Set-up for your Business the RIGHT chart of accounts

First, a few technicalities regarding the necessity to maintain a chart of accounts and why it is going to be (or is already) a key part of your control system. What's an account first of all: very simply, think of it as being a pot where you will accumulate over time (usually one year) all amounts linked to financial events that affect your business.

BTW, never forget that each entry in your accounts or your books should be supported by credible and original documents - a MUST. Indeed, if an entry is not supported by a bona fide document, it could be rejected one day by an inquisitive tax inspector. He/she might just go through the process to increase your taxable income - a scenario I certainly do not wish for you.

Collect first all your key business documents by type (sales invoices invoices together, same for purchase invoices, cash receipts, company bank stements, etc ...). Try not to misplace any of these precious original supporting documents.

Now, How do we get to build up a "suite" of meaningful accounts that reflect your activities ? I would suggest that you take the following steps:

1. List in simple terms the accounts (pots) where you would like to accumulate accounting entries;
2. Try to limit this list of accounts to Max 50 (we will speak in another blog about the concepts of budgeting and how the number of accounts you wish to maintain could make you lose time). By limiting your number of accounts to say around 50, will force you to think hard on how to segment your sales and expenses accounts;
3. Concentrate first on the P&L accounts (i.e. the accounts that reflect your yearly activities in terms of sales and expenses). If you decide for instance on creating 3 sales accounts (say sales for Products 1, 2 and 3), think that you will need to create most probably 6 more accounts to keep track of the related product purchases and their relevant stock values;
4. Re other expenses, create again accounts that are worth to keep separate - don't go down the route of creating 3 separate accounts for say telephone, fax and internet costs (after all, expenses related to these items are all related to communication);
5. Proceed the same way for the Balance Sheet accounts = accounts that are supposed to live more than a fiscal-tax year or to span over two or more years like capital, bank, fixed assets, customer/supplier accounts, etc ...
6. Walk to your chamber of commerce or industry associations or to your accountant to bounce back your choices and see if your list of accounts comply with local regulations. This exercise should not take more than two hours.
7. You are now equipped with one of the most important tool - a chart of accounts tailored to Your business - that will give you more visibility/control over your business.

You wish to know a bit more about "Chart of Accounts". Click on the following link, the text is not too long and though it was created for not-for-profit organizations, advices given can easily be adapted to a business entity:

What should your chart of accounts include?

The Friendly Financial Advisor