WTF is a Chart of Accounts?

Let me guess?

You have some form of accounting software (doesn’t really matter which) and all you really need to be able to do is record your sales and send invoices to your customers. But… it’s so friggin’ complicated you have 3 months’ worth of receipts to enter and now you are paralyzed with the fear that you will enter something wrong and mess the whole thing up. And…you’re too busy for this right now…. and WTF is a Chart of Accounts? Am I right?

Well love, I have been exactly where you are right now. No, really I have and because I was exactly where you are right now (overwhelmed and frustrated) I want to help you. So let me start by clarifying what a Chart of Accounts is and why you need to know this.

What is a Chart of Accounts?

Chart of Accounts is the fancy accounting term for the list of all of your business accounts. It is helpful to think of your Chart of Accounts much like you would a Table of Contents in a book.

In its most simplified terms the Chart of Accounts is broken into 3 primary categories: Assets, Liabilities and Equity. This relates to another fancy accounting concept known as the accounting equation. Which states that your Assets = Liabilities + Equity. If the equation works then your books are considered to be in good order or “balanced”.

Hold on a second…where the heck do the expenses go? And for that matter where are the sales? I know! It’s confusing, they aren’t in one of the 3 categories specifically and here’s why; double-entry accounting. Depending on how you pay for your expense the entry affects either your asset (Cash) or your liabilities (credit). In regards to making a sale, either way it increases your assets either by increasing cash or your accounts receivables.

The accounting equation lied to you; (well sort of) it actually looks like this:

Assets = Liabilities +Owner Capital +Revenue – Expenses –Owner Draws

I’m losing you here aren’t I? I know it’s a snooze fest, but hang on let’s see if I can help you grasp why a stellar Chart of Accounts is integral to your sanity. OK, back to the analogy of the table of contents. As with any good book you want to be able to quickly get to the page you need without flipping through aimlessly until you find the page you need. Each account would then be a chapter in your book. Now you can have as many chapters (accounts) as you like but they need to fall into categories and this is where we get more specific. From our now expanded equation we have 5 main categories which then branch in to their sub categories.

Stick with me for just a tiny bit longer and it will become more clear; I promise!

This is what a very basic Chart of Accounts will look like:

Assets:

• Cash
• Bank accounts
• Accounts Receivable
• Inventory
• Fixed assets

Revenue:

• Sales from product
• Sales from services
• Other income

Liabilities:

• Credit cards
• Loans or lines of credit
• Accounts Payable
• Wages
• Taxes

Equity:

• Owner Equity (sole proprietor)
• Shareholder Equity (corporation)
• Retained Earnings
• Opening Balance Equity

Expenses:

• Advertising
• Rent
• Professional fees
• Automobile
• Utilities
• Meals & Entertainment
• And so on…

   

Stress, Confusion, Overwhelm….

Listen, I get it you don’t give a crap about double entry accounting you just want to make sure you get everything entered properly and at the end of the year pass it off to your accountant to let the whole darned mess be their problem. I’m with you, who wants to have to constantly stress over this crap?

Here’s the thing, spending a little extra time up front and customizing your Chart of Accounts to your specific business will save you time and money. It will save you time in two ways: 1. It will reduce confusion about which account to post to, and 2. It will allow you to quickly generate meaningful reports to assist you in decision making. You will save money by having a well-organized system that your accountant can quickly find and extract what they need in order to prepare your income tax. The less time they have to spend on your file the better for your pocket book.

Have you stayed with me this long? Wow, I’m so proud of you! It may not seem relevant to you now but trust me it is. Now that you have a concept of what this is we can begin to build on this foundation. If you’re still confused don’t stress. Please, I encourage you to post your dilemma in the comment section below.

Now here’s a little bonus gift for sticking with me this long.

Add yourself to my mailing list and post a comment below to be entered in a draw to win an Accounting Clarity Session valued at $200. What you will receive is up to an hour coaching from me where I will either set up your own Chart of Accounts from scratch or review your existing set up to get you organized. I will also explain which expenses go where so you can ditch the accounting entry anxiety. Winner will be chosen at random on July 4^th! Yeah! Exciting!