Chart of Accounts Demystified

A Chart of Accounts is simply a list of all the categories that will get the transactions on your business organized on to your Profit & Loss and Balance Sheet.

It is important because it is designed as a way to separate expenditures, revenue, assets, and liabilities, so a business can have a clear understanding and view of their overall financial health. It also helps meet the needs of management reporting while also complying with all financial reporting standards.

Here is what a typical Chart of Accounts looks like:

When you set up your financial accounting software, it is important that you customize the Chart of Accounts to the needs of your specific business. 

The Balance Sheet will have these accounts:

• Assets
• Cash and Cash Equivalents like Bank Accounts, Accounts Receivable, Inventory.  
• Non Current Assets such as: Fixed Assets like Office and Computer Equipment
• Liabilities
• Current Liabilities such as Short Term Debt like Credit Cards & Shopify Capital Loans (as these are paid back within 12 months), Accounts Payable, & Tax Liabilities
• Non-Current Liabilities & Equity such as Retained Earnings, Current Year Earnings and Owner Contributions/Drawings
• Equity 
• Investments
• Distributions

The Profit & Loss (Income Statement) will have these accounts:

Each of those categories will have sub-categories listed. For example, the expenses category might include . . . 

• Income / Revenue / Sales 

• Cost of goods sold (COGS) 
• General Expenses 
• Payroll / Salary Wages
• Software Subscriptions
• Bank fees
• Travel expenses
• Marketing Expenses

Here are some things to keep in mind:

Accounting/Bookkeeping terms can be confusing. Then to make matters even more confusing when you seek advice from many of those same people they can not translate the terms into a business owner language.

I am here to tell you that in most cases you can name accounts with terms you understand and make sense to you as the Business Owner.

One of the biggest mistakes I see business owners make is to create accounts for single transactions thus ending up with a Balance Sheet and/or Profit and Loss statements that are pages long, inconsistent and hard to understand.

You should consider what transactions you have in your business so you can group them together.

If you are using an accounting software like QuickBooks Online, getting your Chart of Accounts set up the way you want is essential to streamlining QuickBooks Online then you can optimize tools like the Bank Feeds & Bank Rules to help you manage your daily bookkeeping.

The whole point of categorizing financial transactions consistently is so that you can make comparisons over time that allow you to make data-driven decisions as your business grows. If you don’t have consistent record-keeping, you’ll be relying on data that could be inaccurate, which in turn results in poor financial decisions that can hamper your growth.











Disclaimer: This content is for entertainment purposes, and not intended to be proper tax or legal advice, please consult with a professional regarding your specific tax or legal situation(s).