Chart of Accounts: Examples for Small Businesses, Retail, Construction, and Services

Thus, to calculate Blackbird’s ‘true’ profitability, the owner needs to first account for the Direct Expense that would include compensation she receives as an advisor. If her compensation is $200,000, comparable to that of the advisor at Apple, then Blackbird’s operating profit would also be $50,000, identical to Apple’s profitability. Apple employs an advisor who is paid a salary of $200,000 per year, while Blackbird is owned by a sole proprietor who also performs all of the firm’s advisory services.

Understand Your Earnings

Firstly, it helps businesses organize their financial transactions and track their financial performance. Secondly, it facilitates the preparation of financial statements, such as the balance sheet and income statement. Thirdly, it enables businesses to monitor their cash flow and make informed financial decisions.

Equity Transactions

The chart of accounts is like a map of your business and its various financial parts. Revenue accounts keep track of any income your business brings in from the sale of goods, services or rent. This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business.

Double Entry Bookkeeping

At the end of the year, he records this by increasing the “Owner Compensation” Account by $200,000 and reducing the “Owner’s Equity” Account by the same amount. Beyond being just the bottom-line income paid out to the owner, profitability also factors into many of the firm owner’s other potential concerns, such as how well the firm can sustain an economic downturn or how much it would be valued for a sale. The first three categories within the Chart of Accounts (Assets, Liabilities, and Equity) are used to create the business’ Balance Sheet and are therefore called “Balance Sheet Categories”.

• Some of the most common types of revenue or income accounts include sales, rental, and dividend income.
• Taking out a loan, on the other hand, increases Assets (by the amount the business receives as loan proceeds) and Liabilities (by the amount of debt owed), again by equal amounts to balance out both sides of the equation.
• As the first step toward building a better accounting system, firm owners can take a closer look at how to set up their firm’s chart of accounts – a list of financial categories that define the types of data the firm will track over time.
• The main account types include Revenue, Expenses, Assets, Liabilities, and Equity.
• It may be better instead to start fresh, using the transition date as a starting point to make future comparisons.

Charts of accounts use a numbering system to aid with recordkeeping, and are divided into asset, liability, equity, revenue, and expense accounts. They’re organized in the same order as the business’s financial statements, with assets, liabilities, and equity comprising the balance sheet; and revenue and expenses making up the income statement. A chart of accounts is an essential tool for businesses for several reasons.

• The inventory of a manufacturer should report the cost of its raw materials, work-in-process, and finished goods.
• Because the new system may categorize and present financial data differently, it may be difficult to make comparisons between periods before and after changing systems.
• To create a COA for your own business, you will want to begin with the assets, labeling them with their own unique number, starting with a 1 and putting all entries in list form.
• A chart of accounts should keep your business accounting error-free and straightforward.
• No matter if you’re an entrepreneur starting a business or an owner looking to streamline your practices, accounting software can help you get the job done.

Can a chart of accounts be customized to fit specific business needs?

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. Implementing a new bookkeeping system often requires extra effort in the early stages to ensure that transactions are correctly categorized. After all, it’s bookkeeping and payroll services possible that the new system requires categorizing or thinking about transactions in different ways than what the firm owner has grown accustomed to. Each transaction entry should clearly show the source and destination of the money involved (keeping both sides of the accounting equation in balance), but in practice, bookkeeping isn’t always quite that straightforward.

There’s nothing special about the balance sheet accounts you use within your COA since they flow into the balance sheet you already know and love. Obviously, that makes your chart of accounts essential to a host of different retained earnings people and groups, from your decision-makers and stakeholders to potential investors and lenders. But just because it’s important doesn’t mean it’s intuitive or straightforward, at least without true expertise guiding the way. Well, that’s exactly how someone looking through your financials would feel if it wasn’t for the accounting equivalent of that life-saving index – the chart of accounts (COA).

QuickBooks Online uses your chart of accounts to organize all your accounting transactions. QuickBooks does provide a standard Chart of Accounts template upon account creation. Still, it’s much more effective to have a Chart of Accounts specifically designed and tailored to your business.

Subcategories Allow Similar Transactions To Be Combined

For a small business it is important not to over complicate the chart of accounts. A small business does not need many of the accounts required for a large corporation. Periodically review your COA to ensure it continues to meet the needs of your business. As your company grows and evolves, you may need to add new accounts or revise existing ones to accommodate new types of transactions. We also provide ongoing accounting reviews, bookkeeping, and tax compliance services to streamline your financial management. For a more detailed guide, explore this chart of accounts law firm chart of accounts sample for service business.