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The Perfect Chart of Accounts for Your Business

11/6/2017

 
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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.

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    Author

    Successfully meeting the challenges inherent to new and smaller businesses provides me with a special type of satisfaction. 

    Supporting businesses that have the potential to become amazing – from both the perspective of owners and team members as well as their clients – is what I enjoy. 

    I hope to use this blog to provide information specific to businesses that are growing from small beginnings into exceptional companies.

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  • Home
  • Why Us?
    • Reviews
    • Open Positions
  • Client Services
  • Resources
    • Save on QBO Subscriptions!
    • Tax Refund Status
    • Gusto Year End Checklist
    • Videos >
      • Business Taxes >
        • 2019 Business Tax Highlights
        • 7 Ways Small Business Can Save On Tax
        • Taxes for S-Corp Owners
        • The IRS Loves Businesses
      • Personal Taxes >
        • 2019 Tax Highlights
        • Five Yearly Tax Essentials
        • 4 Common Tax Surprises
        • Retirement Can Be Taxing
        • Advance Child Tax Credit Reconciliation - 2022
        • Make the Most of Your Donations
        • Five Great Tax Secrets
        • Renting Your Property Tax Free
        • Ideas to Audit-Proof Your Tax Return
      • The Tax Cuts & Jobs Act >
        • The Tax Cuts & Jobs Act: What You Need to Do Now
        • The Tax Cuts & Jobs Act: Are Itemized Deductions A Thing of the Past?
        • The Tax Cuts & Jobs Act: The New Child Care Tax Credit
      • Tax Topics >
        • Tax Season is Coming!
        • The New World of Deductions: What Everyone Needs to Know
        • Proving Your Deductions
        • How to Fix a Mistake on Your Tax Return
        • How Long Should I Save It?
        • Tax Credit vs Tax Deduction
        • Understanding Effective Tax Rate
        • Understanding Marginal Tax Rate
      • Life Events >
        • Life Events: A New Birth
        • Life Events: Marriage
        • Life Events: Divorce
    • Articles >
      • Accounting & Bookkeeping >
        • How to Get the Most Out of Your Accounting Fees
        • The 10 Biggest Money Leaks in Your Accounting System
      • Business Factors >
        • IRS Rules for Classifying Workers
        • Checklist for a Healthy Cash Flow
        • 12 Ways to Improve Your Business Profits
        • 10 Step Annual Business Check-Up
      • Tax Topics >
        • Tax Guide for Self-Employeds
        • 15 Things Every Tax Payer Should Know
        • Disaster Casualty Losses
        • Travel & Entertainment Deductions
        • Tax Guide - A Deduction Checklist
        • What You Should Know About Tax Audits
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      • Newsletters - Monthly Editions >
        • Newsletter - Monthly Edition
      • Newsletters - Quarterly Editions >
        • Newsletter - 2019 Fall/Winter
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      • How To - BILL
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