As small businesses we each have different needs. The accounting systems we choose may be different, the specific reports we use to make decisions may be different, even how often we do our accounting may be different. But at the base of all of this is what is called a Chart Of Accounts. And even your chart of accounts is specific to your business’ needs and may be different from other businesses’.
What is a Chart of Accounts?
Businessdictionary.com defines the chart of accounts as a “System of accounting records developed by every organization to be compatible with its particular financial structure, and in agreement with the amount of detail required in its financial statements.”
This means that the chart of accounts is specific to your company’s needs and structure. It is the basis of how income and expenses are tracked and reported. It can be tracked in great detail or just as a high level summary. It just depends on how you want to see your reports.
How to Create Your Chart of Accounts
When it comes to small business, I like to keep a fairly simple chart of accounts. I find it easiest to start with the accounts listed on the Schedule C IRS form. While I don’t condone doing your bookkeeping for the sole purpose of completing your taxes (as opposed to doing them for internal business purposes, with the benefit of making filing taxes easier), the Schedule C is a great starting point.
So, looking at the Schedule C, we see the following accounts:
Cost of Goods Sold
Car & Truck Expenses
Commissions & Fees
Employee Benefit Programs
Legal & Professional Services
Pension & Profit-sharing plans
Rent or Lease: Vehicles, Machinery & Equipment
Rent or Lease: Other business Property
Repairs & Maintenance
Taxes & Licenses
Travel, Meals & Entertainment: Travel
Travel, Meals & Entertainment: Deductible meals & entertainment
Some of these you will use, some of them you won’t. Just leave out the ones you know you won’t use. For example, as an accounting business with next to no equipment, I leave out the ‘Rent or Lease’ accounts. I don’t have any of that, so I don’t want those extra accounts cluttering up my chart of accounts.
On the flip side, you may want even more detail than is offered in this base list. You may want to split out Supplies in to Shop Supplies, Shipping Supplies and Office Supplies. Or, you may need to split your advertising in to Online Advertising and Local Advertising. You just need to think about what detail you want to review on your Profit & Loss report and set your chart of accounts accordingly.
There really is no right or wrong when it comes to setting up the Chart of Accounts for your business. And, it isn’t set in stone once you do set it up. Play around with it, make changes as necessary. Over time you will create a fine tuned Chart of Accounts that works perfectly for your growing business!
Click here for a sample Chart of Accounts.