Setting up your Chart of Accounts

I don’t think I’ve ever met an entrepreneur who actually likes the accounting aspect of running a business.  But it can’t be ignored.  Even if you don’t love it, you have to do it – or at least somebody in your organization has to do it for you.

But even if you don’t do your own bookkeeping yourself, you have an important responsibility to understand it.  If you don’t at least understand your accounting, you don’t have a prayer at understanding your company financials.  What’s worse, you are then at tremendous risk of becoming victimized by that somebody else because they know they can play with the numbers and you won’t catch it.  How many times have you read a news story about a long-time bookkeeper being arrested for embezzlement?  By taking responsibility to understand your own accounting practices and systems, you can eliminate the temptation and potential 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 liability company that he had recently formed.  “How do I get money into it?”  “How do I get money out of it?”  “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 questions.  I wanted him to focus for a minute on his accounting systems.  The systems (or lack thereof) that he uses to account for every financial transaction touch every question that he had.  And, as it turns out, he hadn’t really thought about it yet.

Personally, I can’t imagine the “dark ages” of business, when all the accounting had to be manually recorded in “double-entry” ledgers.  I am, gladly, a child of the computer age.  And, what better job is there for a computer in all of business than keeping the books?  There are several software packages available designed for small business accounting – some are stand-alone-installations, and others are hosted web services.  Almost any of them will get you started, but I generally recommend going with a platform that most accountants and bookkeepers will be familiar with – like QuickBooks, for example.

Among the first things that you need to do when using QuickBooks – or any other system, for that matter – is to set up your “Chart of Accounts.

What is a Chart of Accounts?

A chart of accounts is a list of all the categories of income, expense, assets and liabilities of the company.  Every company transaction, 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 marketing costs, and your advertising expenses, for example – and how to track your online advertising expenses separately from your radio advertising.

This chart can be as simple or as complicated as you need.  And, you can always modify your chart of accounts to reflect changes in your business.

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

Asset Accounts

• Cash:  You want a separate account for each bank account you have, including payroll accounts, certificates of deposit, etc.
• Inventory:  This should reflect the cost of goods that you have on hand, but are not yet sold.
• Accounts Receivable:  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.
• Equipment:  The cost to purchase equipment used by the company.

Liability Accounts

• Accounts Payable: Amounts owed for goods and services purchased by the company under terms.
• Loans Payable: Any principal paid on loans.
• Interest Payable: Any interest paid on loans

Operating Income Accounts

• Sales – Products: Usually, this account has a number of sub-accounts to reflect the various products or product lines offered by the company.
• Sales – Services: This account might have a number of sub-accounts to reflect the various services or service lines offered by the company.
• Rental Income: Any payment received for rental of company properties.
• Interest Income: Any interest received on deposit accounts or accounts payable.

Operating Expense Accounts

• 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 facilities.
• Utilities: Any amount paid for power, water, heat, and sewer, etc.
• Insurance: Any amount paid for business insurance, including; indemnification, liability, errors & omissions, etc.
• Telephone: Any amount paid for telephone use.  This account might have additional sub-accounts to reflect local, long-distance, and toll-free service, etc.
• Marketing: Any amount paid for marketing materials, brochures, website, search engine optimization, branding, etc.
• Advertising: Any amount paid to place advertisements.  This account might have sub-accounts for various advertising media, such as radio, televisions, direct mail, pay-per-click, etc.
• Employee Benefits: Any amount paid for employee health insurance, education reimbursement, life insurance, etc.
• Automobile: Any automobile-related expenses.
• Travel: Any expenses related to hotels, taxi fares, airline flights, etc.
• Meals & Entertainment: 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 including 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 reflect any amounts owed for goods or services sold, for which payments have not be recieved, 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, including many out-sourced services.

This list should help you get started setting up you chart of accounts, but it is possible – even likely – that you will need other accounts that will require additional assistance.  For example, there are several different accounts that could require different types of depreciation for tax purposes.  Discuss those with your accountant.

About the author  Derek is the man behind Pinnacle Business Academy and Pinnacle Business Coaching. Married for 22 years, with four sons, aged 20, 17, 17, and 13. Loves business, but loves family even more.