Posted on: 10 March 2022
As your small business grows, one key component of understanding its books, creating reliable financial statements, and knowing how much you're actually making in profit is the accounting chart of accounts. What is a chart of accounts? And how does it help you as a business owner or entrepreneur? Here's what you need to know.
What Is a Chart of Accounts?
The chart of accounts is, at its most basic, a list of all the various types of assets and liabilities your company holds. It provides an index showing the values in each of these categories, which are then grouped into larger categories based on your financial statements' needs.
The main categories of accounts are assets, liabilities, owners' equity, revenue, and expenses. Within these, you may have a few subcategories or your organization may have hundreds — it's all up to you. Each accounting transaction is linked to one or more of these listed accounts so it's recorded in its proper place.
How Does a Chart of Accounts Help You?
As your small business grows, so do its transactions. Eventually, trying to understand your inflows and outflows will become unwieldy unless you create a way to corral them into categories. A chart of accounts does this. For instance, your expense accounts may be further broken down into office expenses, manufacturing expenses, shipping and receiving, and marketing. By using a chart of accounts, you can track exactly how much you spend in each category.
The ability to track income, assets, and expenses is the only way to gauge your real profit margin because you have firm and reliable numbers. It's also the only way to know over time if you're spending more or less in a certain area or which part of your business is earning the most. And it keeps all your numbers current, saving you from wasting time having to do research any time you have a budget question.
Finally, a chart of accounts is how a business prepares accurate and trustworthy financial documents for outside parties. Lenders, potential partners, suppliers offering credit, banks, and grantors will all expect even a small business to be able to produce reliable statements.
Where Can You Learn More?
Is it time for your small company to start using a chart of accounts? Do you currently have one but aren't making use of it to the full? Start by learning more about how they work and how you can tailor your chart to your specific needs. Make an appointment with a business accounting service today to begin.
For more information, contact a company like Colasanti & Iurato.Share