Your Chart of Accounts
The Blueprint of Your Small Business Accounting System

by L. Kenway BComm CPB Retired

Your chart of accounts (COA) is the blueprint of your accounting system around which everything is built. If your COA is poorly designed, the quality of your information is affected ... which could affect the business decisions you make using the information.

What Is The Chart of Accounts? How Does It Work?

So if you haven't guessed, your COA is a list of all the accounts in your accounting system. You use it to categorize then record your transactions onto ledger pages ... each account listed in your COA has its own ledger page. If you use the computer, it is an electronic page.

All the ledger pages from all the accounts listed in the COA are called the general ledger (GL).

When you want a financial report, the accounts (ledger pages in the general ledger) are summarized to produce the financial report requested.

Normally the chart is numerical but with small business accounting systems like QuickBooks, it no longer has to be numerical due to auto recall. A list comes up as you type in your letters allowing you to select the account you want.

COA are usually organized into seven sections that are used to summarize transactions for your financial statements. Do you recognize these categories from your balance sheet and income statement?

• assets [1000 series]
  
• liabilities [2000 series]
  
• equity [3000 series]
  
• revenue [4000 series]
  
• cost of goods sold (COGS) and expenses
  [5000 and 6000 series]
  
• other revenue [7000 series]
  
• other expense [7000 series]

How To Use Your COA

Your chart of accounts is something you should print out and carry with you (like a shopping list) until you become familiar with it.

When you purchase something, write on the receipt what account it should be coded to by looking through your COA listing and selecting the appropriate account.

How To Setup Your Chart Of Accounts

• If your internal financial statements are prepared on a tax basis, a good place to start is to have your COA based on tax form T2125. You can tailor it to your specific business later if need be ... but it won't be necessary for most small businesses.
  
  For my American visitors, take a look at the tax form Schedule C (form 1040) to get started. You can find a copy on the IRS website www.irs.gov. You will find a link to the form under Businesses> Small Business/Self-Employed> Self-Employed.
  
  If you use QuickBooks, they have a whole selection of preset COAs. Just pick the one that is structured for your industry. Again, you can customize it later. QuickBooks has the ability to assign an account to a tax line ... so you don't have to organize your COA for tax purposes. You can organize your COA for your business or industry ... and let the tax mapping report assist you come tax time. It's the best of both worlds.
  
  
• You never want to have accounts that are too specific.
  
  For example, an account called utilities is good ... because it is generalized; an account named after a single customer or vendor such as Telus or BC Hydro is not so good ... because it is too specific. (see sidebar.)
  

As a general rule, an account should NOT be named after one product or service such as Size 10 Pants or Short Haircuts. It is better to name the account Clothing or Haircuts.

This rule applies to the naming of sub-accounts too!

• There should be NO duplicate accounts. If there are, merge them into one account. If you have different departments or locations, a software program like QuickBooks can be setup to track them using classes, but it is NOT done through multiple accounts.

• Each account should be properly classified into one of the seven sections discussed above. This means capital asset accounts for equipment purchases should NOT be found in the expense account section.If you are using QuickBooks software, make sure you have setup the correct type of account ... not every account is a bank account type (the default). Loan accounts should be setup as a long term liability type NOT an income type.
  
  
• A good COA shouldn't need more than 50 or so accounts in a small business. If you have too many accounts, you are likely to have a lot of accounts with small balances under $100. It just doesn't provide useful information at that level and creates a lot of maintenance as each account has to be reconciled regularly. Fewer accounts will ensure you have greater consistency in where transactions are coded and recorded. This means you are more likely to have accurate financial statements you can rely on.

See you on the next page ...
Your tutor Lake

Bookkeeping Essentials › Developing Your Accounting System › Chart of Accounts