Small Business Accounting: Essential Chart of Accounts Every Owner Should Know

You are stepping into a Chicago Public Library, having thousands of books from different categories and genres. It would be easy for you to pick books if books are meticulously organized and labeled. But if everything is scattered all over the place and you are looking for “Mind Games” by Nora Roberts, it would be like searching for a needle in a haystack.

Similarly, you are required to organize and manage the chart of accounts for seamless tracking, reporting, budgeting, and making informed decisions. You very well know that every buck in your business counts and organizing and reporting on them within a cogent General Ledger not only provides insights into what was earned and spent but also results in improved processes that impact practical outcomes.

You may be wondering: “what exactly is a chart of accounts for small business and why there’s a need to create.” Here’s an ultimate guide to basic charts of accounts for small business, covering everything from how they work to getting started with them.

What is a Chart of Accounts?

A chart of accounts (COA) is a systematic listing of all financial transactions your company has made during a dedicated accounting period – January to December, April to March, or July to June. Every financial transaction breaks down into five categories, like assets, liabilities, equity, income, and expenses that facilitate easy access.

Note: The numbers that make up a small business’s chart of accounts come from its daily activities such as overheads, invoice to a customer, customers paying for services, vendor payments, and business transactions that you don’t think about every day, like owner equity or loan.

This aggregated information is adequate for creating income statements, cash flow statements, and balance sheets, providing a complete picture of your business’s financial health.

It’s a financial roadmap for your business. So, you need to do it right from the start.

How Does a Chart of Accounts Work?

COA is not the same across all industry verticals; however, there are some basic categories that you include while setting up a chart of accounts.

Note: The number of accounts listed in your chart of accounts correlates with your company’s size. For example, the chart of accounts for a small business may include 20 accounts, while a large enterprise could have hundreds of different accounts listed.

The first three categories - assets, liabilities, and equity - are recorded in the balance sheet while the remaining two are included in the income statement and cash flow statement.

The balance sheet shows what your company owns and owes at any moment, the income statement tracks your earnings and expenses over time, and a cash flow statement tracks the inflow and outflow of cash. Pretty important stuff!

Chart of Accounts: Feeding Financial Statements of Small Business

Truly, COA lays the groundwork of income statements, balance sheets, and cash flow statements.

Sample Chart of Accounts for a Small Business

Assets Accounts

Liabilities Accounts

Equity Accounts

Revenue Accounts

Expense Accounts

Although you don’t need to follow that format, small business accountants and bookkeepers generally follow the same numbering system for the COA to speed up the recording of business activities, making it easier to view what each account is about. Whenever there’s a new transaction, your qualified bookkeeper adds it to its matching account number. This way, an accountant or bookkeeper builds accurate and organized financial data in the form of your company’s general ledger.

And the best part? You can use this data to generate standard financial reports. The more detailed your small business COA is, the easier it is for the stakeholders to get the information they need to assess the health of your business. There are more benefits to setting up a chart of accounts for a small business.

Understand Your Earnings – Gain detailed insights into your business revenue, including peaks and valleys in cash inflows, cash in hand for disposal, and how long the cash balance will last after considering your average monthly business expenses.

Spend Smarter – You are always looking for opportunities to reduce expenses. With a detailed view of business spendings from COA, you can easily track expenses and see where you may be able to cut down on costs if needed. Also, you can seamlessly handle inevitable recurring expenses, like rent, salaries & wages, office utilities, materials, and more.

Effortless Reporting – COA organizes your financial data, enabling you to generate insightful reports at ease. With these reports, you can track your financial performance, pinpoint areas of improvement, and make strategic business decisions.

Enhanced Efficiency – Having an accurate COA eliminates confusion when recording transactions in general ledger and financial statements, saving your valuable time and resources.

Comparative Analysis Made Easy – With a basic chart of accounts for small business, you can make month-on-month, year-on-year, and location wise comparison of financial data. Identifying trends and measuring your company’s growth are a breeze.</p.

No matter the size of your business, a chart of accounts is imperative to stay informed about your company’s financial health. It’s natural to have questions and confusion while setting up a chart of accounts for your small business. Here are some frequently asked questions on a chart of accounts.

Frequently Asked Questions

How do I edit a chart of accounts in accounting software?

If you’re using accounting software like QuickBooks, Sage, or others, there is no need to edit or make changes to the chart of accounts, as the program has customized accounts.

Can I customize a chart of accounts to fit specific business needs?

Yes, it is a good idea to customize your chart of accounts. This way, you can allocate each financial transaction from your business to a category that makes sense to you as a business owner, keeping track of cash inflows and outflows while adhering to financial reporting standards.

Can I delete old accounts from a COA?

You can delete old accounts from a COA, but it’s better to avoid until the end of the year. If you delete old accounts, merge, or rename them in the middle of accounting year, tax season can get messy. That said, don’t worry about adding accounts as it does not impact the records.

Chart of accounts vs. general ledger: What's the difference?

A chart of accounts and a general ledger are both critical components of your accounting process that go hand in hand. A chart of accounts is a systematic listing of accounts in a business, like assets, liabilities, equity, revenue, and expenses. On the other hand, a general ledger is a record of the financial transactions in each account.