Are you new to book-keeping or just never really understood the importance of the Chart of Accounts? Whether you are a sole trader or a limited company, I wanted to demonstrate why a clear and defined Chart of Accounts (COS) is so crucial and tips on how to organise it using QuickBooks.
Your COS is the backbone to your company’s financial record keeping and so ensuring that these are organised from the offset makes book-keeping more straightforward, easier to access specific financial information and simpler when reviewing the performance of your company.
The COA is your list of accounts that you use for transactions. They are typically shown in the order that they would appear on the financial statements. Without these set up clearly and organised, you may find difficulties when reviewing the performance of your company.
The COA is used to separate your revenue, expenditure, assets and liabilities with the aim of being able to review the company’s performance easier and quicker.
Every business is different and so your chart of accounts will be different too and should be tailored to best suit your business’ needs. However, the fundamental aspects remain the same across most businesses. The COA are made up of 5 different groups:
Assets: Accounts that represent anything that your business owns that has a value, such as, buildings, vehicles, inventory etc or anything that is liquid, such as, your business bank account, accounts receivables, loans to others etc.
Liabilities: Accounts that represent anything that your business owes, such as, bank overdraft, credit card, loans, VAT & tax due, trade payables etc.
Equity: Accounts that represents funds the shareholder has put into the business and their share of ownership. Accounts that also track the profit or losses accumulated by the business since inception through the “Retained earnings” account.
Income: Accounts that represent all sales made and all money received into the business such as, commissions, grants etc.
Expenses: Accounts that represent all expenses made from the business such as, wages, utilities, bank charges etc.
Each of the above groups will be broken down into many different categories. For example, within expenses you may have accounts for rent, utilities, interest and bank charges paid.
Tips on how you can keep on top of your Chart of Accounts using QuickBooks
Each account will have its own heading and line. When creating the account make sure the heading is simple, straightforward and means something to you.
You should ensure that different accounts are set up for all the different transactions that go through your business. This will help you to track the various elements with ease.
In Quickbooks online, for each account that is set up you can create sub-accounts of these:
• Income – rather than entering all sales into the one account, create separate sub-accounts of sales for the different types of goods you sell or services you provide or perhaps by geographical sub-accounts. This will assist you in decision making by being able to track the cashflow and profitability of each type of income.
• Expenses – you may want to keep track of how much you are spending on travelling. Rather than entering all transactions into a generic travelling expenses account, you can create sub-accounts of travel which could be broken into flights, hotels, taxis, subsistence etc.
Making sub-accounts for different expenditure could certainly assist when trying to set your budgets.
The longer you are in business, the more accounts you will have to set up. The sub-accounts also prevent the accounts becoming cluttered and untidy. Another solution is to use the classes function in QBO. This allows you organise your data without the need of having to set up multiple accounts. For example, if you are a hotel you might want to assign expenses and income to specific departments (class).
You should try and get into the habit of reviewing and updating these regularly to ensure you are using as up to date as possible accounts.
In addition to sub-accounts and classes, one final way of organising accounts on the financial statements is to use account numbers by turning on the “use account numbers” function in QBO. This will allocate accounts within a number sequence depending on what type of account it is. A typical example of account numbers would look like this:
How can Invicta Accounting help you?
As a QuickBooks Advanced Pro-Advisor Invicta is well placed to assist you in the management of the day-to-day book-keeping and financials.
Our cloud accounting software can help you keep track of your financials by providing a real-time snapshot of the performance of your company.
Gain access to expert accounting resources and knowledgeable professionals who can assist with any questions you might have. Plus be safe in the knowledge that we will remind you of those important accounting deadlines.
We want to see you succeed and help your business grow. Give Invicta a call today on 01624 672358 or email us at email@example.com for a free no obligation chat.