What is chart of accounts?
A chart of accounts is a list in a business’s general ledger that indexes and keeps track of all monetary transactions.
The chart of accounts is organized with a numbering system to help keep recordkeeping more organized. It includes categories such as assets, liabilities, and equity on the balance sheet and revenue and expenses on the income statement.
The number of accounts listed reflects the size of the company; larger businesses typically have more categories than smaller ones do.
What are the different types of charts of accounts examples for small businesses?
1. Entry-level chart of accounts
An entry-level chart of accounts is a list of accounts used for recording transactions in a company’s general ledger. It organizes transactions into groups, such as assets, liabilities, equity, expenses and revenue. The purpose of having an organized chart of accounts is to help track money coming in and out of the company more efficiently.
An entry-level chart of accounts typically includes five primary account types:
Assets.
Liabilities.
Equity (or Capital).
Expenses.
Revenue.
Asset Accounts
An asset account is an account used by a company to keep track of the assets that are owned by the company.
In accounting terminology, a capital expense that has been debited to an asset account is referred to as a capitalized expense.
The asset account of the company reflects the number of assets that the owner brought into the company when he founded it.
As the name implies, an asset account is an account that a company uses to keep track of its assets.
Liability Accounts
It is important to understand that liability accounts are sections of the company’s books that show its debt.
As soon as a liability account is debited, the amount owed by the company is reduced (i.e., the liability increases), and as soon as a liability account is credited, the amount owed by the company increases (i.e., the liability decreases).
Owner’s Equity Accounts
This type of account represents the amount of money that the owner(s) of the business has invested in the company.
Owner’s equity accounts can be used to track the amount of money that has been reinvested into the business, as well as the amount of money that has been withdrawn from the business.
Operating Expense Accounts
Operating expenses are those costs incurred in the day-to-day operations of a business. These expenses can include rent, utilities, payroll, insurance, and other miscellaneous costs.
Operating expense accounts are important to track, as they can give you a clear picture of where your money is going and how much it is costing you to run your business. By tracking these expenses, you can make informed decisions about where to cut costs and how to best allocate your resources.
There are a number of different ways to categorize operating expenses. One common method is to divide them into three categories: direct, indirect, and general.
Direct expenses are those that can be directly traced to the production of a good or service.
For example, if you are a manufacturer, your direct expenses would include the cost of raw materials, labor, and overhead.
Indirect expenses are those that cannot be directly traced to the production of a good or service.
For example, if you are a retailer, your indirect expenses would include the cost of rent, utilities, and advertising.
General expenses are those that are not directly related to the production of a good or service.
For example, if you are a service provider, your general expenses would include the cost of office supplies and travel.
Operating Revenue Accounts
Revenue accounts are important for any business, large or small. They provide a way to track the money coming in from sales and other sources. The chart of accounts for a small business should include several revenue accounts.
Operating revenue accounts are those that pertain to the day-to-day operations of the business. This might include sales of products or services, rent from tenants, and interest from investments.
Non-operating revenue accounts are those that don’t directly relate to the business’s operations. This might include income from the sale of assets or investments, gifts, and grants.
The chart of accounts for a small business should also include several expense accounts. These are used to track the money going out to pay for the costs of running the business.
Other secondary accounts may also be included depending on the needs of the business. Examples include but are not limited to: Accruals/Deferrals/Other Adjustments; Accounts Payable; Accounts Receivable; Allowances/Depreciation/Amortization; Bad Debt Expense; Capital Gains Losses or Deferred Taxes; Cash Flow Statement Adjustments; Contingency Reserve; Customer Deposits or Prepayments; Customer Discounts or Credits; Depreciation Expense; Donations In Kind Recording Account; Earned Income Tax Credit, Employee Bonus Recordings, Employer Contributions to Retirement Plans.
2. Advanced chart of accounts
An advanced chart of accounts is a list of accounts used for recording transactions in a company’s general ledger. It organizes transactions into groups to help track money coming in and out of the company.
To create an effective chart of accounts, it is important to organize it with simplicity in mind. Most QuickBooks Online plans support up to 250 accounts, so the average small business should not have to exceed this limit if its accounts are set up efficiently.
A typical chart of accounts includes five primary account types: assets, liabilities, equity, expenses, and revenue. A numbering system helps organize these categories and numbers reflect the size of your company’s balance sheet (assets & liabilities) and income statement (revenue & expenses).
3. Custom Chart of Accounts
A Custom Chart of Accounts is a chart of accounts created specifically for a particular business. It includes all five account types found in standard accounting charts of accounts: assets, liabilities, equities/owners’ equity, revenue/sales, and expenses/costs. It provides an in-depth look at the financial activities taking place within a business by separating transactions into different account types.
Having a custom chart of accounts can be beneficial for small businesses because it allows them to track specific transactions more effectively than with a standard default chart of accounts. By having sub-designations for each type of account (such as 1-XXXXX for assets or 2-XXXXX for liabilities), businesses can keep better track of their finances and ensure transparency throughout their accounting system. Furthermore, customizing the numbers used in each designation allows businesses to create an even more tailored system that fits their specific needs better than generic default numbers would.
4. Chart of accounts for small business
A chart of accounts is a list of accounts used to keep track of a business’s financial transactions. It typically includes balance sheet accounts such as assets, liabilities, stockholders’ equity, and income statements such as revenue and expenses.
