Establish a Chart of Accounts

A Chart of Accounts is a listing of the accounts used by your company.  The accounts are normally grouped by type and have a number associated with the account to keep like accounts together on bookkeeping programs and so that it is easy to charge expenses appropriately and consistently so you can prepare accurate financial statements and keep accurate cost records to prepare future budgets including production and overhead budgets. 

One example of a chart of accounts we used in the housing industry was one recommended by the National Association of Home Builders. This Chart of Accounts can be found here.  http://www.nahb.org/generic.aspx?genericContentID=29577

When I took over at the SCUBA shop the former manager who knew a lot about SCUBA diving but very little about business was recording expenses into accounts set up in QuickBooks. He had very little understanding of the difference between income and expenses at least as it related to the QuickBooks Accounts. He guessed at what account to charge expenses based solely on the name of the account without regard to whether the account was income or expense or even asset or liability.

When the accountant came in to do the taxes the financial statements made no sense. Before we could even begin the year end accounting we had to go back and correct nearly every transaction. We also noticed there were several accounts with similar names.  There was an Asset Account called SCUBA Equipment and an expense account by the same name. We changed the Asset account to '1280 - Rental Equipment 'and the expense account to '3680 - Cost of Goods Sold – SCUBA Equipment.'  We assigned four digit numbers to all the accounts. The Asset Accounts all started with a similar numbers and all the Expenses started with similar numbers. We also did training with the employees who had access to the accounting system.

Accurate accounts and accounting will make it easy to plan your overhead budgets and make sure you are charging enough to at least cover your costs. A good Chart of Accounts will make it easier to keep your accounting accurate and consistent.  In a future article we will talk about cost accounting as a method to control and accurately predict your costs.

Original Content copyright 2010 Thomas Robinson