Small Business Accounting: Essential Chart of Accounts Every Owner Should Know

You are stepping into a Chicago Public Library, having thousands of books from different categories and genres. It would be easy for you to pick books if books are meticulously organized and labeled. But if everything is scattered all over the place and you are looking for “Mind Games” by Nora Roberts, it would be like searching for a needle in a haystack.

Similarly, you are required to organize and manage the chart of accounts for seamless tracking, reporting, budgeting, and making informed decisions. You very well know that every buck in your business counts and organizing and reporting on them within a cogent General Ledger not only provides insights into what was earned and spent but also results in improved processes that impact practical outcomes.

You may be wondering: “what exactly is a chart of accounts for small business and why there’s a need to create.” Here’s an ultimate guide to basic charts of accounts for small business, covering everything from how they work to getting started with them.

What is a Chart of Accounts?

A chart of accounts (COA) is a systematic listing of all financial transactions your company has made during a dedicated accounting period – January to December, April to March, or July to June. Every financial transaction breaks down into five categories, like assets, liabilities, equity, income, and expenses that facilitate easy access.

Note: The numbers that make up a small business’s chart of accounts come from its daily activities such as overheads, invoice to a customer, customers paying for services, vendor payments, and business transactions that you don’t think about every day, like owner equity or loan.

This aggregated information is adequate for creating income statements, cash flow statements, and balance sheets, providing a complete picture of your business’s financial health.

It’s a financial roadmap for your business. So, you need to do it right from the start.

How Does a Chart of Accounts Work?

COA is not the same across all industry verticals; however, there are some basic categories that you include while setting up a chart of accounts.

Account Number Account Type Account Name
1000-1099 Assets Cash, Accounts Receivable, Inventory, Fixed Assets, and Accumulated Depreciation
2000-2900 Liabilities Accounts Payable, Accrued Expenses, Sales Taxes Payable, Notes Payable
3000-3900 Equity Common Stock and Retained Earnings
4000-4900 Revenue Service Revenues, Product Revenues, and Repair Revenues
5000-5900 Expenses Costs Incurred for Material, Office Supplies, Utilities, Rent, Salaries & Wages, etc.

Note: The number of accounts listed in your chart of accounts correlates with your company’s size. For example, the chart of accounts for a small business may include 20 accounts, while a large enterprise could have hundreds of different accounts listed.

The first three categories - assets, liabilities, and equity - are recorded in the balance sheet while the remaining two are included in the income statement and cash flow statement.

The balance sheet shows what your company owns and owes at any moment, the income statement tracks your earnings and expenses over time, and a cash flow statement tracks the inflow and outflow of cash. Pretty important stuff!

Chart of Accounts: Feeding Financial Statements of Small Business

Truly, COA lays the groundwork of income statements, balance sheets, and cash flow statements.

Sample Chart of Accounts for a Small Business

Assets Accounts

Account Code Account Name Description
1000 Cash Funds available to cover business expenses
1010 Inventory Raw materials, work-in-progress, and finished goods a business holds for sale
1020 Accounts Receivable Money owed to the business by customers for goods or services purchased on credit
1030 Prepaid Expenses Expenses that are paid for in advance (E.g. rent or interest paid in advance
1040 Land The physical land area owned by the business
1050 Buildings Office buildings, warehouses, and more
1060 Equipment Computers, machinery, and more used in the business operations
1070 Furniture Desks, chairs, and more

Liabilities Accounts

Account Code Account Name Description
2000 Accounts Payable Money owed to suppliers for goods and services purchased on credit.
2010 Accrued Expenses Unpaid expenses that have been incurred but not yet paid.
2020 Short-Term Loans Payable Loans that are due within one year from the date they are issued.
2030 Long-Term Loans Payable Loans that are due more than one year from the date they are issued.
2031 Mortgage Payable Loan secured by real estate property, typically with a term of 15-30 years.

