Three or four categories are usually sufficient for a small or medium-size business (SMB), or even just one might be enough. The account names will depend on your type of business, but the classification and grouping should be similar to the sample chart of accounts. This organized approach minimizes the risk of audits or penalties by ensuring compliance with tax regulations. Furthermore, a properly maintained COA can help identify opportunities for tax savings through precise tracking of deductible expenses, supporting a more efficient and transparent tax filing process.
- Instead, focus on meaningful categories and use sub-accounts to provide additional detail when needed.
- This helps you plan more effectively for future growth, manage cash flow, and prepare for both opportunities and risks.
- To do this, she would first add the new account—“Plaster”—to the chart of accounts.
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The document outlines a chart of accounts for a small business, listing account names, codes, financial statements, groups, and sub-groups. It includes over 70 accounts categorized under current assets, long-term assets, current liabilities, long-term liabilities, equity, income, cost of sales, and expenses. Within the five general types of categories of accounts, assets, liabilities, and equity comprise the balance sheet, or statement of financial position. The other two, revenue and expenses, together amount to the income statement, or statement of financial activity. A Chart of Accounts (COA) is a structured and organized listing of all the financial accounts a business uses to record its transactions. Acting as the foundation of a company’s financial system, the COA categorizes every aspect of your finances into key groups such as assets, liabilities, equity, revenue, and expenses.
Chart of accounts: Definition, how to set up, and examples
This isn’t just a generic template—it’s tailored to your specific business type with accounts that actually matter for your industry. Create accounts that help you calculate key performance indicators for your industry. For example, a service business might separate “Direct Labor” from “Administrative Labor” to accurately calculate project profitability. To calculate margin by product or service line you need to setup matching revenue and cost of goods sold (COGS) accounts.
Use This Chart of Accounts Numbering Template for Clarity
Regularly review compliance requirements and ensure that your accounts are structured to meet these standards. Adding too many accounts to your COA can lead to confusion and inefficiencies. While detail is essential, an overly complex COA can make it difficult to analyze financial data and generate reports. Instead, focus on meaningful categories and use sub-accounts to provide additional detail when needed. Align your chart of accounts with Generally Accepted Accounting Principles (GAAP) or other relevant standards.
- While the chart of accounts can be similar across businesses in similar industries, you should create a chart of accounts that is unique to your individual business.
- As a member of the QuickBooks® Business Affiliate Program, I can help you get started with QuickBooks® with a discount that makes it even more affordable to get the right accounting foundation for your business.
- Below, we’ll delve into the different types of accounts and how to number them.
- Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.
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As a Certified QuickBooks® ProAdvisor specializing in small business financial organization, I can help you create a chart of accounts that provides the clarity and insights your business deserves. Doing the hard work of setting your accounts up correctly makes calculating margin by product or service line easy. The simplified example PnL below shows what happens when you setup your chart of accounts the wrong way versus the right way.
At its core, the chart of accounts helps categorize all of your company’s accounts, making it easier to record, track, and analyze financial activity throughout the accounting cycle. It’s especially useful for generating key reports like income statements, balance sheets, and cash flow statements. If you downloaded a chart of accounts template from the internet, there’s a good chance it’s built for your tax CPA, not for running your business. A poorly structured chart of accounts makes your financial reports confusing, your margins unclear, and your decisions harder than they need to be. If your income statement isn’t helping you manage the business week to week, the real issue might be how your accounts are organized.
The specific accounts and their numbering may vary by company, industry, or specific accounting standards adopted. Regular updates to the COA may be necessary to reflect changes in the business structure or accounting requirements. Gains and losses represent the money earned or lost from activities outside the company’s primary operations.
Making Your Chart of Accounts Work for Growth
Whether you’re setting up your books for the first time or refining an existing system, using a chart of accounts template can make your financial management more efficient and less stressful. This column shows the financial statement in which the account appears, and for a profit making business is either the balance sheet of the income statement. The purpose of the account code is simply to group similar accounts together, and to provide an easy sample chart of accounts for a small company method of referring to an account when preparing journal entries.
Following these three tips will help you set up your chart of accounts correctly the first time, saving you time, money, and frustration. Click the button to download our full chart of accounts template to follow along. It is best to consult with a CPA who understands a company’s industry to see if any additional accounts should be added to this list. In general, however, the preceding chart of accounts should be sufficient for a small company. In this sample chart of accounts, the code is a number, but could be any appropriate system which allows accounts to be grouped together.
Whether you’re a budding entrepreneur or a seasoned business owner, mastering your COA empowers you to take control of your finances and build a thriving enterprise. By following these steps, you can ensure your COA is a powerful tool that not only meets your compliance needs but also supports financial growth and clarity for your business. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries.
Service-Based Businesses (Consultants, Contractors, Professional Services)
Tracking assets accurately is key in small business accounting, especially considering that small businesses make up nearly 99.9% of all U.S. companies and contribute about 43–50% of the GDP. A strong chart of accounts can reveal inefficiencies in your day-to-day operations. By regularly reviewing categorized financial data, especially operating expenses, you can identify areas where costs can be reduced or resources better allocated. For example, if you need to create a new account for ‘PayPal Fees’, instead of creating a new line in your chart of accounts, you can create a sub-account under ‘bank fees’.
It also offers a generous welcome bonus, but it has lofty balance requirements so it may not make sense for all businesses. Online-only banks have grown in popularity in recent years thanks to certain benefits that brick-and-mortar banks can’t match. With less overhead costs from not having to operate physical branches, online banks may offer lower fees and other perks like better interest rates. Of course, the convenience of being able to bank from anywhere, anytime, can also be a huge draw, especially for busy small business owners. A well-designed chart of accounts should separate out all the company’s most important accounts, and make it easy to figure out which transactions get recorded in which account.