First off, what is a Chart of Accounts? It’s a list of general ledger accounts in your accounting system. The general ledger accounts, or categories, are what the accounting system uses to generate reports. So, if you have a hastily prepared Chart of Accounts, your reports will also be poorly laid out.
Most companies who use QuickBooks or Sage use the pre-existing chart of accounts. Which is okay, but what happens when you:
- Want to track specific product lines?
- Want to track a specific expense?
- Want to track individual loans or mortgages?
- Fixed Assets have been horrible to track?
Unlike other countries, there is no legally prescribed chart of accounts in the United States. So you are free to track or loosely track your income and expenses as you see fit. Federal and State Tax returns have specific categories it would be a wise idea to at least track at that level. If you do, there can be significant tax savings.
It also depends what type of business that you have. A few examples:
- Construction: Do you do mostly retail? Commercial? Do you employ sub-contractors? Wouldn’t it be nice if all your electrical subs are in a different category than your drywall subs? Start the process by listing out your major income and expense categories. Those will probably morph into general ledger accounts.
- Locations: If you have multiple locations, it is a good idea to track income and expense by location. In QuickBooks, if you create a separate ‘class’ or ‘location’ it creates general ledger subcategories.
- Rentals: For tax purposes you will need to provide the pnl information by location. Also if you track each building with it’s own Fixed Asset and accumulated depreciation account, it will save hours of research when you sell it.
- Multiple Bank Accounts: You will need a separate general ledger account for each one. Easier to track. Easier to Reconcile. Easier to determine the actual balance.
- Multiple Loans and Credit Cards: If you wish to keep your sanity, make sure you have a separate general ledger account for each. Loans and credit cards often start off simple, but then become horrid to track if lumped together.
- Multiple partners in an LLC, Partnership, and S-Corporation. ( I know they aren’t all referred to as ‘partners’) Each investor puts in a certain amount of cash or assets. Then they draw a certain amount. Then the profits are allocated to them over the years. Wouldn’t it be easier to track if they had individual accounts?
- Parent – Children Accounts. Most Accounting Software programs have the capacity to create Sub-Accounts or Children Accounts. For example, the Parent Account might be supplies. The Children Accounts might be Office Supplies, Store Supplies, Marketing Supplies or Medical Supplies. If you create the parent – children account relationships then the reports will also print the general ledger accounts in that order. A much easier read.
Hopefully, that is a fair amount to get you started on the task of creating your business’s chart of accounts. An hour’s worth of planning can save you weeks of plowing through reports to find the interesting information nuggets which will help you grow your company.