Chart of Accounts
When a small business owner chooses an accounting system for their business, the next step is to select their chart of accounts. A chart of accounts is defined as a listing of your accounts that make up your general ledger for your business. These accounts are used to create your financial statements such as your balance sheet and your profit & loss statement.
Chart of accounts are usually pre-defined to a set of accounts in the accounting software chosen based on the business industry chosen. It’s important to understand that the accounts are a good foundation to start your books but by no means should that be the way your chart of accounts remain. Below are some helpful tips to keep in mind when creating and maintaining your chart of accounts.
Consistency is key to be able to compare reports from year to year, so when creating your chart of accounts, begin with the pre-defined set and add those you think apply to your business.
It is important to understand what kind of information you need from your reports. If you want to be able to tell what your profit margin is on your products or services specifically, then be sure to create your chart of accounts to be able to give you this information.
There are costs of producing your products or services and there are expenses of the business, to have this granular detail it is important to structure your chart of accounts accordingly.
It is also helpful to review your chart of accounts annually and see if any accounts are not being used or a particular account needs to be broken down in greater detail. For example, many books have a miscellaneous or other account, these accounts are not specific enough to be useful if they have large balances.