Your chart of accounts is the list of accounts in your accounting software. The accounts are listed in your reports, and the totals allow you to determine how much you’ve spent, made, own, or owe depending on the type of account.
It’s essential to create a list of accounts that you need in order to make better business decisions. You need to design your chart of accounts intentionally. But if it hasn’t been, it’s never too late.
Two Types of Accounts
There are two major types of accounts:
- Balance sheet accounts that tell what you own and owe. These are determined by your checking accounts, inventory, and credit cards.
- Income statement accounts that tell you about current period operating results. These, in turn, have two major categories, income and expenses. For companies with inventory, expenses are further broken out into cost of goods sold and other expenses.
A chart of accounts should meet three needs:
- Make it really fast for you to do your taxes
- Give you all sorts of “aha!” moments
- Allow you to spend far more time on revenue analysis than expense analysis because that’s where success lies for small businesses
Let’s break each of these needs down in further detail.
Your accounts should be the same as (or be able to be grouped into) the lines on your tax return. You can find a copy of the tax form you fill out. For example, a sole proprietor will use a Schedule C of the 1040, and a corporation will complete an 1120.
There are a few special needs, such as meals and entertainment which are only partially deductible, that you need to pay special attention to. We can help you with that.
As small business owners, we work with a gut feel, but when you see what you’ve made or spent in black and white, it takes on a whole new level of meaning. Your income statement and other reports should do that for you. If they don’t, then you may not have your accounts set up right.
Think about how you want to see your revenue broken out by:
- Product line
- Major supplier
- Category of solution to the customer
- Customer type
- Service type
- Location (you can also use Class for this)
- Distribution method
Again, we can help you brainstorm based on your industry and type of business.
If you’ve been putting all your revenue into one revenue account, then it will be exciting the first time you see your new Profit and Loss statement.
If you’ve been breaking out your revenue but it hasn’t led to any actionable change in your business, then there may be a better way to break it out.
And if you’re happy with the way your reports break out your revenue, then think about how you can take it to the next level.
Once you see your new chart of accounts, you will likely have even more questions. The chart of accounts can be an evolving entity, designed to serve your business needs. Contact us at Innovative Financial Services, LLC today if you need help with this, or any other aspect of your small business bookkeeping needs.