All businesses need to be able to document the financial information that flows in and out of them. This is often done through records that are known as Ledgers, and the collective of them all for a business is known as the Chart of Accounts. However, having too many ledgers can cause complications and clutter, so we'll be discussing how to organize your Chart of Accounts.
The first thing to do is to divide the Chart of Accounts into five different groups: Assets, Liabilities, Equity, Income, and Expenses.
Assets are any resources owned by the business or are used to make a profit, ranging from Cash and Bank Accounts to Buildings.
Liabilities are debts owed to creditors, such as Mortgages and Credit Cards.
Equity are the owner and shareholders investment in the company, such as the Owner Investments.
Income happens to be any revenue earned by the business, such as Rent Income or Sales.
Expenses are any expenditures in the process of making revenue, such as Utilities or Wages.
Once you have the ledgers divided into these five groups, you should also take the time to number them. Larger businesses or those that have divisions and departments will have more extensive numbering systems to encompass the scope of their accounts. But for small businesses, the typical convention for doing so is to increment them by 100 each:
100: Assets
200: Liability
300: Equity
400: Income
500: Expenses
This division makes it much easier to track down which ledger you need. For example, if you need to track down an shipping expense then you'll go to the Expense section and search for the Shipping Expense ledger, which will also be numbered from 501 to 599, depending on your personal preferences. In this case, we'll have it being 530, making it collectively:
530: Expenses - Shipping Expense
One last tip for organizing your Chart of Accounts is to have a spreadsheet with the account numbers and general purpose of the account easily accessible. That way you can always refer back to it, or it can serve as a guide for a new bookkeeper. It might take a little time to draft initially, but its worth it to save yourself a headache later on.
Comments