Learn How to Build Your Chart of Accounts as A Freelancer
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The Chart of Accounts
A chart of accounts is one way to organize your business money movements.
A chart of accounts (COA) is a financial organizational tool that provides a complete listing of every account in an accounting system. An account is a unique record for each type of asset, liability, equity, revenue and expense.
If you do not have an accounting training or some understanding of book-keeping, you may feel overwhelmed by the need to create a Chart of Accounts. Do not worry this article will help you to cross the river.
Gathering financial transaction in a filing system is what you need. A filing system can be unorganized in a way that will make you lose your precious time while looking for the information you need. Or well organize that will allow you to find promptly any information that you may need.
Organizing The Chart of Accounts
There are five categories to make your chart organizes:
- Business Asset, tangible values like buildings of equipment.
- Liabilities are your debts or obligations.
- Revenue, what you receive for your production or service
- Expenses, all that you spend on materials or services for your production
- Owner’s Equity is the value of what you have made since the starting of your freelancing business.
Bigger businesses use accounting program that works with numeric code for each category.
Example: Assets can be 4000, and the main building can be 4001 vehicles can 4002-3-4 and so on. As your business is one person band, you can use more descriptive subcategories that will make sense for you and your bookkeeper.
Freelancers are not a that big or complex operation their chart of accounts will be quite simple; it will have no inventory or a list of expenses.
How To Build Your Chart of Accounts?
When you are going to set up your chart of account, you better take your time to think about the flow of money that you are going to create.
- The amount of cash you are going to put in the bank account of your business and the equipment, like computers or other tools you will need for your production.
- Are you going to use credit cards or another type of financing? How much money you will have to save for your tax payment.
- What kind of revenue you are expecting to earn?
- What will be your level of expenses will you have?
While you create this list avoid creating too broad or too narrow categories, it will difficult to understand your financial situation. Categories that are too narrow will create your bookkeeper overload with categories that will create headaches.
Here We Have some Examples of a Chart of Accounts for Your Freelance Business
We will use an example of a freelance writing business. it means that you will be paid for the blogs or other articles that you will be writing for your customers. You may earn more money from editing or royalties from a book that you are writing now. If you will create only one category, like “sales” for all this different type of work and income you will have no clear idea about the job that is making better or the work that you spend more to be able to deliver it.
To create a clear view of your freelance business, you better define your categories in advance and keep track of whatever you spent or earned on these jobs.
- Writing for magazines
- Blogs writing
- Editing Blogs
- Your Book royalties
You could create subcategories by a consumer that will be a little bit overkill. As you create an invoice and a receipt, you can have it all summarized and know how much you have made.
With your chart of account well made you will be able to know what your work is producing for you and choose the best jobs.
A well-developed chart of accounts you can create a forecast for the near or medium future. If you register the time, it takes you to produce and compare the unit of each category, and the income of the same. You may see that one category is more rentable than the others, and guide your marketing to the juicy jobs.
If you have a business plan you have made at the beginning, you can use a plan and compare with the earnings and costs you planned and the reality.
Knowledge is gold; knowing your situation is life. It will save you from falling into an unexpected crisis and help you to be prepared to face the problem or take advantage of the opportunities.