A Chart of Accounts is a list of all of the accounts used by an organisation in its financial reporting.
The Chart of Accounts is used by the organisation’s financial accounting software to collate all the data into financial reports and financial statements that can be used by the leadership of the business.
Standard categories in the Chart of Accounts will include:
Screenshot below of the Chart of Accounts screen in Xero
Each of those categories will have sub-categories listed. For example, the expenses category might include…
- Cost of goods sold
- Bank fees
- Travel expenses
Chart of Accounts Example
Screenshot below of examples of expense account types in a drop-down list within the Chart of Accounts in Xero
The Chart of Accounts allows you to allocate every transaction to a category so that you can see exactly where your business is making and spending money.
When you set up your financial accounting software, it is important that you customise the Chart of Accounts to the needs of your specific business. There can be significant differences between the reporting needs and Chart of Accounts for different businesses.It’s important to customise the Chart of Accounts for the needs of your specific business. Click To Tweet
It is important that you have a consistent coding system for your Chart of Accounts, particularly if you have multiple people (such as the tax accountant, the bookkeeper, the virtual assistant (VA), the business owner, and the sales guy who’s raising invoices…) adding transactions to your software.
You need to have a very specific description of which transactions should be coded to each category so that your data is consistent over time.
Screenshot below of a Profit and Loss report in Xero
The whole point of tracking your data like this is so that you can make comparisons over time that allow you to make good decisions as your business grows. If you don’t have consistent record-keeping, you’ll be relying on data that could be inaccurate, which in turn results in poor financial decisions that can hamper your growth.
In the Profit and Loss report above, advertising expenses look low in November. It is possible that the Facebook ads expense has been coded to a Balance Sheet account by accident and is missing from this report. This highlights the need for consistent coding to ensure the accuracy of reports.
Balance sheet accounts are one of the more commonly used financial statements. There are three different kinds of balance sheet accounts you should be aware of:
Asset Accounts. These record the resources your business owns that provide value. It can include physical assets, including land, equipment, and even cash or more intangible items like trademarks and software.
Liability Accounts. This is a record of all the debt that is owed by your company. Often you will find the word “payable” in this category like accounts payable, wages payable, sales tax payable, and invoices payable.
Equity Accounts. This is what is left after the liabilities have all been subtracted from the assets. It is often considered the measurement of how valuable the business is to its shareholders. It is a clear outline of the shareholders’ equity.Tracking your data helps you make comparisons over time, which lead to better growth decisions. Click To Tweet
For example, if you believe that loan payments fall into liabilities, but your VA has been logging those payments in your expense category, then your unable to make accurate decisions about either category and will likely be pulling your hair out trying to work out why your liabilities are not decreasing while your expenses seem very high.
Now, for most small businesses, the Chart of Accounts will evolve over time, particularly when you are first getting set up and are still working out the true revenue and expenses of the business.
Over time, though, you should aim to get a custom Chart of Accounts locked down so that you can start building up enough data that you can make informed and accurate comparative decisions.
Customizing Your Chart of Accounts
Customizing your Chart of Accounts can help give you more meaningful financial data. Instead of KonMar-ing your house … how about your Xero file?!
As your business evolves, it’s important to review your Chart of Accounts to ensure it is still relevant. In this short video, I share a few tips.
Take action: review your Chart of Accounts to see whether any accounts need to be created /archived or edited to more accurately reflect the transactions in the account.
Adjusting Your Chart of Accounts
You can add as many accounts as you want throughout the year, but you should never delete any old accounts there are until the end of the year, or it could mess up your books and cause problems.
If changes do need to be made, it might be best to record it under a new account for that particular item or category rather than recording it in the regular expense account area it would have initially been put. This can help keep things adjusted properly without messing up the numbers in other categories throughout the year.
In summary, a Chart of Accounts is a tool that provides a business with a complete and accurate listing of each account in their general ledger. These accounts are broken down into different subcategories. It is a good way to organize finances and give shareholders more insight into the financial health of the company overall.
Having a Chart of Accounts for your business also makes it easier to locate specific amounts. Each account will have account names, a brief description of the account, along with an identification code. A Chart of Accounts can be customised to fit the company’s specific operations.
Chart of Accounts Template
Here is an example of what a Chart of Accounts for a very small business may look like. It is a sample Chart of Accounts your business may find helpful.
Need help with your Chart of Accounts?
If you’ve got questions about how to structure the Chart of Accounts for your specific business, feel free to get in touch.
Or if you’re looking for help with online bookkeeping, take a look at what we offer and get in touch! We’d love to help you secure the financial growth of your business.
Chart of Accounts FAQ
What is included in a Chart of Accounts?
Typically, you will find assets, liabilities, equity, revenue, and expenses in a Chart of Accounts. Revenue and expenses are usually listed last.
How is a Chart of Accounts grouped for reporting purposes?
The Chart of Accounts starts with cash, goes through to liabilities and shareholder’s equity, and then moves on to accounts for revenue and, finally, expenses.
Is the Chart of Accounts similar to a balance sheet?
Not exactly. The Chart of Accounts actually begins with the balance sheet accounts and then is followed by the income statement accounts. The accounts will stay in the same order as they are presented on the financial statements.
A balance sheet is a statement listing the assets, liabilities, and capital of a business at a specific point in time and then details the balance of income over an earlier period of time.
What are the three primary financial statements?
The three primary financial statements for a business are the income statement, balance sheet, and statement of cash flows.
Why is a Chart of Accounts so important?
It is important because it is designed as a way to separate expenditures, revenue, assets, and liabilities, so a business can have a clear understanding and view of their overall financial health. It also helps meet the needs of management reporting while also complying with all financial reporting standards.
What types of accounts are assets and liabilities?
Every business has a list of assets and liabilities. Asset accounts include cash in hand, cash in the bank, real estate, inventory, prepaid expenses, goodwill, and accounts receivable. Liability accounts, on the other hand, are different financial obligations and often include accounts payable, bank loans, bonds payable, and other accrued expenses.