Tip 3 of 10: Maintain a good chart of accounts
Updated: Jan 8
Welcome to the Top 10 Tips for Financial Success blog series, where we hit the books to better manage your books!
Whether you’re a small business or a solopreneur, these 10 tips are vital to your bottom line!
You may have read that sentence and thought, “Of course I have a good chart of accounts!”
But I’m guessing that a few of you are thinking, “Okay, um, Beth? What are you talking about?”
Hang tight. I’ve got you.
What is a chart of accounts?
A chart of accounts is a list of the categories of expenses and income that you have. For example, a chart of accounts for expenses would include line items like office supplies, utilities, professional fees, things like that. On the income side, you may list separate accounts for products you sell (like t-shirts or swag) vs. services that you provide (consulting or writing services).
What’s the best way to organize my chart of accounts?
The only ideal way to set up your chart of accounts is to make it right for your business needs, and for it to meet IRS requirements.
If you’ve ever filed a Schedule C for your taxes, you’ve seen the list of items that would go into a good chart of accounts. That’s the bare minimum of what you want to have on your chart of accounts.
You’ll also want to have a chart of accounts that reflects what you need when you’re reporting. So for example, the IRS requires that you have a line for utilities, but you might want to see what you are spending for oil vs. what you are spending on gas. So you might break that down and have two different categories.
How detailed do I need to get?
You need to be detailed, but you don’t want to go overboard. Case in point: I have a lovely client who came to me and said “Hey Beth, I need you to help me get my books in order. Let’s take a look.” Now typically, a profit and loss that’s made based on your chart of accounts is maybe a page or two. Hers was at least five pages long. The most surprising category was office supplies, which she had split out by pens, staplers, envelopes, paper, paper clips, erasers, you get the picture.
Fascinated, I wondered if she was tracking an office pen thief, or if she really needed to know for herself how many pens she was buying. So I asked. Turns out, she didn’t need to know anything about the number of pens she was buying; she thought she was supposed to detail her chart of accounts that deeply.
Boy, was she relieved when I told her she didn’t have to! And the time she saved by not tracking pens is energy she could put into her business!
The Bottom Line
Set up your chart of accounts so you aren’t wasting time and money. You want an appropriate chart of accounts that meets your particular business needs and also your needs at tax time.
Not sure if your chart of accounts will pass IRS muster? Think that you may have a chart of accounts that is too detailed or not detailed enough for your business needs? Contact Beth Blaney and Associates, and we’ll set you up for success.
At Beth Blaney and Associates, we help clients get unstuck from their financial habits through our "Bookkeeping Clean Up and Evaluation" service. We will take a look at your books in their current state and offer suggestions to build a better financial foundation for your business. Connect with us at email@example.com or click here to schedule your assessment today!