A chart of accounts is integral when running a business, but many companies do not have their finances organized proactively. Although this does not mean a business is neglecting its responsibilities, it leads to a more time-consuming process when completing accounts at the end of a tax year.
The following is an overview of a chart of accounts and the benefits it can offer a business when managed correctly.
A Chart of Accounts Explained
A chart of accounts is essentially a table of contents for accounts. How a chart of accounts is created can depend on the business's goals but generally consist of the following components.
● Liabilities
● Assets
● Revenue
● Expenses
● Equity
A breakdown of each of these components is as follows:
Liabilities
Liabilities are an overview of what a business owes and can include transactions relating to accounts payable, preferred stock, and common stock.
Assets
Assets are what a business owns and uses to operate the business and come in many different forms due to many companies in existence. In some instances, assets may come in the guise of software, petty cash, buildings, and vehicles.
Revenue
In addition to recording sales of products and services, the revenue section of a chart of accounts will also show sales returns and investment income.
Expenses
The expenses section of a chart of accounts details the costs incurred by the business. These costs will differ depending on the company's nature but often include bank fees, advertising, and rent.
Equity
The inquiry section of the chart of account refers to the amount left after liabilities have been deducted. The equity is also used for information to shareholders about the current value of a company and will include details about common and preferred stock.
Why Is a Chart of Accounts Important?
A chart of accounts is vital as it allows a business to quickly review the company's financial health while ensuring consistency when updating accounts.
Managing a Chart of Accounts
The rule of thumb when managing a chart of accounts is to add new accounts throughout the tax year but wait until it ends before deleting old accounts. Double-entry accounting is also commonplace in that when one account is debited, another account must be credited.
As the size of a business increases, so too does the work that needs to be carried out when managing a chart of accounts.
Fortunately, there are automated options available that can streamline the process, including Quickbooks. As well as being able to document debits and credits easily, Quickbooks also provides users with a chart of accounts template.
However, there can still be instances when professional assistance is required, especially when trying to focus on other areas of the business.
Why Choose ProBookkeeper for Chart of Accounts?
As keeping a chart of accounts is essential, some may want to enlist the services of a professional. ProBookkeeper has helped businesses with several aspects of their accounting, including creating and managing a chart of accounts.
If your business still needs to create a chart of accounts, or you are searching for a reliable professional to assist your business with its existing accounts, then contact ProBookkeeper to discuss your needs in more detail.