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Setting Up Your Chart of Accounts

Wednesday/November/18 14:56 Filed in: accounting

by Derek Rowley 2009 All Rights Reserved

I dont think Ive ever met an entrepreneur who actually likes the accounting aspect of running a

bus iness. But it cant be ignored. Even if you dont love it, you have to do it or at least

somebody in your organization has to do it for you.

But even if you dont do your own bookkeeping yourself, you have an important respons ibil ity to

understand it . If you dont at least understand your account ing, you dont have a prayer at

understanding your company financ ials . Whats worse, you are then at t remendous risk of

becoming vict imized by that somebody else because they know they can play with the numbers

and you wont catch it. How many t imes have you read a news story about a long-t ime

bookkeeper being arrested for embezzlement? By tak ing responsibi li ty to unders tand your own

account ing prac tices and systems, you can eliminate the temptat ion and potent ial for crimes of

opportunity . It just makes sense.

Having said that, I spoke with new entrepreneur a few days ago who was confused and concerned

about dealing with a new limited liabil ity company that he had recent ly formed. How do I get

money into it? How do I get money out of i t? How do I pay my son? How do I?

I had to back him up a few steps before we could get to many of his quest ions. I wanted him to

focus for a minute on his account ing systems. The systems (or lack thereof) that he uses to

account for every financial t ransaction touch every quest ion that he had. And, as it turns out , he

hadnt really thought about i t yet.

Personally, I cant imagine the dark ages of business, when all the account ing had to be

manually recorded in double-entry ledgers . I am, gladly, a child of the computer age. And, what

bet ter job is there for a computer in all of business than keeping the books? There are several

software packages available des igned for small business account ing some are s tand-alone-

ins tallat ions, and others are hosted web services. Almost any of them will get you s tarted, but I

generally recommend going with a plat form that most accountants and bookkeepers wil l be famil iar

with like QuickBooks, for example.

Among the first things that you need to do when using QuickBooks or any other sys tem, for that

mat ter is to set up your Chart of Accounts.

What is a Chart of Accounts?

A chart of accounts is a list of al l the categories of income, expense, assets and liabil it ies of the

company. Every company t ransaction, whether it is coming in or going out , needs to have a

category assigned to it . That is how you know the difference between your market ing costs, and

your advert is ing expenses, for example and how to t rack your online advertising expenses

separately from your radio advert is ing.

This chart can be as simple or as complicated as you need. And, you can always modify your

chart of accounts to reflec t changes in your business.

Here are some sample accounts tha t you might want on your chart of accounts:

Ass et Acc ounts

Cash: You want a separate account for each bank account you have, including payroll

accounts, certi ficates of depos it , etc.

Inventory: This should reflect the cost of goods that you have on hand, but are not yet

sold.

Accounts Rece ivable : This account is used to record amount owed to the company for

goods that have already been sold, or services already performed.

Land: The cost to purchase and improve land for company use.

Buildings: The cost to purchase or build buildings used by the company.

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Equipment: The cost to purchase equipment used by the company.

Lia bi li ty Acc ounts

Accounts Payable: Amounts owed for goods and services purchased by the company under

terms.

Loans Payable : Any principal paid on loans.

Interest Payable: Any interes t paid on loans

Ope ra ting Inc ome Ac counts

Sales Products: Usually , this account has a number of sub-accounts to reflect the various

products or product l ines offered by the company.

Sales Services: This account might have a number of sub-accounts to reflect the various

services or service l ines offered by the company.

Renta l Income: Any payment received for rental of company propert ies.

Interest Income: Any interest received on depos it accounts or accounts payable.

Ope ra ting Expense Acc ounts

Salaries: Salaried employees receive a fixed amount on a regular basis. Salaried

employees are typically but not always involved in some level of management.

Wages: Wages are paid to non-salary employees, These are usually based on hourly -

wages.

Supplies: Any amount spent on office supplies .

Rent: Any amount payed for use of fac il it ies.

Uti li ties: Any amount paid for power, water, heat , and sewer, etc .

Insurance : Any amount paid for business insurance, including; indemnification, liabil ity,

errors & omissions, etc .

Telephone: Any amount paid for telephone use. This account might have additional sub-

accounts to reflect local, long-dis tance, and tol l-free service, etc.

Marke ting: Any amount paid for market ing materials, brochures, webs ite, search engine

opt imizat ion, branding, etc .

Advertising: Any amount paid to place advertisements. This account might have sub-

accounts for various advert is ing media, such as radio, televisions, direc t mail, pay-per-cl ick,

etc .

Employee Bene fi ts: Any amount paid for employee health insurance, education

reimbursement , li fe insurance, etc.

Automobile: Any automobile-related expenses.

Trave l: Any expenses related to hotels, tax i fares, airline flights , etc.

Mea ls & Enterta inment: Any amount spent on food, beverages and entertainment which

is work-related.

Postage & Shipping: This could include sub accounts for various shipping carriers , or

shipping services, such Next-Day, 2nd Day, Ground, bulk mail, etc .

Taxes: This account may have sub-accounts inc luding property taxes paid, sales tax paid,

and federal, state or local income taxes, etc .

Repairs & Maintenance : Any amounts spent of repairing or maintaining company assets .

Bad Debt: This account would reflec t any amounts owed for goods or services sold, for

which payments have not be received, and which the company will not longer pursue.

Credit Card Processing: Expenses related to merchant account processing of credit cards ,

debit cards or ACH payments .

Contract Services: Amount paid to non-employee contractors, inc luding many out-sourced

services.

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This list should help you get s tarted set ting up you chart of accounts, but i t is possible even

likely that you wil l need other accounts that wil l require additional ass is tance. For example,

there are several different accounts that could require different types of deprec iation for tax

purposes.

Call 800-508-1726 and ask about how NCH Tax Solut ions can help you get your books ready for

next years tax season.

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