Tracking Your Business Finances: Create an Effective Chart of Accounts

Every business owner wants to know their business’ financial information, like: what is their biggest source of income, and where their business is spending most of their cashflow. The secret to finding the answer to questions like these in your business, starts in the very foundation of your accounting system – a Chart of Accounts. An effective chart of accounts will help you make informed decisions in your business, be able to spot trends, manage budgets and plan for future growth.

But.. what IS a Chart of Accounts?

A chart of accounts is a structured list of a company’s financial accounts. It organises financial information into categories, such as:

assets,
liabilities,
equity,
income, and
expenses.

Each account is usually assigned a unique number, making it easier to track and report financial data. This system helps businesses manage their finances, make informed decisions, and ensure consistency across financial reports.

Creating an Effective Chart of Accounts

Creating an effective chart of accounts is crucial for any business. It serves as the backbone of your accounting system, helping you organise financial information and make informed decisions.

Here’s a step-by-step guide to setting up a chart of accounts that works for your business.

1. Understand the structure. A chart of accounts typically includes accounts classed under five categories like assets, liabilities, equity, income, and expenses, with different accounts under each category. Each account is assigned a unique number, making it easy to track and report financial data.

2. Tailor it to your business needs. Consider the specific accounts that are relevant to your operations.

3. Keep it simple. Avoid overcomplicating your chart of accounts with too many categories or subcategories. A streamlined chart is easier to manage and reduces the risk of errors.

Things to think about:

All businesses will have at least one Asset account (usually a bank account), one Income account (Sales from their main source of income), and multiple Expense accounts (such as Bank fees, Insurances, and Software subscriptions, just to name a few).
A retail business might need accounts for inventory and sales tax
A service-based business might focus more on accounts receivable and service income.

4. Regularly review and update your chart of accounts. As your business grows, your financial needs may change. Periodically assess your chart to ensure it remains relevant and efficient.

5. Finally, ensure consistency. Use the same chart of accounts across all financial reports and systems. This consistency helps in accurate financial analysis and decision-making.

When you have an effective Chart of Accounts for your business, you can then find out information for your business, such as:

Which month is your most profitable
How much are you spending on freight each month
What was your total cost for printer paper and stationery over the last financial year
How much did you pay on software over the last year (and then, you can even use this information to see if you can save money by streamlining your tech stack)

Having an effective Chart of Accounts for your business becomes a vital part of understanding your business finances, and enables you to track assets, liabilities, equity, income and expenses over any period of time. This then enables you to make informed financial decisions in your business.

Do you want to understand your business finances better, and be able to make financially-informed decisions in your business, check out my Aussie Bookkeeping Basics course. It’s designed to provide you with the essential skills and knowledge to manage your business finances effectively, like creating an effective Chart of Accounts. Learn more about the course >>HERE<<

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