Small businesses need to organize their financial information. You might be aware that you need three main financial statements: balance sheet, income statement, and cash flow statement. But, do you know that you also need a chart of accounts (COA) for recordkeeping? What is a chart of accounts?
What is a chart of accounts?
A chart of accounts (COA) is a bookkeeping tool that lists all the accounts included in financial statements. It breaks down your business’s money into categories for budgeting and tax purposes.
You need to keep accurate records of all your business’s financial transactions. Record all money going into your business and all money going out. A chart of accounts is broken down into these five sections:
- Assets (short-term and long-term)
- Liabilities (short-term and long-term)
Each type of business account is categorized in one of the five sections. Transactions are recorded in their respective accounts. Transactions go into accounts, and the accounts go into the categories.
Small business chart of accounts
Small businesses will have a smaller chart of accounts than big corporations. The accounts you include in your COA depend on your business. You have specific accounts tailored to your business in addition to the common accounts all businesses have.
If you own a taxi service, for example, you would have an account for fuel expenses, an account for vehicle repairs, and an account for vehicle loan payments in addition to typical accounts like inventory and accounts payable.
Here are some common accounts that might be included in a typical small business’s chart of accounts:
- Checking account
- Savings account
- Petty cash balance
- Accounts receivable
- Undeposited funds
- Prepaid insurance
- Company credit card
- Accounts payable
- Employee salaries
Why use a chart of accounts?
A chart of accounts gives you an overview of all your business accounts. And, a chart of accounts shows you where your money is going and easily helps you organize it. You must be organized for tax purposes, and a chart of accounts helps you in case of an IRS audit.
The chart of accounts helps you to budget (especially if you use zero-based budgeting), forecast, and reduce your business costs. That will help you assess your business’s financial health.
How to set up a chart of accounts
Now that you can answer “what is a chart of accounts for small business?” you need to know how to create one. Assign a group of numbers to each of the five categories. Then, number each account to match the category it belongs in. For example, your assets are 100-199. Since cash is an account under the assets category, you would number it in the 100s.
Most small businesses only need numbers with three digits. Take a look at this breakdown of a chart of accounts for small business:
- Assets: 100 to 199
- Liability: 200 to 299
- Equity: 300 to 399
- Revenue: 400 to 499
- Expenses: 500 to 599
Variations of chart of accounts
A chart of accounts does not follow a specific layout. Some small business owners use a combination of letters and numbers (e.g., A100).
Large businesses use four-digit numbers (e.g., 1000). If your business grows substantially, you will need to add numbers.
Regardless of how you number your accounts, make sure they make sense to you. The purpose of the numbers is to make recording transactions easier.
You also want to make sure you leave empty numbers in between accounts so that you can add to them in the future. Try to keep your accounts consistent so that you can compare the business’s financial health from one year to the next.
Chart of accounts example
Here is a basic example of what a small business chart of accounts might look like:
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This article was updated from its original publish date of 06/24/2014.
This is not intended as legal advice; for more information, please click here.