Chart of Accounts – The Backbone – Part I

Ha!  Chart of accounts is just an accountant’s thing — not important to me as a business owner.  Think again.  The “Chart of Accounts” or some simply call it categories, is the structure for your bookkeeping.  Think of it as the framing of a house — you wouldn’t try laying bricks, placing windows, etc. without a house being framed.  Sloppy chart of accounts equals sloppy financial records.

Here are some tips for a workable chart of accounts.

1.  Look at the IRS forms that you will be reporting, i.e. a schedule C for sole proprietors and single member LLCs.  This will give you an idea of the categories that are necessary.  The difference between the entities is all in the “equity.”  Income and expenses are the same, so a schedule C is a good place for everyone to look.

2.  Think of what categories YOU want for keeping up with certain aspects of your business.

3.  Use a numbering system for your chart of accounts.  This is good habit building if you’re doing it by hand, but best practice if you are using a computer program.  With a numbering system you’ll be able to print your financial statements with income and expenses in alphabetical order, and in general, things will be easier to find.  And you’ll be consistent with the rest of the accounting world.  Leave space when numbering so that you’ll be able to add if needed.

4.  Most important — KEEP IT SIMPLE.  You need a nice balance.  If you make the chart of accounts too detailed, you will lose interest in categorizing items.  A too detailed chart can also become confusing.  There are other ways to keep up with details rather than making a new category in your chart of accounts.

5.  Don’t over-think it.  Nothing is set in stone.  You should have two goals in sight with your bookkeeping system: Know how your business is doing and be able to accurately report to the IRS.

6.  Always have a category called “Ask my accountant.”