The Perfect Chart of Accounts for Your Business

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 have spent, made, own, or owe depending on the type of account. 
 
It is essential to create a list of accounts that meets your  needs in order to make better business decisions. Your chart of accounts should be designed intentionally. If it has not been, it is never too late. 

Two Types of Accounts
 
There are two major types of accounts:

1. Balance sheet accounts that tell what you own and owe. These are determined by your checking accounts, inventory, and credit cards. 
2. 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.   

 
Three Purposes
 
A chart of accounts should meet three needs:

• Make it really fast for you to do your taxes
• Give you all sorts of “Aha’s”
• Allow you to spend far more time on revenue analysis than expense analysis because that is where success lies for small businesses

 
Taxes
 
Your accounts could 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, to which you need to pay special attention. We can help you with that. You can also see this article.) 
 
Aha
 
As small business owners, we work with a gut feel, but when you see what you have 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, you may not have your accounts set up right. 
 
Revenue
 
Think about how you want to see your revenue:

• By product line
• By major supplier
• By category of solution to the customer
• By customer type
• By service type
• By location (you can also use Class for this)
• By job
• By distribution method

 
We can help you brainstorm based on your industry and type of business. Please contact us to schedule a review of your current Chart of Accounts and needs.
 
Actionable Intelligence
 
If you have been putting all your revenue into one revenue account, it will be exciting the first time you see your new Profit and Loss statement. 
 
If you have been breaking out your revenue but it has not led to any actionable change in your business, then there may be a better way to break it out. 
 
If you are happy with the way your revenue is broken out, 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. 

This is general information and should not be acted upon without first determining its application to your specific situation. Please contact your CPA or tax advisor for additional details.