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A common question I get often is, "What is a Chart of Accounts and how do I set it up?" The short answer to this question is, your Chart of Accounts is the road map for your bookkeeping.
The Chart of Accounts is a chart or list of all your bookkeeping accounts for your expenses, income, equity, liabilities, etc. While some businesses have one avenue of income, another business may have 2, 3, or even more than that. Expenses for a business will always be more than one (think utilities, gas, auto, office supplies, etc.) and equity is usually 2 or more, depending on the structure of the business (sole proprietor, LLC, S Corp, partnership, etc.)
Let's look at two different companies to make this easier for you to understand. For the example below, both companies are Sole Proprietor businesses. That means there is one person that owns the business. No partners and not a corporation.
A landscaping business named A Plus Landscaping, only has one stream of income. The business does not sell any products, they strictly do landscaping. They also have 2 bank accounts and several expenses they use for business. The owner, Jo, is a sole proprietor and does not have any employees.
Another landscaping business named BB Landscaping offers landscaping services and sells some pesticide and compost. They have 2 bank accounts and one corporate card, several expenses and 3 employees including the owner, Larry. This means this company also has payroll and workers comp to deal with. BB Landscaping does not ship their products yet, they sell to their customer and deliver.
For company A Plus Landscaping, the Chart of Accounts would look like this:
Chart Of Accounts for A Plus Landscaping
Income - Sales of Service
Bank - Checking Account 101
Bank - Savings Account 102
Bank - Cash on Hand
Assets - Current Assets
Assets - Long Term
Cost of Sales
COGS - Supplies
COGS - Equipment Rental
COGS - New Equipment
COGS - Wood Chipping/Recycling
Owner's Equity
Owner's Investment
Owner's Draw
Retained Earnings
Expenses - Advertising
Expenses - Auto Gas
Expenses - Auto Repair
Expenses - Insurance
Expenses - Licenses
Expenses - Office Supplies
Expenses - Taxes
Expenses - Utilities
For company BB Landscaping, the Chart of Accounts would look like this:
Chart Of Accounts for BB Landscaping
Income - Sales of Service
Income - Sales of Products
Bank - Checking Account 225
Bank - Savings Account 226
Bank - Cash on Hand
Credit Card - Corporate CC 829
Assets - Current Assets
Assets - Long Term
Assets - Inventory Asset
Cost of Sales
COGS - Supplies
COGS - Equipment Rental
COGS - New Equipment
COGS - Wood Chipping/Recycling
COGS - Inventory Purchases
Owner's Equity
Owner's Investment
Owner's Draw
Retained Earnings
Expenses - Advertising
Expenses - Auto Gas
Expenses - Auto Repair
Expenses - Insurance
Expenses - Licenses
Expenses - Office Supplies
Expenses - Taxes
Expenses - Utilities
Payroll Expenses
PR Expenses - Salaries & Wages
PR Expenses - PR Fees
PR Expenses - Workers Compensation
PR Expenses - PR Taxes Paid
At this point, you probably noticed that the two examples of the Chart of Accounts have several items that are the same and a few that are different. That is because, while both companies are landscaping businesses and have a lot of the same structure in their business, they are not completely the same. The Chart of Accounts needs to reflect each business correctly. This way all income, expenses, equity, liability, payroll, and other items can be coded accurately.
I hope this post has helped you understand a little more about the Chart of Accounts and why I call it the "road map" for your bookkeeping.
If you have any further questions about this or other bookkeeping subjects, please contact me at Rebecca@RHBizSolutions.com. I look forward to talking to you about your bookkeeping needs.
Disclaimer: The Chart of Accounts listed above are examples and are in no way complete. Please consult an accounting professional for help setting up your Chart of Accounts. This is vital to starting your books off correctly and best practice for accounting and tax purposes.
Here's To Your Success!
Rebecca Hurt
RH Business Solutions
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