As small business owners we all have different needs. The bookkeeping systems we select may vary, the specific reports that we access to make crucial business decisions may vary, even the frequency of our accounting may be vary. But at the foundation of it all is what we call a Chart Of Accounts. And your chart of accounts is specific to your business’ needs and, set up correctly, it often will be different from that of other companies.
So What is the Chart of Accounts?
Our business dictionary defines the chart of accounts as a “System of accounting records developed by an organization to be compatible with its particular financial structure, and in agreement with the amount of detail required in its financial statements.”
What this means is that the chart of accounts is specific to your company’s needs and structure. It is the basis of how income and expenses are tracked and reported. It can be tracked in great detail or just as a high level summary. It just depends on how you wish to view your reports.
How to Create Your Chart of Accounts
Source: Holly Neitzel | Outright.com
When it comes to small business, I like to keep a fairly simple chart of accounts. I find it easiest to start with the accounts listed on the Schedule C IRS form. While I don’t condone doing your bookkeeping for the sole purpose of completing your taxes (as opposed to doing them for internal business purposes, with the benefit of making filing taxes easier), the Schedule C is a great starting point.
So, looking at the Schedule C, we see the following accounts:
Cost of Goods Sold
Car & Truck Expenses
Commissions & Fees
Employee Benefit Programs
Legal & Professional Services
Pension & Profit-sharing plans
Rent or Lease: Vehicles, Machinery & Equipment
Rent or Lease: Other business Property
Repairs & Maintenance
Taxes & Licenses
Travel, Meals & Entertainment: Travel
Travel, Meals & Entertainment: Deductible meals & entertainment
Some of these you will use, some of them you won’t. Just leave out the ones you know you won’t use. For example, as an accounting business with next to no equipment, I leave out the ‘Rent or Lease’ accounts. I don’t have any of that, so I don’t want those extra accounts cluttering up my chart of accounts.
On the flip side, you may want even more detail than is offered in this base list. You may want to split out Supplies in to Shop Supplies, Shipping Supplies and Office Supplies. Or, you may need to split your advertising in to Online Advertising and Local Advertising. You just need to think about what detail you want to review on your Profit & Loss report and set your chart of accounts accordingly.
There really is no right or wrong when it comes to setting up the Chart of Accounts for your business. And, it isn’t set in stone once you do set it up. Play around with it, make changes as necessary. Over time you will create a fine tuned Chart of Accounts that works perfectly for your growing business!