14: Understand, Clean-Up And Manage Your Chart Of Accounts And Record Your Transactions Correctly ~
14:Understand, Clean-Up And Manage Your Chart Of Accounts And Record Your Transactions Correctly ~ Whether You Are A Small Business Owner, You Have A Virtual Online Bookkeeping Business Or You Are A Virtual Assistant Or VA
Believe it or not, if you are doing your own bookkeeping you have a chart of accounts. If you are using an Excel spreadsheet, QuickBooks or another system to record your bookkeeping, you will have a chart of accounts. You may just have a list of accounts you use periodically, but this is your actual chart of accounts. Whether you are a small business owner, a virtual online bookkeeper or a virtual assistant doing bookkeeping, you will use a chart of accounts when doing your bookkeeping. Today we are jumping into what your chart of accounts is, how you should maintain it and why it even matters to your small business. We’re breaking down each part of your chart of accounts and discussing what each section means as well as how you should be recording your transactions. If you struggle with this in your business, I promise after this podcast you will gain more confidence and will find you have one less reason you hold off on doing your bookkeeping on a consistent basis. I want to give you all the tools to make sure you understand your business finances and that they are up to date so that you have accurate information to make smart business decisions. Listen in as we clear all the confusion around your chart of accounts and what each account really means…
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Believe it or not, if you are doing your own bookkeeping you have a chart of accounts. You may just have a list of accounts you use periodically, but this is your actual chart of accounts. Whether you are a small business owner, a virtual online bookkeeper or a virtual assistant doing bookkeeping, you will use a chart of accounts when doing your bookkeeping. Today we are jumping into what your chart of accounts is, how you should maintain it and why it even matters to your small business. We’re breaking down each part of your chart of accounts and discussing what each section means as well as how you should be recording your transactions. If you struggle with this in your business, I promise after this podcast you will gain more confidence and will find you have one less reason you hold off on doing your bookkeeping on a consistent basis. I want to give you all the tools to make sure you understand your business finances and that they are up to date so that you have accurate information to make smart business decisions. Listen in as we clear all the confusion around your chart of accounts and what each account really means…
Welcome Back…If you do bookkeeping on any level, you’ve more than likely heard the term chart of accounts. You may or may not know what this means, but today we are going to dive deep into what it is and why it is so important to your small business.
I’m going to start out by saying that no matter what system you are using to do your bookkeeping, you will have a chart of accounts. If you use an Excel spreadsheet, QuickBooks Desktop or Online, Wave, or something similar, there will come a point in time where you need to decide how to allocate each transaction to a specific account. This is where your chart of accounts comes into action.
Whether you have a shoe box of receipts or a nicely balanced check register, you will need to allocate each of these transactions to get a report showing you exactly how much of each transaction you had – or a summary to do your tax return at the end of the year. I want to encourage you no matter what system you use to try to do it on a consistent basis, so you don’t feel overwhelmed doing it all at one time – this is where I see people struggle and stress over getting everything ready prior to getting their taxes done.
Bookkeeping doesn’t have to be hard. I want you to imagine each of your transactions for your business. Now imagine you have a group of buckets each one with a label on it such as telephone expense, and all you need to do is take each of your transactions and put them into the bucket that best fits what that transaction was for. Each of these buckets represents an account on your chart of accounts. Once you are done, you simply take all the transactions from that bucket, add them up and you have the total for that account. Pretty simple, right? Your chart of accounts sorts, organizes and consolidates each of these accounts making it easier for tracking each item. It is truly the backbone of your business’s finances.
So, why when some people hear the term chart of accounts or general ledger accounts, their palms start to sweat, they get nervous and start to shut down? Well, maybe this is an extreme exaggeration, but in all reality, I believe it is realistically because they don’t really understand what the chart of accounts does for a business.
If you are using a computerized software system like QuickBooks Desktop or QuickBooks Online, you can easily go to your chart of accounts and get familiar with each of the accounts you have set up for your business. I often get the question about having a number assigned to each of your accounts. This is something that many accountants will use, but in all honesty, I feel this is something that was used more in the past. With all the computerized software systems that are out there, the account numbers have started to disappear and people are just using the actual name of the account rather than the number…and let’s be honest, if we don’t need to remember that your checking account has the account number 1001 attached to it, that is just one less thing to worry about. Make it simple for your business and don’t use account numbers.
