A great way to set your business up for success is to develop good bookkeeping habits. If you create clear ledgers and organized financial records, you can make it easier to manage your business and make important strategic decisions.
A chart of accounts (COA) is an important component of expense management. Use this guide to answer common COA questions to get the most out of this tool.
Defining Chart of Accounts (COA)
A chart of accounts is used to organize your financial statements. Instead of looking at a long list of credits and debits, you can review your financial performance in a clear spreadsheet or a single-page report.
The chart of accounts has different categories based on your assets, liabilities, and shareholder equity. By glancing at the COA, you can see where your money goes within a typical month or quarter.
What Are the 3 Categories in a COA?
You will need to divide your financial transactions into 3 main categories to determine where the money is coming, going, and growing:
- Assets refer to cash and credits to your business (accounts receivable, petty cash, building equity).
- Liabilities refer to bills and debts related to your business (accounts payable, loans, mortgage, etc.).
- Shareholder equity includes company stock and retained earnings for your investors and owners.
You can likely create subcategories under each of these major categories. For example, you can create an accounts receivable section in your assets and even break out the subcategories in greater detail below that.
How Do You Create a Chart of Accounts?
The chart of accounts is meant to help you easily discern where the money is within your organization. As a result, you will want to make sure each account has 3 aspects:
- An account name (that clearly describes what it is)
- A brief description for a shareholder or investor review
- An identification code differentiating this account
For example, if you pay a mortgage on your brick-and-mortar location, you could have an account named “Mortgage,” a description of your Central Ave location and mortgage costs, and a code 1005. Each mortgage payment would be labeled 1005 in your ledger and sorted into the mortgage category.
Are There Specific COA Guidelines?
While there is flexibility in how you develop a chart of accounts, you will need to follow the Financial Accounting Standards Board (FASB) if you plan to take your company public or include multiple shareholders.
Not only will following these standards keep you in compliance with the SEC, but they can help you attract investors if you want to grow your company but keep it private. Financial professionals look for certain bookkeeping formats when they review proposals, and a clear COA can tell them a lot about your financial situation.
Use Available Tools to Establish Your Small Business
Your first COA might only have a few line items as you take out a small business loan or send an invoice to a new client. However, as your business grows, your charts will become more complex. Use the free tools offered by Sunrise to boost your bookkeeping practices. Preparation today can keep you from getting overwhelmed tomorrow.