Right now, your accounts are full of data that can help you understand the overall performance of your business. You probably know that, but do you feel like you’re taking advantage of those insights? If understanding your day-to-day expenses and income and calculating your profit feels hard to navigate, it likely means you need to work on building your chart of accounts.
A chart of accounts is defined as an organizational tool that includes a full, categorized listing of all accounts in your ledger, such as income, expenses, assets, liabilities and equity. This chart of accounts, or COA, provides crucial information about your business, but understandably, many owners aren’t sure how to set up this method of categorization. What should your categories be, how do you define them, and where do you keep track? We spoke to Karen Randolla, EA and owner of Padgett Westchester to learn her four key tips for building a strong chart of accounts for your business:
Use a template.
There are several “standard” COA templates available online, including templates from Xero and QuickBooks, as well as Padgett’s own standard COA, available to clients. Using a standard template can help you make sure you’re including the most important categories and not leaving any key areas out. If you’re using a similar COA to other businesses in your industry, it also becomes easier to set benchmarks and compare your business to competitors.
When using a template, you’re likely to still need to make some edits to adjust for how your business runs. “For example, most standard templates include an area for postage costs,” Karen says. “If you run an e-commerce business or need to ship things regularly, this would be a relevant cost for you to track. But for many businesses, especially restaurants or those in the service industry, sending mail is not a common day-to-day occurrence. If that’s the case, you could list the occasional postage expense under a category like ‘office expenses’ rather than keeping it separate.”
Avoid the “miscellaneous” category.
While there are occasional expenses that just don’t fit anywhere else, the miscellaneous category is very easy to overuse in your COA. “Don’t let it become a financial junk drawer!” Karen warns. “It’s worth taking the time to sort things out and determine what categories your income and expenses really belong in.” Having everything neatly sorted will make it easier to track your budget and cash flow and help you identify specific areas that may be causing an issue.
Don’t overcategorize.
As tempting as it can be to lump everything together in miscellaneous, it can also be tempting to make your categories too specific. “If you run a restaurant, you may have categories for food and beverages,” Karen says. “You could break down that food category even further, and sort by appetizers, entrees and desserts. When tracking income, this could be useful in determining what your best-selling products are, but it can cause complications when trying to track expenses.”
For example, if an appetizer and an entrée both use the same ingredient, where do you categorize that cost? When setting categories, remember that you’ll need to track both incoming and outgoing funds to have meaningful measurements. If your income and expenses don’t line up well, something may need to be adjusted.
Consider other documents and filings.
When tracking your funds, don’t forget about other places those numbers may show up. Payroll is a good example. Whether it’s for your employees or it’s the funds you take out to pay yourself as owner, that will also show up on forms like a W-2 and a tax return. For funds that show up on multiple documents like this, it’s crucial that these numbers match to your COA.
Remember that at the end of the day, your chart of accounts is meant as a tool to help you run your business better. Whether you need help managing your accounting or want to learn about other ways to strengthen your business, Padgett’s network of advisors are ready to work with you. Find a location near you today!
Meet Karen Randolla, Enrolled Agent and Owner of Padgett Westchester
As an owner and lead accountant at Padgett Westchester alongside her husband Joe, Karen likes to make peoples’ work easier. She helps small business owners by providing peace of mind, sound advice, and informed problem resolution. Karen is an Enrolled Agent (EA) and has earned an MBA from New York University Stern School of Business. This academic knowledge, and experience in several consulting firms, allows her to assist small businesses as well as business groups within large enterprises, across a broad variety of industries.