How to Develop a Chart of Accounts for a Small Business
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An accounting system for your company relies on a framework of accounts that keeps the history of revenue, expenses, and other data. Archived ready for use when you need a financial statement. Any decision making will need a study of your business situation. I am referring to gain and loss, rentability, and forecast of capital need or future dividends. A financial statement is the number one tool to use when you are thinking about investing in your business.
The chart of accounts is the framework for your accounting. The table of accounts serves as the index of the financial statement. Bookkeepers use the chart of account as a code system for the records on the general ledger.
Build the Chart of Accounts
When you established your business’s accounting, you set up a chart of account as the first step in building your accountant system. Each business creates its chart of accounts tailored to its activities and industry. For example, if you are a services provider, you will not have inventories and warehouse costs and values.
You need to create a numbering system that will assign a number for each category and derived numbers for the sub-accounts. For the use of computerized accounting, the accounts numbering will look like the following:
A block of numbers is usually assigned to each of the categories that make up the chart of accounts, and new numbers are left at the end for additional accounts to be added in the future.
In the above image, you can see how the numbering is done, and space is left for the future.
- Owner’s Equity
The Business Asset is the account where you put what the company owns. Accounting software uses the number 1000 for assets, so it will continue with 1001.1002 and so on. The list of assets will start with current assets and finish with fixed assets. Current assets are the money you have in banks and account receivable. If you sell goods, you will have an inventory too. Your fixed assets will be the facilities your company owns.
Your fixed assets will have a depreciation account too. Properties lose their value during the years, and you need to register the depreciation. Depreciation is necessary for taxation.
The liabilities category is where you register what the company owes or other obligations. Liabilities will be the second category in the chart. It will have the number 2000, 2001,2002 and up. You can follow the traditional balance Balance sheet and make one section for current liabilities and another part for long term liabilities.
Current liability section will include short tern dept accounts like account payable, the account where you write down what you owe to the suppliers. Accrual accounts are what you owe for payroll taxes and sales taxes. You might have a current liability account for credit card payable and short-term loan payable.
Reserve some space for future long term debts, like a mortgage. Leave space for a Long term debt loan accounts.
Owner’s equity accounts include your investment in the business. This account will bear the number 3000 and up. That is where you introduce your investment as founder and any earning that you reinvested. It is the account that will show your value as owner and will have high importance when you have a partner coming in to be your partner.
The income statement is made of the sales revenue account that will bare the number 4000 and up. Sales revenue is the primary income source of your business. Completing the category are the accounts for sales discounts and sales returns and allowances. Any other income that you may have earned apart of your primary business will be added to the revenue c
As you can sell if you do not buy the good or make them in your production line, you will need an account for the purchase of raw materials or goods, shipping, and miscellaneous sales costs.
The last account on the chart will be the one that will have the expenses category, that will be the number 5000. You could help yourself with the IRS Tax Form Schedule C . use the IRS list, it will make easy to use the same concept as the IRS because it will be easier to report from your book into the Tax report. The Schedule C form will give the basic accounts so you will have to add your particular accounts and get it done for easy work for you reading and your accountant writing the Tax Report.
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