If you’re like most small business owners, you don’t have the training, knowledge, or inclination to handle your own accounting. But because dealing with numbers is an inescapable part of doing business, you may be curious about some bookkeeping questions.
For example, conversations with your CPA or even with fellow small business owners may have left you wondering, “What is a chart of accounts? Do I have one? Do I need one?” We at Remote Books Online may not yet know your specific situation, but we do know the chart of accounts (COA) is a critical foundation for any business’s accurate bookkeeping.
If you’re asking questions about it, we’ve got answers you need to know!
The Chart of Accounts (COA) Shows Revenues and Expenses at a Glance
While some bookkeeping and accounting terms mystify the uninitiated, a chart of accounts is exactly what it sounds like. It is an index of all financial accounts a company uses, listed by name, number, and identification codes. So, a chart of accounts includes all accounts in these five key categories:
- Revenue – The money your business takes in.
- Expenses – The money your business pays out.
- Assets – The tangible or intangible items adding value to your business.
- Liabilities – The business’s debts.
- Equity – The business’s assets minus its liabilities.
COAs also include contra accounts—accounts with balances opposite the normal balance, used to report both an account’s original and net amounts. COAs break accounts in each of the five categories into sub-accounts. For example, a chart of accounts for a small business would list cash on hand, savings accounts, and petty cash under Assets; accounts payable, payroll, and company credit cards under Liabilities; and so on. Each business’s COA must be tailored to what the company does in order to be helpful, so some will require more detailed sub-accounts than others. Generally, liquid balance sheet accounts (such as cash and accounts receivable) lead the COA, followed by income statement accounts (operating and non-operating revenues and gains, cost of sales, operating and non-operating expenses, and losses). Accounts more closely related to regular business operations are listed first. The chart of accounts numbering system used may be alphabetical, numeric, or alphanumeric. Many businesses use these three-digit numeric ranges:
- 100s: Assets
- 200s: Liabilities
- 300s: Equity
- 400s: Revenue
- 500s: Cost of goods sold
- 600s: Expenses
- 700s: Other revenues
- 800s: Other expenses
These ranges should prove sufficient for a small business chart of accounts, when no need for departmental or divisional information exists. But as businesses grow, the numbering system used in the COA can grow, too.
Why the Chart of Accounts is a Critical Business Tool
While it provides an overview of your business’s revenue and expenses, the COA allows you to record and report your financial transactions in more detail than in your general ledger. It gives you a clear snapshot of your business’s financial health in any given accounting period.
Without the carefully categorized financial data a chart of accounts provides, you simply don’t have enough data to make informed decisions about your business.
“Whether you’re a freelancer, a sole proprietor, or have been in business for years,” former accountant and non-profit development specialist Mary Girsch-Bock writes for The Motley Fool’s Blueprint, “your chart of accounts is the most important component of your business.”
A strong and solid COA can help you focus on your business’s most pressing areas for growth and improved performance. But if your COA isn’t properly set up, it’s not going to yield the accurate insights you need to succeed.
Even worse, when outside parties need to know how your business is doing—whether you’re filing income taxes, applying for a business loan, or perhaps even looking to sell so you can retire—a COA in disarray can lead to a distorted picture of your enterprise’s performance, with negative consequences.
If you don’t already have a correctly organized, comprehensive COA in place, Remote Books Online will build one for you as part of our bookkeeping and accounting services.
We’ll ensure your financial statements always give you the information you need to make smart choices about achieving greater success for your business.