We’re going to start with a quick bird’s eye view. When you look at your chart of accounts, you will notice that it is broken down into sections. This is done so as you record transactions into each account it is properly deciding where in your financial statements the amounts should go. If you’ve been listening to this podcast for a while, you’ve heard me talk about your financial statements being made up of your Balance Sheet and Profit and Loss Report, which is also called your Income Statement. Each time you put something into a bucket that belongs on your Balance Sheet, those amounts go to that report. When you put something into a bucket that belongs to your income statement, those amounts will show up on your income statement. This process ensures you have accurate and useful financial information to make smart business decisions.
The sections in your chart of accounts are: Assets, Liabilities, Equity, Revenues and Expenses. Here’s a quick explanation for each of these items: your assets are anything that you own. This would be items like your checking account, accounts receivable and fixed assets. Your liabilities are anything that you owe. Your accounts payable – or bills you need to pay, loans and credit cards would fall in this category. Your equity is the difference between your assets and your liabilities and also includes any personal funds you are taking out of your business. Your revenues are all the sales you have made in your business and your Expenses are any costs you are incurring in your business. Your chart of accounts should be tailored to your unique business. Each business will have a little different chart of accounts according to the nature of their business. You can always start with a sample chart of accounts and tweak it to exactly how you need your chart of accounts for your business.
Normally when you are recording your typical transactions, the majority of them are going to be going into your revenue and expense buckets.
When you are deciding which accounts to add to your chart of accounts, don’t go too overboard. Keep the end result in mind. If there is a certain expense you would like to see the total for at any period of time, you would want to add this as an additional account on your chart of accounts. For example: If you do a lot of advertising, and you would like to know exactly how much you have spent on Facebook ads, billboard advertising and print advertising, you will probably want to add a subcategory under your original advertising account for Facebook Ads, Billboard Advertising and Print Advertising. Then when you go to record each of these transactions, you will want to make sure you select the correct subaccount. Remember the saying, garbage in/garbage out? Well, that is exactly what you want to be thinking when you add subaccounts. If you don’t specifically record each transaction into the subaccount, you will not be able to get the quick reporting you wanted when you originally set up your advertising accounts. What I don’t want you doing is setting up an account for every single transaction though…especially if you don’t see yourself needing to see a total for that specific account. For this, I will give you an example of office expenses. If you would set up a subaccount for paper, ink, envelopes and stamps you would need to record each of these purchases in each subaccount. If you never really even want to know how much you have specifically spent on envelopes, this could easily just be recorded in one main office expense account and would make your reporting much easier to read. Like I mentioned before, keep the end in mind. If there is a reason you would like to have an account set up, then set it up. But try not to go overboard with too many accounts. Keep it simple.
Go through your chart of accounts and make sure you know what each of the accounts is for. If you have accounts on your chart of accounts that you never use, you should either delete them or at the very least, make them inactive. Do not delete any chart of account item that you have used in the past. If it was used before…even if it was used for just one transaction, you will want to make this account inactive rather than deleting it. By keeping your chart of accounts nice and clean it will eliminate any accidental entries the wrong account when you are recording your transactions.
Make sure that each account is clearly titled so you know exactly when you should be using it and will help you remain consistent when recording your transactions throughout the year.
Your chart of accounts will be a great starting point for you too, if you are looking at setting up a budget. We’ll talk more about budgeting in the future, but for now, just know that you could go through your chart of accounts and decide for the year just how much you think you will spend in each of the categories.
It doesn’t matter if you are just starting your business, or if you have been in business for many years, your chart of accounts is the most important aspect of your businesses financial reporting. If you don’t have your chart of accounts set up properly, your reporting will be off, and you will not have accurate information to rely on.
I am going to post a sample chart of accounts in our Women Business Owners ~ Ultimate DIY Bookkeeping Boutique. If you haven’t joined our community yet, please join us. It is free and a great place to connect with other like-minded business owners and bookkeepers just like you. I’ll post a link in the show notes, or you can search Women Business Owners ~ Ultimate DIY Bookkeeping Boutique on Facebook and you’ll find us there. Even though this community is geared toward women, all are welcome. You can use this sample chart of accounts to start looking into your chart of accounts to make sure everything is set up correctly.
If you are working with an accountant or bookkeeper, schedule a quick review of your chart of accounts with them. If you are doing your own bookkeeping, are a bookkeeper or if you are a virtual assistant and you have questions regarding how your chart of accounts is set up, let me know…I would be happy to help you! You can email me at Info@FinancialAdventure.com and I will personally respond to your email.
And, you know I’m going to ask…what’s at least one thing you will take away from this episode that will help your business succeed and grow your bottom line? If you need some accountability, join our PRIVATE Facebook community and post your action item, we’d love to support you.