A chart of accounts is a fundamental tool in your business’s financial management – think if it as the blueprint of your financial house. It serves as a structured framework for organizing and categorizing financial transactions. By creating a well-designed chart of accounts, you can gain valuable insights into your company’s financial health, track expenses, and make informed decisions.
Before your begin, you should have a basic understanding of the five main account types, which apply universally to all businesses:
- Assets: This is what your business owns (cash, PPE, inventory, etc.).
- Liabilities: This is what your business owes (loans, bills from vendors, etc.).
- Equity: This is the owner’s interest in the business.
- Revenues: This is the income from the business’ sales of goods and services, or possibly other sources depending on the structure of the business.
- Expenses: These are the costs that relate to the running of your business (office supplies, salaries, rent, etc.).
Be sure that your chart of accounts is specifically tailored to your business and its operations. For example, if you are a service-based business, then you are not likely to use inventory in your chart of accounts. If you are a product-based business, then you will need both inventory as well as the cost of goods sold, that is the direct costs associated with producing the inventory you are selling.
It is often helpful to assign account numbers to each of your accounts, and to keep them consistent. These numbers should follow a pattern based on what type of account they are. You might follow a system similar to this:
Asset Accounts: Numbered 1000–1900
Liability Accounts: Numbered 2000–2900
Equity Accounts: Numbered 3000–3900
Revenue Accounts: Numbered 4000–4900
Expense Accounts: Numbered 5000–5900
Your chart of accounts will be most helpful to you if you regularly review it and keep it simple. A well-structured chart of accounts ensures financial clarity, facilitates decision-making, and empowers your organization to thrive.