A big part of setting up a business for success lies in the management of financial accounts. Structuring these accounts correctly is crucial come tax time, when the last thing your accountant wants to do is sift through disorganized spreadsheets and invoices. A chart of accounts gives business leaders and tax professionals accurate insights into their business’ revenues, assets, expenses, and liabilities. Organizing your chart of accounts makes financial reporting and planning easier from the moment you open your doors for business.
What is a chart of accounts?
A chart of accounts (COA) is a financial tool that categorizes each account into unique records for every type of asset, liability, equity, revenue, and expense. In short, it‘s an index for your accounting system. It helps business owners and accountants see where money is going, and allows them to make more informed business decisions. Setting up a universal COA for your business from the get-go makes it much easier for GMs and accounting professionals to locate specific expenses and revenues. It also eliminates the possibility of setting up alternate accounting practices that may jumble information and make it impossible to find.
Why does your business need a chart of accounts?
If a new business wants to thrive it must experience growth, and fast. When a business adds a new revenue stream, a new revenue account is added to the general ledger. On the vendor side, expenses are often coded to inventory accounts that are grouped by type. Keeping track of this information is imperative to every business, and setting strong foundations and processes for adding these accounts plays into this. A chart of accounts can serve as the foundation for a company’s financial record-keeping system. While the organization of a chart of accounts can vary from company to company, it is a universal system that can be accessed and understood by any accounting professional.
How to structure a chart of accounts
While the organization of each business’ chart of accounts may vary, it will likely contain five categories:
- Asset Accounts
- Liability Accounts
- Equity Accounts
- Income Accounts
- Expense Accounts
Within each category are specific line items that represent different sub-accounts. Asset accounts are anything the business owns that has value. The original purchase price of the asset is normally included in the sub-account notes. For business purposes, assets are also depreciated over time. Your business’ COA may contain asset accounts similar to the following:
- Asset Accounts
- Cash Accounts
- Fixed Assets
- Prepaid Accounts
- Accounts Receivable
- Savings Accounts
- Rental Income Accounts
Liability accounts are debts owed by your business. They are usually separated into two subcategories: Current liabilities and long-term liabilities. Current liabilities are debts that need to be paid within a year or less. Long-term liabilities are debts that have a longer payback period than one year.
- Liability Accounts
- Accounts Payable
- Payroll Taxes
Equity accounts represent shareholders’ total equity within a company. It is normally funded by the owners or shareholders of a company for the startup and continued operations of the company. There are varying types of equity accounts, including:
- Common Stock
- Preferred Stock
- Contributed Surplus
- Paid-In Capital
- Retained Earnings
- Treasury Stock
The types of income accounts a business uses depend largely on what it does. Some companies offer products and services, while others offer one or the other. Profits from the sales of various products, goods, or services can be divided into sub-accounts, so a business owner can see where her business is seeing profit.
- Income Accounts
- Sales Income
- Dividend Income
- Rental Income
Expense accounts include outgoing money used to help your business operate. For example, a florist may include sub-accounts for exotic plant vendors. He may also have a sub-account for the marketing expenses he pays out to advertise his shop.
- Expense Accounts
- Salaries or Wages Paid
- Interest Expense
- Product Expense
- Advertising and Marketing
Which accounts to include in your chart of accounts
The structure of a chart of accounts will depend on the type of business you run, as well as its size. Small businesses usually have a more simplified COA, while enterprise-level companies usually have thousands of accounts. Remember when you’re structuring your chart of accounts that the purpose of it is to easily understand your business’ financial history and position. You want the next accountant you hire to have no problem assessing your business’ financial health. Additionally, a COA must be structured in a way that adheres to financial reporting standards. In order to follow best practices and set up your business’ chart of accounts properly, it’s best to seek the advice of your tax professional first. In general, you can use the following basic structure when setting up your COA. The purpose of separating numbers is so that you can eventually add new accounts in the future.
- Assets – 1,000 – 1,999
- Liabilities – 2,000 – 2,999
- Equity – 3,000-3,999
- Income – 4,000 – 4,999
- Cost of Goods Sold – 5,000 – 5,999
- Expenses – 6,000 – 7,999
Categorize each sub-account into one of the main accounts above. If this organization doesn’t work for your business, consult a tax professional to find the best structure for you.
How to use your chart of accounts
- Track your money: A chart of accounts should quickly show you where your business is generating the most revenue, as well as what expenses you have that might be eating away at your profits.
- Understand what assets and debts you have: Keeping track of income, expenses, and debts will give you better insight into the financial health of your business.
- Use the COA to help make business decisions: The purpose of any business is to grow. A well-structured chart of accounts will help any business owner see the state of their business’ financial health, and enable them to make faster decisions.
How Docyt’s accounting automation can simplify a chart of accounts
Maintaining a chart of accounts can require a lot of time and effort. Businesses can experience growth quickly, which may inundate accounting departments with hours of data entry and account reconciliation. However, many companies are eliminating the manual data entry and reconciliation processes with Docyt’s accounting automation software. Docyt sits on top of its pre-existing cloud software like QuickBooks and expands its life cycle. The benefits of Docyt’s accounting automation software include automated data entry and reconciliation, real-time P&L and departmental reporting, automated vendor payment, and more.
Docyt accounting automation software continually updates the data included in a chart of accounts, eliminating the need for a bookkeeper to enter it manually. Accounts are automatically reconciled, and reports can be viewed in real time. Business owners no longer need to wait to see their business’s most updated financial picture. They’re empowered to make faster business decisions and grow their companies.
Want to find out how accounting automation can streamline and standardize your chart of accounts and help you see the real-time financial health of your business? Contact us today.