As a bookkeeper I have found that many small business owners do not have a clear understanding of the chart of accounts. Below is an example of how the chart of accounts should be numbered with a small description.
Understanding the Chart of Accounts by Fawn Choate
To help you understand how to set up your chart of accounts you will need to understand proper accounting methods. There are 5 numbers which outline your chart of accounts. This is standard accounting practices.
1 – Assets
Cash, all of your cash is considered an asset along with anything that can be converted to cash. Any item of economic value owned by an individual or corporation. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate.
This number is a balance sheet item, and can be found on your balance sheet reports from QuickBooks.
2 – Liabilities
Liabilities are a balance sheet item. It consists of debts. Liabilities are your QuickBooks files that denote what bills are outstanding or owed. This can be long term or short term debts. Examples include unpaid rent and utilities for your office, loans due and unpaid insurance. It is important to keep track of these liabilities for cash flow planning purposes because they factor into the overall costs that your business is going to incur going forward
2 – Expenses
Expenses are costs or charges. Expenses are different than liabilities because they involve items that have been paid. Some expenses can be written off when they are paid, such as rent and utilities while others like vehicle loan payments must factor in depreciation and should be handled under the direction of an accountant.
3 – Owners Capital or Equity
Owners Capital or Equity is your assets minus your liabilities which equals the net worth of your business. Total assets minus total liabilities; here also called shareholder’s equity or net worth or book value.
4 – Revenue
Revenue is income. This is simply the amount of money you make. QuickBooks provides profit and loss statements which will help show you your income vs. your expenses. This will tell you where your business is at from a revenue standpoint.
5 Cost of Goods
An income statement figure which reflects the cost of obtaining raw materials and producing finished goods that are sold to consumers. Cost of Goods Sold = Beginning Merchandise Inventory + Net Purchases of Merchandise – Ending Merchandise Inventory. In standard accounting practices, gross margin can be calculated by subtracting the cost of goods sold from total sales. These cost of goods sold is any cost related to creating your product. For example if you are a painter the cost of purchasing paint would be a Cost of Goods Sold. If you manufacture dresses the material to make the dresses would be Cost of Goods sold.
Any cost of doing business from revenue-generating activities. This is your overhead. For example your light bill, office supplies, marketing and advertising. This will be found on your Quickbooks profit and loss statements.
There are three sources of business capital: personal investment by the owners, outside investors, and the sale of shares in the company. All three options have distinct benefits and risks. The primary risk is the loss of money invested in the company, should it stop operations or does not record a profit. This is a balance sheet item, and can be found in Quickboooks on the balance sheet reports.
Accumulated other comprehensive income is a general ledger account that is classified within the equity section of the balance sheet in Quickbooks. It is used to accumulate unrealized gains and unrealized losses. A transaction is unrealized when it has not yet been settled. So if you invest in a bond, you would record any gain or loss in its fair value in other until you sell the bond, at which time the gain or loss would be realized.
Fawn Choate, the owner of The Office On The Go, is a professional bookkeeper with over 15 years of experience. Small businesses throughout Boston’s North Shore hire her bookkeeping company to set up their Chart of Accounts and so that it can be used as a great tools for a small business. She can be reached at firstname.lastname@example.org.