SMALL BUSINESS BLOG
The Chart of Accounts, heard of it? Don’t worry if you haven’t, you’re not alone – in fact most ‘non-accountants’ draw a blank face when the term is mentioned.
But today I want to spend a few moments running you through why you should have a basic understanding of what your Chart of Accounts is and how you can customise it to suit your business.
The Chart of Accounts can be considered the engine room of your business, every single transaction goes through it and builds your financial reports. It is a listing of all the accounts your business has available to record your transactions and helps to categorise your assets, liabilities, equity, revenue and expenses. Your assets, liabilities and equity make up your Balance Sheet and your revenue and expenses make up your Profit and Loss report.
Most accounting software packages will have several 'default' Chart of Accounts you can work with, but tailoring your Chart of Accounts specific to your business will help you classify transactions quickly, correctly and allow you to generate reports that actually mean something to you. Equally important is ensuring the GST codes assigned to each of the accounts is correct so your BAS includes the correct figures for GST paid & collected as mistakes here could lead to paying too much/too little tax or fines from the ATO.
If you find yourself allocating things to ‘general expenses’ all too often, then you should definitely get customising! Without customisation you’re pretty much left with one big ‘income’ account and a stack of expenses that have been reconciled but with no logic or reason.
Imagine you’ve been in business for 12 months and things are going well, but you feel like you’ve got way too many subscriptions – so you log into Xero and run your Profit & Loss report but you find you have nothing allocated to a ‘Subscriptions’ account, odd, because you know those monthly direct debits are still active in your bank account. But when you look at your ‘General Expenses’ account this has a pretty large balance, so you have to resort to looking through that account transaction by transaction for the past 12 months to add up what you spent on subscription fees – this is way too time consuming and leaves room for error because you might miss something.
Imagine instead that your chart of accounts had been customised to categories that made sense for your business, and when you logged into Xero you could have a ‘Subscriptions’ total spend at your finger tips the minute your Profit & Loss report is generated. A major time saver and no need to pull your hair out with frustration!
Your business might have multiple revenue streams (this can apply whether you’re a product based or service based business) and rather than lumping all income to one ‘Sales’ account, you might like to set up a few different income accounts to capture the specific streams. For example, if you’re a Wellness Practitioner you might have ‘Consulting Income’ as well as ‘Product Income’, and by separating the streams you can access a quick snapshot of how they’re performing simply by running your Profit & Loss Report.
We help structure our clients expenses into different cost centers for their business, for example – administrative / employee / technology / property etc and in doing this, it helps get them a much clearer picture of the different areas of their business rather than having one big dumping ground for expenses.
What do you think? Are you ready to customise your chart of accounts so you can finally see where your money is going and start making some strategic business decisions?
Need a hand? We’re here to help! Contact us for a Chart of Accounts review today.