When I was an accounting freshman in college, one of the very first aspects of accounting that we were taught was the chart of accounts and how it all works together. Simply put, the chart of accounts is the foundation and structure to your entire accounting system.
Without the chart of accounts, there would be no place to put your transactions. I’m going to walk through the bookkeeping side so you can see how important this is.
When you spend money on your business from your business checking account that I know you have set up, that creates a transaction. If you go to target and spend $50 on office supplies, it will show up in your bank as $50 from target. All of the transactions from your bank account are then put into your accounting system. This could be QuickBooks, a spreadsheet or something similar. Once the transaction is written out in that system, you have to ‘code’ it for your reports. QuickBooks doesn’t automatically know what it is or why you spent the $50 at target. And there is a lot of different reasons you could have been shopping at Target!
Food for a luncheon, office supplies, supplies a client is going to reimburse you for, a gift for a client and so on. QuickBooks is smart enough to import the transaction from your bank so you don’t have to do any data entry, but it’s not smart enough to know why you spent the money.
That’s where the COA comes in. The COA is a list of accounts that should be specific to your business. QuickBooks does give you a standard set of accounts, but these won’t tell you a ton when you run your reports.
Speaking of, let’s talk about reports for just a second. There are two main reports that you want to look at – your profit and loss and your balance sheet. Your profit and loss shows your income at the top and your expenses at the bottom. The difference between those is your net income, the money you made that wasn’t paid our in expenses. This is important to know because if you are constantly spending more than you bring in, then you will have to pay to keep the company running from something besides your revenue.
Your balance sheet shows your assets at the top, then your liabilities and then the equity you own in your business. This means that you see how much your company is worth on paper.
If you have let’s say $5,000 in your bank account and a $2,500 loan as the only asset and liability, then the equity you own in your company is $2,500 roughly. After all liabilities have been paid, it’s what’s left.
Both of these are going to be important to know as a business owner. And the way that you get accurate reports is with an accurate chart of accounts.
Now, you can get away with the standard chart of accounts in QuickBooks, no problem. But like I said earlier, it doesn’t tell you much and it’s certainly not customized to your business. Here’s what I mean by customized. Your COA can have accounts that reflect your business. Instead of just income, it can say ‘coa customization’ or ‘strategy session’ or ‘bookkeeping customization’ Those are all revenue streams in my business and when I run reports, I can see exactly how much each of them made.
It can also be customized to your expenses. Instead of just saying ‘subscriptions’ you can list them all separately so that anytime during the year, you can see exactly how much you spent on each one.
This is going to be so important when you run reports and customize report.
If you have a service package that requires specific subscriptions, you can customize a report to show the profit you’re making if all of your transactions are broken out and specific.