Equity Accounts

Account Code Account Name Description
3000 Owner’s Equity Initial investment and additional contributions made by the owners
3100 Retained Earnings Net income (profit) or net loss of the business over time

Revenue Accounts

Account Code Account Name Description
4000 Sales Revenue from the core business activity of selling products or services
4010 Interest Income Income earned on interest-bearing accounts, such as savings accounts or bonds.
4020 Rental Income Revenue earned from leasing out property or equipment to tenants.
4030 Gain on Sale of Assets Increase in value realized when a long-term asset is sold
4040 Commissions Earned Percentage of sales
4050 Other Operating Income Revenue from incidental business activities that are not part of the core operations

Expense Accounts

Account Code Account Name Description
5000 Salaries and Wages Salaries, bonuses, commissions, and payroll taxes
5010 Rent and Utilities Rent, electricity, water, gas, and internet
5020 Marketing and Advertising Online advertisements, print materials, or promotional events.
5030 Office Supplies Paper, pens, toner cartridges, and more
5040 Depreciation The gradual decrease in the value of tangible assets over their useful life.
5050 Professional Fees Fees paid to CPAs, lawyers, or consultants
5060 Insurance Premiums of fire, medical, assets, and other insurance
5090 Bank Fees Fees charged by your bank for business account maintenance or transactions.
5100 Cost of Goods Sold (COGS) The direct costs of the products
5110 Other Operating Expenses Repairs, maintenance, or bad debts.

Although you don’t need to follow that format, small business accountants and bookkeepers generally follow the same numbering system for the COA to speed up the recording of business activities, making it easier to view what each account is about. Whenever there’s a new transaction, your qualified bookkeeper adds it to its matching account number. This way, an accountant or bookkeeper builds accurate and organized financial data in the form of your company’s general ledger.

And the best part? You can use this data to generate standard financial reports. The more detailed your small business COA is, the easier it is for the stakeholders to get the information they need to assess the health of your business. There are more benefits to setting up a chart of accounts for a small business.

Understand Your Earnings – Gain detailed insights into your business revenue, including peaks and valleys in cash inflows, cash in hand for disposal, and how long the cash balance will last after considering your average monthly business expenses.

Spend Smarter – You are always looking for opportunities to reduce expenses. With a detailed view of business spendings from COA, you can easily track expenses and see where you may be able to cut down on costs if needed. Also, you can seamlessly handle inevitable recurring expenses, like rent, salaries & wages, office utilities, materials, and more.

Effortless Reporting – COA organizes your financial data, enabling you to generate insightful reports at ease. With these reports, you can track your financial performance, pinpoint areas of improvement, and make strategic business decisions.

Enhanced Efficiency – Having an accurate COA eliminates confusion when recording transactions in general ledger and financial statements, saving your valuable time and resources.

Comparative Analysis Made Easy – With a basic chart of accounts for small business, you can make month-on-month, year-on-year, and location wise comparison of financial data. Identifying trends and measuring your company’s growth are a breeze.</p.

No matter the size of your business, a chart of accounts is imperative to stay informed about your company’s financial health. It’s natural to have questions and confusion while setting up a chart of accounts for your small business. Here are some frequently asked questions on a chart of accounts.

Frequently Asked Questions

How do I edit a chart of accounts in accounting software?

If you’re using accounting software like QuickBooks, Sage, or others, there is no need to edit or make changes to the chart of accounts, as the program has customized accounts.

Can I customize a chart of accounts to fit specific business needs?

Yes, it is a good idea to customize your chart of accounts. This way, you can allocate each financial transaction from your business to a category that makes sense to you as a business owner, keeping track of cash inflows and outflows while adhering to financial reporting standards.

Can I delete old accounts from a COA?

You can delete old accounts from a COA, but it’s better to avoid until the end of the year. If you delete old accounts, merge, or rename them in the middle of accounting year, tax season can get messy. That said, don’t worry about adding accounts as it does not impact the records.

Chart of accounts vs. general ledger: What's the difference?

A chart of accounts and a general ledger are both critical components of your accounting process that go hand in hand. A chart of accounts is a systematic listing of accounts in a business, like assets, liabilities, equity, revenue, and expenses. On the other hand, a general ledger is a record of the financial transactions in each account.

Published on: Jun 04, 2024

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Author

John Bugh

John Bugh is the Chief Revenue Officer for Pacific Accounting and Business Services (PABS), responsible for the strategic direction, planning, vision, growth, and performance of the company’s marketing, branding, and revenue streams.

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