Building a Helpful Chart of Accounts
If you have already been in business for a while, chances are your Chart of Accounts needs a little help. I have developed a category system to describe the three main pitfalls I find when reviewing a new client’s Chart of Accounts:
- Sahara Desert Accounts – These are accounts that may have never been used or were briefly used more than 5 years in the past.
- Copycat Accounts – These accounts serve the same purpose as one or more other accounts already existing in the Chart of Accounts. All of these similar accounts have transactions booked to them, but it can be difficult to understand why they are not one account.
- CPA Accounts – These accounts are understood only by your CPA and you are afraid to even open them up in fear that you might mess up your whole bookkeeping system.
I will clean up these types of files, being careful not to affect the books that have been closed for the previous tax year.
Below are some tips for building a useful Chart of Accounts:
- Make sure that your Items (such as Inventory and Services) point to the appropriate accounts in your system.
- Have correlating Cost of Goods Sold and Income accounts to ensure easy analysis:
- Service #1 Income, Service #2 Income
- Service #1 COGS, Service #2 COGS
- Utilize subaccounts (rather than new accounts with similar uses) to better analyze your business activities.
- Separate Individual Owner’s Draws and Contributions.
- Separate Owner’s Equity transactions from Company Retained Earnings.
- Separate all Fixed Assets with amortization/depreciation for each individual asset.
- Separate Payroll expenses between Gross Wages and Employee Payroll Taxes.
- Ensure there is NO balance in the Opening Balance Equity account in QuickBooks, then delete or inactivate this account.
- Try not to utilize more than one Accounts Receivable and one Accounts Payable account (unless you are a Non-Profit company).
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