A chart of accounts for small businesses typically includes more detailed account types than those used by larger companies. Examples include assets such as cash or receivables; liabilities such as loans payable or accrued expenses; income items like sales commissions or royalties; and expense categories like utilities or travel expenses.
How to create a chart of accounts for small businesses?
Step 1: Determine the purpose of your chart of account
A chart of accounts is a system used to organize, classify, and number the financial transactions of a small business.
The purpose of a chart of accounts for a small business is to provide an organized way to track and report on the company’s financial information. It helps ensure that all relevant transactions are categorized correctly so that they can be easily identified in reports such as balance sheets and income statements.
Additionally, it provides a four-digit numbering system so that transactions can be tracked accurately across time periods. By creating this system upfront with careful consideration for your individual business needs, you will have an effective accounting system that allows you to make informed decisions about future strategies or changes in operations.
Step 2: Choose the main account type
The options for choosing the main account type for a chart of accounts for a small business are the same as those for any other business. They include assets, liabilities, equity, revenue, and expenses.
However, the options may be more limited for smaller businesses due to their smaller scale and fewer resources available to them. For example, some businesses may not need to track assets or liabilities but instead focus on tracking only revenues and expenses.
Step 3: Create other account types
1. Determine the categories for your account types. These should be unique to your business and include asset, liability, equity, revenue, and expense accounts.
2. Select an appropriate software application that offers multiple types of accounts for each category you have identified (e.g., “Primerica Inc” might have separate assets accounts such as cash or investments).
3. Create a chart of accounts with the appropriate account type for each transaction that takes place in your business (e.g., if you buy a new computer system then there will be an entry in the computer equipment account).
4. Ensure that all transactions are coded correctly so they appear in the correct financial statement columns (e.g., revenue should go into the income statement column).
Step 4: Assign account numbers
1. Start by listing the five main categories: Assets, Liabilities, Equity, Revenue, and Expenses.
2. Give each category an account number between 101 and 199 for Assets accounts; between 201 and 299 for Liability accounts; between 301 and 399 for Equity accounts; between 401 and 499 for Revenue accounts; and between 501 and 599 for Expense accounts (the example below represents a medium-sized business).
3. Use a four-digit numbering system to help organize all your accounts (1000 – 1900 for Assets; 2000 – 2900 for Liabilities; 3000 – 3900 for Equity; 4000 – 4900 for Revenue; 5000 – 5900 for Expenses).
Step 5: Set up matching revenue and cost of goods sold accounts
1. Start by creating a blank chart of accounts in a spreadsheet program such as Microsoft Excel. Add the name of each account in the left column, and include both revenue and cost of goods sold accounts.
2. For each account, decide what type it should be (e.g., asset, liability, equity). Then assign an appropriate category type to each one (e.g., assets = “Equipment”).
3. Next, add details for each account such as description or purpose so that you can easily identify them when reviewing reports or statements later on down the line.
4 . Finally, double-check that all accounts are correctly labeled with their corresponding category types before saving your chart of accounts!
Step 6: Normally a debit or credit account
A chart of accounts for a small business is a list of all the accounts used to track financial transactions.
Typically, this will include accounts such as cash, revenue, expenses, and liabilities. Small-business accounting software like Xero or Zoho Books will set up this chart of accounts with default categories for debit and credit entries. These programs also automate the double-entry accounting process so that you can easily record transactions in one entry and have their balance out on the other side automatically.
Step 7: Create an overview account
1. Create account categories that apply to your company. This will help you organize all of your company’s financial information and make it easier for you to track expenses and revenues.
2. Assign a four-digit numbering system to the accounts you’ve created, starting with “01” for the first account and continuing in sequence until all accounts have been numbered.
3. Add new accounts, delete ones you don’t need, or edit names of existing accounts by going to the gear icon in the upper right corner of QuickBooks and clicking “Chart Of Accounts”.
4 . To customize your Chart of Accounts, add sub-accounts by clicking on the “Subaccount” check box when adding/editing an account title (e . g Retail Sales – Internet Sales).
Step 8: Keep your chart of accounts organized and keep it that way
1. Aim for consistency: Create a chart of accounts that doesn’t change much from year to year, enabling you to compare the performance of different accounts over time.
2. Don’t go overboard with detail: Your chart of accounts should give you important information but don’t need a separate account for each product or service you sell – certain items can be lumped together.
3. Wait to delete old accounts: It’s a good idea to wait until the end of the year to delete old accounts; renaming or merging them can create headaches when tax time rolls around.
4. Close or make old accounts inactive: Make it a policy to review all of your accounts each year and determine if there’s an opportunity to consolidate some categories into fewer ones – this will make it more manageable overall when filing taxes or reviewing statements/invoices, etc.
Conclusion
The chart of accounts examples for small businesses are sets of account codes used to track the financial transactions of a business.
The article explains that for small businesses, a simple chart of accounts can be used that includes only a few major categories such as assets, liabilities, income, and expenses.
This makes it easier for business owners to understand and manage their finances since they do not have to keep track of too many different accounts.
Additionally, the article suggests that businesses should customize their chart of accounts based on their needs and the accounting software they use so it fits better with their overall financial strategy.
