Do numbers make you feel a little bit queasy? Do your eyes glaze over at the mere thought of your chart of accounts?
Knowing the fact that those numbers in those reports actually equate to hard-earned dollars can make you feel even queasier!
That is why it is important to have a good understanding of your financials. It can help take the queasiness away.
Even if you outsource your business bookkeeping and accounting to a professional, it’s crucial that you grasp the basics of your financial records.
One thing that every business should have, regardless of how small or big, is a Chart of Accounts (COA).
While each COA will likely differ slightly from business to business, there are basic organisational characteristics that they all have in common.
So, what is a Chart of Accounts, how can you understand the different sections and their purposes? Luckily, we have assembled a beginner’s guide for your reading pleasure…
What is a Chart of Accounts?
Essentially, a COA is a tool to help you manage your money. It allows you to track your transactions and see a summary of your financial information at a glance.
This chart lists the various accounts used by your business. We are not talking bank accounts here. The word accounts actually refers to the unique record used for each kind of data.
If you log in to your accounting software, on the COA, you will see the type of account, a description, the account balance, and an ID code.
Why Is A Chart Of Accounts Important?
Organisation makes life easier for everyone. When you can see all the financial information laid out clearly, it’s simple for you to gauge how things are tracking. You can clearly see expenses, revenue and where your money is going to.
You will have all the data needed to analyse past trends and forecast for the future.
It’s also useful to allow other interested parties or stakeholders to see a snapshot of how things stand.
Breaking Down The Chart Of Accounts
Every COA is structured around two key financial reports: the balance sheet and the profit & loss statement.
Here is what they consist of:
Balance Sheet Data
Assets:
These are accounts relating to everything the company owns – such as cash, accounts receivable, inventory, buildings, machinery, equipment and furniture.
Liabilities:
The flipside of assets. These accounts track any debts owed by the business and may include things like accounts and interest payable, credit cards payable, mortgages and bond.
Owner’s/Stakeholder’s Equity:
Covering financial capital sourced by owners or shareholders, which may be from the sale of stock or what has been injected into the business by owners to finance it.
Profit & Loss Data
Expenses (operating and non-operating):
Each of these accounts displays money spent by your business. Operating expenses may include administrative expenses and the cost of goods sold, whereas non-operating expenses are things like wages, advertising, interest and rent.
Revenues (operating and non-operating):
These accounts show any income made by your business over a specific time-line from sales, interest income, etc.
The Numbers
When looking at your COA, you will see that each account in the chart has a unique name and number assigned to identify it. Usually, these numbers are between three and five digits long. Each digit represents a different variable, such as company division, department, or type of account.
For example, an account starting with the ‘6’ might fall into the asset category, while one starting with ‘4’ might be classed as an operating expense.
Each different expense or revenue stream will have a different number assigned to it so that you can easily organise your finances. Then at a glance, you will know what funds are being allocated to each account.
The flexibility of a COA is part of its beauty. Accounts can be fine-tuned even further than those listed above, and organised by business function, company division, product line, or whatever suits your business.
If you need some help understanding your Chart of Accounts or help maintaining it, then get in touch with the team here at Admin Army. We have a team of bookkeeping experts who understand the ins and outs of a Chart of Accounts. Drop us a line today.