A murder of crows, a pod of dolphins, a chart of accounts. It can be overwhelming to manage all the different aspects of your business accounts, every sector needs to be handled differently and reported individually. A chart of accounts is where it all comes together to provide one snapshot of your business’s financial standings.
What is the purpose of a chart of accounts?
At the heart of your financial record keeping is the chart of accounts. Its purpose is to hold everything together while acknowledging the separate, individual parts of finance that make your company work. Its function is to keep management and shareholders informed on how different aspects of the business are performing and what the overall standings are, as well as to help keep your business up to date with audits and financial compliance.
What is in a chart of accounts?
Even a small business will have thousands of incoming and outgoing financial transactions each year, while a big business might have millions. Keeping these organised in a way that can segregate entries, calculate totals and have a searchable history is a challenge. A chart of accounts (COA) is a sophisticated software system that organises it all by indexing your accounts into groups.
Typically, a chart of accounts has five main account listings with subcategories under this that might appear as:
Assets
Valuable resources your company owns such as:
- Cash
- Equipment
- Inventory
- Accounts receivable
- Vehicles
Liabilities
This is any debt your company owes including:
- Taxes
- Business loans
- Accounts payable
Equity
Equity is what remains when you subtract the liabilities total from the assets total. Equity can also include:
- Preferred stock
- Common stock
- Earnings
Expenses
This is the money your business spends on resources for revenue such as:
- Staff pay
- Rent
- Utilities
- Travel
Revenue
Money your business earns through selling goods or services including:
- Sales
- Paid dividends
Different companies will have different sub-branches to take into account, some of which will take a much larger priority for their business than it would for others.
Creating a chart of accounts
When it comes to creating a chart of accounts there are lots of variations available to help tailor the system to fit your unique business needs. Standard accounting software will have a chart of accounts template or let you import your current chart into their system. Either way, it’s best to have a qualified accountant look over your index in the early stages to assess additional accounts that are needed to capture your business’s financial movements.
Chart of accounts best practices
A small business should be looking to simplify accounts as much as possible. Most small businesses won’t need more than 250 accounts listed. While there is plenty of scope to create an individual system, do keep the Financial Accounting Standards Board in mind to create something that will be accepted. This makes auditing and reporting much more straightforward. Setting up a chart of accounts for your business is the ideal way to monitor your finances as a whole and get a true picture of your financial health as a business. With so many options and so much data entry required it’s best to Contact a fully certified bookkeeper for a tailor-made solution.