent accounts that are used at the top level of your financial reports, you will probably see more temporary ones like income and expenses (account numbers beginning with 4 and 5, for example).
Of course, lots of room is left between assigned numbers so that you can add more accounts (or reduce them) as your needs change.
Why Is It Beneficial?
If your company is small, this list may seem like a higher level of accounting than you need to be doing. However, it's good to start thinking about the future, and setting up numbered and structured accounts is just the way to do so. Why? Here are a few great reasons.
First, assigning numbers to categories helps you use those categories consistently. Instead of choosing new titles or descriptions each time you enter an expense, for example, you can now choose from a set list and with the same description.
This option allows you to actually track expenses easier and more consistently. You'll be able to know what your office supplies cost each month (by using the same number) rather than searching for myriad descriptions like pencils, paper, or yellow notepads and blue notepads.
Second, grouping like items with each other also gives you the ability to see larger categories more thoroughly. You can have all your assets listed together, for instance, so that you know exactly what you own and how much is owed on these goods. This organization helps you track things as your business grows and know where you stand financially at any given moment.
Third, you can scale up your chart of accounts as your business grows. As you offer new products, expand the income category from just one business-income amount to sub-accounts that show the income from each product separately.
Break down expense categories, such as payroll, to show how much each department costs to run each month. And you can even track the cost or benefit from a particular asset, such as an expensive tool.
Or you may want to track how much things like business vehicles, operating a particular location, or maintaining a night crew all cost by themselves. How about knowing what exactly you're spending on meals, entertainment, or networking? By adjusting your accounts to show more specific categories, you can track all these things without much extra work by you or your bookkeeper.
How Can You Get Started?
If these benefits sound great but you're not sure where to begin, make an appointment with an accountant or professional bookkeeping service. Williams & Associates Tax Services is happy to help you find the right basic chart of accounts to start with. And they can help you learn how to grow your accounts along with your business' changing reporting needs.