When setting up your business finances, a chart of accounts for bookkeeping is one of the most important tasks to complete.
This foundation for all your accounts is essential for understanding the flow of money within your business, and to get a snapshot of assets and liabilities quickly.
Below, we’ll give you 5 expert tips for setting up your chart of accounts.
What is a Chart of Accounts?
Think of a book’s table of contents. A quick glance and you can see how many chapters the book contains, the titles and general subjects of those chapters, and what page you’ll find them on. A chart of accounts is much the same concept, only it applies to your financial accounts. Because it organizes all of your financial data, a chart of accounts is crucial for quickly and easily creating essential financial records. As an organizational tool, you want this chart to be as simple and effective as possible.
- Don’t Be too Broad or too Narrow
Your account categories and subcategories should be broad enough to quickly gain an overview of where money is going, but with enough detail that you recognize the accounts. It’s better to err on the side of simplicity, remembering the function of the account categories. For example, you can keep all office supplies purchased for your company in one account, rather than setting up individual accounts for each supply vendor you might purchase from.
- Customize Your Account Categories
There are five common account categories used in a chart of accounts for bookkeeping: assets, liabilities, equity, revenue, and expenses. If you are using software such as QuickBooks™, some groupings may show up by default. None of these categories are set in stone, and you should instead consider them a framework which you can then customize in a way that makes sense for your particular area of business.
- Begin with the End in Mind
One of the main functions of a chart of accounts is easily creating reports. When organizing your accounts within this framework, decide what reports will be most beneficial to you, and when. What do you want to know at the end of the month? Each quarter? The year in review? Allow these reports to guide how you categorize and decide how much detail is necessary.
- Leave Room for Growth
Many bookkeepers recommend using 4-5 digit base account numbers to identify accounts. A good practice is to use 10000s for asset accounts, then name liability accounts with 20000s, and so on. When naming the accounts, remember to leave some space for future growth, such as using 10000 for the main checking account, and 10100 for the next category. As your business grows, you will have room to add to your accounts without having to overhaul your entire chart of accounts.
- Use Your Tax Forms to Create Your Chart of Accounts
Ideally, when tax season rolls around, you should be able to easily fill out your forms using your chart of accounts. As most small businesses are required to fill out a Schedule C, you can use this form as a guide for which income and expense categories the government wants you to track. If you organize your accounts in this way, filling out the Schedule C is as simple as entering the balances of your accounts to the corresponding Schedule C line.
B&B Bookkeeping Can Help
Setting up a chart of accounts for bookkeeping can certainly seem intimidating, but it doesn’t have to be. At B&B Bookkeeping, we assign you a bookkeeper to assist you in creating a QuickBooks™ account for your Wasatch Front business, and getting your books up to date and easy to review. Contact us today for a free month trial! We serve Salt Lake City all the way down to Provo in Utah.
