Everyone knows that the core reports for accounting are an income statement and balance sheet. But what few people outside of the accounting profession know is how to structure their books to create useful reports. Understanding how to create your chart of accounts is paramount to building your business.
So what are the 5 things you need to know to get your chart of accounts built correctly?
Think of your income statement and balance sheet like a treasure map. They’re going to guide you to lining your pockets with gold (Aaargh!). But seriously, those reports are going to help you make strategic business decisions to manage your cash flow – pointing the way towards available financing options, highlighting where you might be losing money, or warning you that you’re burning through cash too fast. Your chart of accounts is your treasure map key.
1. Too much or too little
The level of detail in your chart of accounts categories and subcategories is the #1 thing that will affect your ability to create meaningful reports. You need to go into enough detail so that the data is reflective of where money is moving, but overdoing it defeats the purpose of bundling transactions together.
2. Don’t copy and paste your categories
There are some basic categories that everyone will have but there are some that are reflective of your industry or business type. It’s ok to start with a basic list but be sure to personalize it. Asking questions and doing online research can provide you with a sense of what similar organizations are using.
3. Decide what you want to report on
By understanding how much you want to slice and dice your data, you’ll get a sense of how detailed to make your categories. Think about the things that you want to know at the end of the month, quarter and year and make sure that you’ll be able to get the data you want.
4. It’s really hard to re-do
Once you create your chart of accounts and start to use it, it’s really hard to re-do it. You can easily add on to your list, but moving transactions from old to new categories is complicated and makes things with the IRS even harder. So it’s important to do your research and utilize your resources. Think about what you need now and what you think you’ll need later.
5. Don’t trust someone else
It’s great to ask for help, especially if it’s not your area of expertise, but that doesn’t mean you should be hands-off. No one knows your business like you do. They may have the technical know-how, but you’ve got the inside scoop on day-to-day operations and future plans. If you do have someone else help you, stay involved!