July 23, 2013
A chart of accounts is a complete list of a company’s classification categories for accounting purposes. Accounts are used to track how much money a company has, how much it owes, how much money is coming in, and how much money is going out. The chart of accounts is the backbone of an accounting system because everything revolves around them. Every account selected has a reason for tracking that specific accounting information.
When you are setting up your chart of accounts you must choose from 15 different types of accounts that are either Assets, Liabilities, Or Equity accounts. The Asset accounts will consist of bank accounts, accounts receivable, fixed assets, and other assets. The Liability accounts will consist of accounts payables, credit cards, and long term liabilities. The equity accounts would be owners Capital contributions, owners draw, and retained earnings. The Profit and Loss account types will consist of income, Cost of Goods Sold, Expenses, other income & Expenses. All of which can have subaccounts to track certain amounts, like payroll liabilities or sales taxes.
Creating a chart of accounts for you company important because every company in unique and should have a chart of accounts that goes with the proper business model. There are many things to think about when creating your chart of accounts like the type of industry your company is in. Each industry has standard accounts specifically chosen to help monitor the areas that matter for a company in that industry. Once these accounts have been selected you should set safeguards in place to make sure they stay the same and new accounts are not created unless approved. Creating sub accounts can be a great way for companies to break up the way they track certain accounting information rather than creating a new account each time.
By limiting the ability to add new accounts by your employees it allows your accountant to have a reliable benchmarking industry data that can help create the most accurate reports with your accounting records. With the correct chart of accounts your accountant does not need to spend time and money correcting data entry errors. This will give your accountant more efficiency when preparing your tax return which in the long run is able to spend more time on company analysis like tax planning and budgeting for the future. Creating the chart of accounts early can really have a long term effect on a business. Providing the users reliable data can help plan for the future and measure data against the industry standards, and can help show areas of strength and weakness.
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