Why Your Business Needs a Chart of Accounts?
Effective account keeping is vital for any business, regardless of its size or nature. Whether you manage a small bookstore, a large sporting goods store, or a thriving e-commerce site, keeping track of your financial transactions is crucial. A chart of accounts serves as an essential organizational tool, acting as an index for all your business accounting needs. By incorporating it into your bookkeeping system, you can efficiently manage your cash flow and access precise financial information about your business. This article explores the significance of a chart of accounts, what should be included, and how to streamline your account-keeping processes for optimal results.
Chart of accounts – a definition
Whenever a business transaction is made, the amount of money spent should be recorded in an account. A chart of accounts provides businesses with an index of all the accounts associated with a business. So, when a purchase for the business is made or an invoice is paid, business owners can refer to the chart of accounts to see where they should record the transaction.
The chart of accounts should contain a range of categories and subcategories so every type of transaction can be accounted for. All income and revenues made should be recorded as well as all business assets, liabilities and expenses. In some cases, a chart of accounts will list details of shareholders’ equity.
Why a chart of accounts is essential for your business
It is virtually impossible for a business owner to memorise not only all of the accounts in their books but also all of the information in these accounts. This is why having a chart of accounts is so essential. A well-structured chart of accounts should enable accountants and business owners to view a list of accounts from the most important to the least important. All the financial aspects of the business should be laid out clearly, making it simple to see where transactions should be recorded.
As well as helping business owners to maintain clear and precise records of their expenditures, a chart of accounts also provides valuable data on the financial state of an enterprise. Because a chart of accounts separates all financial transactions clearly, a business owner can refer to it and see very quickly where capital is flowing in and out. This enables the easier creation of a financial statement analysis. It also allows accountants to continuously update their journal entries and HMRC reports throughout the financial year.
The data contained in a chart of accounts makes clear what areas of the business are maintaining good levels of profitability and what areas are losing money. This information can help owners and managers make more informed decisions regarding how to balance their books. These figures can also help business owners and managers to develop strategies to enhance the growth and structure of the business. A properly constructed and accurately updated chart of accounts also makes it simpler and faster to comply with financial reporting requirements or requests from His Majesty’s Revenue and Customs (HMRC).
What needs to be included in a chart of accounts
How complicated and extensive a chart of accounts will be depends on the nature and scope of the business. For instance, a chart of accounts for a small business will be less involved than a chart of accounts for a large retail organisation. Partnerships and sole traders will require more simplified versions than an incorporated company as they will not need to list details of shareholders’ equity, for example. The structure of a chart of accounts is also dependent on the type of accounting method the business uses.
There are, in general, five main categories in a chart of accounts:
- Business asset accounts – A record of everything the business owns
- Business liabilities accounts – A record of all debts owed by the business
- Business revenue accounts – A record of all funds the business has received
- Business expense accounts – A record of all funds paid out by the business
- Business equity accounts – A record of funds put into and taken out of the business by the owner/s
These main categories can be further divided into subcategories for more accurate bookkeeping.
These categories can all be customised and updated according to changing business needs.
The business asset account may include the following sub-categories:
- Accounts receivable
- Available cash reserves, including petty cash
- Ongoing prepaid expenses
- Allowances for bad debts
- Funds for accumulated depreciation
The business liabilities account can be broken down into sub-categories such as:
- Accounts payable
- Salaries or wages payable
- Taxes payable
- Notes payable
- Accrued expenses
Under the equity accounts section, the following sub-categories may be listed:
- General equity (amount of liabilities subtracted from the value of business assets)
- Shareholder’s preferred stock
- Retained earnings
- Common stock
The revenue account and expense account categories can be subdivided into sections that designate the expenditure and profits made by each team or sector within a business.
Many businesses use reference numbers to separate the account categories. These reference numbers will need to be manually assigned if the chart of accounts is kept in a paper ledger. However, most business owners and accountants use specialised accounting software that assigns reference numbers automatically.
These reference numbers make it easier to manage very large accounts from businesses that have various departments. A chart of accounts for a company that operates in multiple countries may have hundreds of separate accounts for its many divisions. Reference numbers are used to ensure that accountants can access information quickly.
The chart of accounts is usually maintained for a fiscal year or an accounting cycle before being replaced. Updates and additional account sections can be added throughout this period; however, care should be taken not to delete any sections until the end of the fiscal year or accounting cycle.
How to improve your account keeping
Creating a chart of accounts is one of the best ways to make sure you always keep accurate and up-to-date records of the financial transactions of your business. When designing and maintaining a chart of accounts, the most important aspect is to ensure consistency of reporting. It is advisable to try and design the structure of your chart of accounts in such a way that it remains roughly the same over a period of a few years. This will make it easier for you to compare past and current data. It is also advisable to try not to add too many new accounts and to regularly review your chart of accounts to ensure all information is relevant.
Mooncard can help you to stay on top of your business accounting. The Mooncard corporate card provides a digital copy of all expenditures made for business purposes. An employee pays for goods or a service and then takes a digital photo of the receipt or invoice. This is then sent to the Mooncard system, which automatically creates a sales report which is then forwarded to your accounts department who can quickly and easily enter it into your chart of accounts.
If you would like to see how simple it is to use Mooncard, go to our website to book a free, no-obligation online demonstration today!