The chart of accounts is a list of all accounts used by an organization in its financial reports. When you use software such as Quickbooks, this is a standard accounting system function that allows you to organize all data into financial reports for the business.
What Is a Chart of Accounts?
The chart of accounts allows you to assign each transaction to a category in the general ledger so that you can view a complete list of assets, liabilities, equity, income, and expenses.
When setting up financial accounting software, it is very important to customize the chart of accounts according to the needs of a specific business. There may be significant differences between the reporting requirements and the chart of accounts of different businesses.
For example, if you run a DTC e-commerce business on Shopify, you will want to clearly see your best and worst products. The customer service business wants to see aging accounts payable and aging accounts receivable.
It should be noted that it is important to adopt a consistent coding system for the chart of accounts, especially if you have multiple people in your accounting software (for example, tax accountants, bookkeepers, virtual CFOs, you and your senior management team).
Moreover, you need to be very specific about which transactions should be coded into each category so that your data remains consistent over time. For example, properly publish transactions related to the cost of sales (product cost, fulfillment, postage and shipping, merchant fees) to have a clear gross profit margin.
The purpose of tracking data in this way is to allow you to compare over time in order to make data-driven decisions as your business grows. When you do not have consistent records, the data you rely on may be inaccurate. This, in turn, can lead to poor financial decisions and hinder your growth.
For example, these inconsistencies may appear on your balance sheet. Your balance sheet shows the following:
Assets
This could be inventory (inventory and moving), prepayments from supplier deposits or equipment needed to convert raw materials into finished products, or even cash in bank accounts or other intangible assets such as trademarks and patents.
Liabilities
This is a record of all debts of your company. This may include loans, accounts payable, payroll tax payable, sales tax payable, and accrued expenses.Equity Accounts
Equity accounts is the value of the company after subtracting debts or liabilities.
For example, if you believe that a loan payment was included in liabilities, but your bookkeeper has recorded the payment in your expenditure category, then your debt will not decrease, and your expenses will increase. This would reflect negatively in your Equity Accounts.
Adjusting Your Chart of Accounts
You can add accounts as you need throughout the year, but don’t delete old accounts before the end of the year. Deleting certain types of accounts before review could cause other accounts to be overstated.
If changes are required, it is better to put them in the Ask My Accountantfor that particular transaction rather than under the recurring expense account section that was originally posted. Thiswill help to minimize the time needed clean-up at year end.
In Closing
The chart of accounts is an essential tool that provides companies with a complete and accurate list of all accounts in their general ledger, where these accounts are divided into several subcategories. This is a great way to organize finances and provide shareholders with more financial information.