If you’ve ever had trouble setting up a Chart of Accounts for your business, you’re not alone! Although it is an extremely important part of your accounting system, there aren’t a lot of resources telling you what needs to be included.
Some software systems offer preselected Chart of Accounts (COA) depending upon your profession and these work OK but are very generic. The issue I have with them is mostly the order – alphabetical isn’t normally how a business owner looks at the reports, especially the Profit & Loss. Most owners I’ve worked with like to see the biggest expense items first, followed by the lesser expenses. Others like to see certain items grouped together with sub-totals for big categories. If I’m given the choice, I normally put things in the same order as their tax return for ease of comparison.
I’ve always worked with the people who use the accounting software & gotten feedback – they know their bills, purchases, etc. better than anyone so listening to their opinions is smart. However, the final decision is up to the business owner (or whomever is appointed to lead the process) in case of disagreements.
Also realize that most COA can be modified (be sure to check your software!). If the software requires a numbered COA, be sure to leave ‘spaces’ (unused numbers) so you can later put in anything you need to. This can happen often, especially if you add a new revenue category, or new types of expenses (who remembers when ‘Web Hosting Fees’ wasn’t in a COA?).
Don’t forget the Balance Sheet items! Be sure to include all bank/investment accounts (do you need one for PayPal?), and make sure you have enough asset categories (for fixed assets, I generally use Property, Equipment, and Vehicle categories, but some businesses may require more detail), and be sure to put in the Accumulated Depreciation. For ‘Other Assets’, do you need Prepaid Insurance or Loans to Employees (or Prepaid Commissions)? Something frequently overlooked is a Current Liability account for Accrued Payroll (used mostly at year-end when you’ve got a few days left in the calendar year but you haven’t paid the employees yet). I used to use an Other Liability Account called ‘Holding’ for things like Child Support withheld from employee checks – when the monies were paid to the appropriate agencies, I then could look at that account and check it was at zero. Just something I thought was easier…
If you’ve got any questions on COAs, don’t hesitate to ask! Also, please send me any ideas you have or have used that you’d like to share!
Thomas C. Hodge, CPA
The Hodge Group
4118 N. Western Avenue
Chicago, IL 60618