Often overlooked but very important for managing your business
Establishing the chart of accounts for your business is one of the first things completed when setting up accounting software. During the set-up process, you may have answered a few questions about your business which customized the chart of accounts for your industry but the adjustments to the pre-loaded list were likely minor. While it may be tempting to just go ahead and use the list that was provided to you it’s necessary to understand the importance of the chart of accounts and spend some time creating one that’s right for your business.
Why?
In order to manage and grow your business, you need to have useful financial information. This useful information also needs to be easily obtained. Your chart of accounts organizes your business’s financial information and enables you to get what you need. Therefore, your ability to quickly access relevant financial information, whether it be detailed or summarized, depends on how well you designed your chart of accounts.
Let’s look at a really simple example of some accounts you might find on an income statement. A standard, pre-populated chart of accounts is likely to provide you with accounts like this:
Revenue
Cost of sales
Advertising
Bank fees
Office supplies
Occupancy costs
While these categories are relevant, let’s look at what a customized chart of accounts for a travel agency may consist of. The same accounts will be used but sub-accounts will be added to provide useful information for managing and growing your business.
Revenue
cruise
land
insurance
service fees
Cost of sales
consultant fees
royalties
Advertising & marketing
social media
promotional material
client appreciation
Bank fees
account service fees
credit card fees
Office Supplies
Occupancy costs
rent
utilities
See the difference?
With the customized chart of accounts, you can quickly and easily tell where your revenue is coming from and what you’re spending money on. Again, this is just a very basic example using a few accounts.
Final Thoughts
The goal is to keep your chart of accounts as simple as possible yet designed with enough detail to provide the information and reports needed for managing your business. Further, your chart of accounts should be stable and flexible to help your business plan and grow. Even though you can always add or remove accounts, you should spend some time figuring out what information you need and the accounts required to provide you with that information. Adding and/or deleting accounts distorts financial comparisons and these comparisons are very beneficial for analyzing your business.
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