Posted by Maria Katrina dela Cruz
Jul 31, 2019
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Running a small business requires a lot of paper works and management functions. While it’s good to know your business is growing, it’s still best to keenly keep track of your financial health through regular recording of the transactions your business generates. This is where creating a chart of accounts come in.
READ: Simple Budget Guide for Business Owners
What is a chart of accounts?
Creating an index of all your transactions during a specific accounting period can help you get a clearer insight of your financial status. Having a chart of accounts (CoA) can provide you with a digestible rundown of your transactions, reflecting the performance of your operations. That’s why it’s dubbed as the backbone of your bookkeeping system.
All income and expense accounts are categorized under the Profit and Loss statement, while the assets, liabilities and owner’s equity accounts are recorded on the Balance Sheet. Sitting down and updating your CoA accordingly will produce more precise and more reliable financial statements.
Establishing a standard chart of accounts can be a tricky activity. Good thing is that accounting software programs are packaged with a preset list of accounts that can give you a head start and can be modified along with your growing business.
Read more below to learn how you can create a chart of accounts for small business:
Keep Your Chart of Accounts Simple
Starting up your CoA, you may think setting up multiple accounts can spare you from inaccuracy in numbers. However, it’s still best to keep your accounts intact and controllable. Just create the lists you need. This way, you can avoid frantically running through your long list just to spot the account you’re looking for. Keep it manageable and simple.
Use Generic Account Codes
Having a chart of accounts allows you to file your transactions categorically. Account codes fall under different types such as expenses, revenues, equity, assets, and liabilities. That’s why it’s advisable to keep them generic. Instead of tagging the accounts with a customer name, it’s more convenient to list an account according to the type of transaction.
By doing so, it will be easier to track where the spending is coming from. You’ll know your status from each account type, and if consistently done, can even forecast your future spending on the particular account.
Selecting the Right Account Type
One of the most crucial parts of maintaining a CoA is categorizing the account type accurately, as this will reflect on the financial statements to be produced. If there are errors on the account list, this can result to inaccurate records on your business, making you lose grasp on your small business’ financial development.
A sample chart of accounts can be found online. This way, you can figure out what CoA is most suitable for your business type, giving you an idea of how to prepare your own chart of accounts.
Knowing what is a chart of accounts can contribute to the financial stability of your small business. With proper tracking of expenditures, you can learn how to best manage your finances as your business scales through the years.
