140: Understanding Your Chart Of Accounts Whether You Are Starting A Business Or Side Hustle
140: Understanding Your Chart Of Accounts Whether You Are Starting A Business Or Side Hustle, A Solopreneur, Entrepreneur, Mompreneur, Freelancer, Bookkeeper, Virtual Assistant, Business Owner, Or Self-Employed
Every business has a chart of accounts, whether they are using a computerized software system or simply recording their income and expenses manually. Even if you simply have a list of accounts you use periodically, this is actually your chart of accounts. You’ll use this chart of accounts every time you are doing the bookkeeping for your business. In today’s podcast episode, I’m 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. Whether you are starting a business or side hustle, you’re a self-employed individual, a solopreneur, entrepreneur, mompreneur, freelancer, small business owner, a remote, virtual, online, or in-house bookkeeper, or a virtual assistant or VA; if you struggle with understanding your chart of accounts 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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Show Notes:
Every business has a chart of accounts, whether they are using a computerized software system or simply recording their income and expenses manually. Even if you simply have a list of accounts you use periodically, this is actually your chart of accounts. You’ll use this chart of accounts every time you are doing the bookkeeping for your business. In today’s podcast episode, I’m 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. Whether you are starting a business or side hustle, you’re a self-employed individual, a solopreneur, entrepreneur, mompreneur, freelancer, small business owner, a remote, virtual, online, or in-house bookkeeper, or a virtual assistant or VA; if you struggle with understanding your chart of accounts 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 will 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 when 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 so that you can get a report that will show you exactly how much of each transaction you had. These transactions flow through to your balance sheet and your profit and loss statement or income statement. These are the reports you will need 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 your bookkeeping 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 complicated. 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 they 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. Many accountants will use numbered accounts, but in all honesty, I feel this is something that was used more in the past or with bigger businesses. 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 if you don’t have a specific need for them.
Let’s take a bird’s eye view of your chart of accounts. 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 that you have accurate and useful financial information.
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. For example, one business may have a loan which would show up in its liability section, and another business may not have any liabilities at all. Your business can always start with a sample chart of accounts and tweak it to exactly how you need your chart of accounts for your business.
Typically 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 particular 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…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 items 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 in 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 it will help you remain consistent when recording your transactions throughout the year.
Your chart of accounts will also be a great starting point for you if you are looking at setting up a budget. If you are struggling with getting started with your budget, 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 one of the most important aspects of your business’s 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.
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 are a virtual assistant and you have questions regarding how your chart of accounts is set up, let me know, and remember, make sure you sign up for one of my consultation sessions. These sessions are so valuable for the clients who have signed up already. My promise to you after the session is that you will understand more about your business and your personal life after the session, and you’ll walk away with knowing exactly what you should be working on next to reach the success you’re striving for. You can go to www.FinancialAdventure.com and click on the work with me button. I’m looking forward to meeting with you soon and digging deeper to see where you currently are in your business and start creating actionable steps so that you can reach your vision and goals for the future, not only in your business but also in your personal life. I’m ready to work with you, see all of your successes, and watch you become a thriving business owner while creating your best work-life balance. I’ll post links to this and other valuable resources for business owners and accountants where you are listening to this podcast.
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.
