The Chart of Accounts provides a complete list of every account in the accounting system for your business. These accounts are then aggregated into the Trial Balance and used to create your Income Statement and Balance Sheet.
Spending the time to set up the Chart of Accounts the right way from the beginning will allow your financial statements to grow seamlessly as your business grows. When preparing to set up your Chart of Accounts, consider some of the following points and tips:
Do an internet search for Chart of Accounts in your line of business and model yours after some examples. Keep account names generic but specific enough to your needs. For example, ‘Utilities’ is a common account for your electric, phone, and internet bills to all be expensed to, but for a client services business, you may want two separate Meals accounts, one for internal office expenses and one for entertaining clients specifically.
Don’t add accounts you know you will never use. For example, if you are a services business, you don’t need Inventory and Cost of Goods Sold.
Consider using classes instead of a larger Chart of Accounts. In QuickBooks, you can set up classes to track different departments or sales channels. For example, if you will be selling items in two separate states, you can set up classes for each state. You will then have the ability to run a full Income Statement for your business but also provide your tax accountant with two separate Income Statements by class for each state.
Think long term when naming your accounts. Most accounting systems allow you to change the name of an account if needed, but careful planning from the beginning can save you the trouble. For example, even if you are your only employee, you should name the payroll expense account ‘Payroll’ instead of ‘John Smith’s salary’.
If your business is already up and running but you realize you Chart of Accounts isn’t working for you, it’s not too late to fix it! Nearly all accounting programs allow you to add and even merge accounts as needed.