Creating a Chart of Accounts for a Small Business
A chart of accounts lists the individual balances making up financial statement line items. Often, each account is labeled with a number so it is easy to tell where the balance fits into financial statements. For example, asset accounts might begin with a 1, liability accounts with a 2, and equity accounts with a 3. By establishing a list of accounts in the initial stages of setting up a bookkeeping system, companies can easily categorize transactions as they occur and ensure consistency of financial recording methods.
Sequence of Asset Accounts
Assets listed in the chart of accounts follow the same reporting sequence as the financial statements. The list begins with the most liquid items (cash) and progresses to fixed assets such as property, plant and equipment. Accounts receivable and inventory are also generally included by small businesses in their account listing.
Listing of Liability Accounts
Like assets, liability accounts are also set up in list format beginning with current liabilities, which are those due in one year or less. These current liabilities may include accounts payable, lines of credit, or loans due within the next twelve months. Long-term liabilities would include long-term debt and other payments which are not due in the next year.
Equity accounts represent the owners’ stake in the company. This may include cash investment by business partners or the value of property and equipment an owner contributed to the business. Net income or loss from the income statement also rolls into the retained earnings account, which is part of the equity section of the balance sheet.
Income Statement Accounts
Income and expense accounts are also included in a company’s chart of accounts. Income accounts generally encompass operating revenues like sales as well as interest income and other nonoperating revenue. All expenses are also assigned to an account which is tracked through the bookkeeping system, and eventually is reported in the financial statements.
During the initial setup of a bookkeeping system, line items can be created at whatever level of detail makes the most sense for a small company. Subaccounts may be used when appropriate. If accounts payable consists of two or three large accounts, such as a business credit card and one main supplier, then breaking out these separate accounts may be more helpful for management. On the other hand, if accounts payable is made up of numerous, smaller accounts, companies may choose to use one general account in a chart of accounts, with subaccounts created for each payee.
Bookkeepers should view the chart of accounts as a helpful tool. This report should not be difficult to maintain and create extra work. Many online accounting software programs are pre-loaded with a listing of accounts to help small businesses set up the structure of their bookkeeping system. Generally, accounts may be added to the chart of accounts as needed to help ensure accurate financial reporting.