Most people don’t give the chart of accounts a second thought.
That’s most people. But you’re not most people.
You’ve given it some thought.
You know it’s there but it’s possible that you’re not exactly sure what it is, why you need it, what you’re supposed to do with it…or how to create your own.
What is a Chart of Accounts?
A chart of accounts is a list. Think of it as a list of categories that you use to group and organize your transactions…
Put another way, it’s a collection of buckets. Buckets that collect the individual transactions that make up the inflow and outflow of cash in your business.
Why Do You Need A Chart Of Accounts?
The chart of accounts is the backbone of everything when it comes to your accounting system.
Based on the account type, the accounting system knows where to put the balance (the collective total held in each respective bucket).
The system will know which financial statement it should be included on and where.
For instance, revenue and expense accounts go on the Income Statement (aka the Profit & Loss Statement).
Furthermore, the assets like your bank account… they hang out on the Balance Sheet.
It’s all a system and it’s all a flow… and it all starts with the chart of accounts.
What Are You Supposed To Do With Your Chart Of Accounts?
Considering it’s the backbone to your bookkeeping/accounting system… you’re supposed to set one up.
And it’d be nice if it were setup properly.
If you use a system like Xero or Wave Accounting, a chart of accounts will be provided to you during the setup process.
For the most part, what’s provided will do just fine.
However, if you need to customize it a bit, you have that opportunity to do so during the setup process and if you forget an account that you’d like to add, you can always include it later.
Adding an account in either system is pretty easy so don’t worry too much about getting it right during the setup.
How To Create Your Own Chart Of Accounts in 5 Easy Steps
- Download my standard chart of accounts for creatives or the one for coaches and consultants
- Look it over. Maybe you need to add a few accounts or delete a few.
- Think twice before deleting any accounts. Depending on where you’re growing… you may want to upload them and archive (save) them for later.
- Save the file as a .CSV file
- Upload to your accounting system
You’re DONE. You’ve just customized your chart of accounts.
What to do next?
What if you’re not ready to use an accounting software package yet? What if you’re using a spreadsheet to keep track of your income and expenses.
First, we both know that’s not the best way to take care of business but I get it, sometimes you have to grow into these systems as your business grows.
Second, there are free accounting alternatives out there that will actually make this process easier than using a spreadsheet so no excuses…. (for example, Wave Accounting… so I’ve basically told you to stop being a wuss and get some accounting software already!)
Anywho, enough of that… what to do next.
#1 – Get into the habit of categorizing all of your transactions, even if you are using a spreadsheet.
#2 – To make your categorizing habit stick, make an appointment with yourself. Put it on your calendar.
Frequency will vary from business to business and from person to person, but my recommendation is to do this weekly so that the transactions are fresh in your mind and there will probably be less of them. Less transactions to review = less overwhelm and less friction.
The more often you take a peek at it, the less time and the less cumbersome it will be for you. And at this frequency you will become more efficient and productive.
When you wait too long, you lose a bit of productivity and efficiency because you will have to research the transaction and sometimes make extra efforts like making phone calls or sending emails to find out what the transaction was for… all of this equals tons of time that you could have used doing something else!
Before I go… thought I would give you a copy of my chart of accounts. You can grab it here with the rest of my templates and checklists. 🙂
Until next time,
Templates & Checklists (including my chart of accounts) – https://go.thecommoncents.com/checklists
Review of Xero – http://www.thecommoncents.com/blog/accounting-software-review-xero/
Review of Wave Accounting – http://www.thecommoncents.com/blog/accounting-software-review-wave-accounting/