The accounting system of a company is based on a system of accounts that keep the revenues, expenses, and other information well-organized and ready to be put into the financial statement.
The framework, also known as”the chart of accounts serves as an account of the financial accounts of the company. Accountants make use of the chart to determine the transactions they make in the general ledger of the business.
Setting Up the Chart of Accounts
When you begin your new venture and you establish an accounting chart as the first step in setting up the accounting system of your business. Small-sized firms do not all have identical account charts. The types of accounts you can include depend on the type of business you operate. For instance, if, example, you are a service company there is no need for inventory accounts.
When you create an accounting chart, you should think about the near future. Do not just think of the accounts you require for your small business today. Consider the accounts that you’ll need 5 or 10 years from now and add them to your chart. There may be no employees right now but in a few years, you will be adding employees to your company which is why you need to plan for this with your chart. There is a chance that you will need to include accounts in your list as you go.
It is recommended to establish a numbering system for your account chart. If you intend to utilize an accounting software program that is computerized choose a four-digit numbered system. A block of numbers is generally assigned to the various categories in your chart of accounts and the blank numbers are left in the final to permit additional accounts that can be added later.
As part of the accounting process, The chart of accounts is employed to record journal transactions. the chart of accounts has 5 categories of this chart.
- Owner’s Equity
This is the place where you track the assets your company has. It is possible to prefer your asset category, to begin with, the number 1000. It is typically the number that accounting software programs for computers employ. The number of each account for assets is by a number, for example, 1000 10, 1010, 1020, and so on. It starts with current assets and then goes on into fixed assets.
Current assets include accounts that hold cash like the cash you have in your checking and savings accounts. You might have customers to whom you offer credit, and therefore you’ll require an account. If you are selling products that you sell, you’ll require the accounts for inventory.
After you have a fixed asset account, place it into a bank account to accumulate depreciation. It will always be an amount that is negative on the balance and is directly linked to fixed assets because they are the ones they are quitting. Don’t leave space for other accounts in between fixed assets and the accumulation of depreciation. There is a chance that you have accrued depreciation for multiple fixed assets. You can depreciate your building and vehicles, as well as commercial equipment, more.
The category of liabilities is the area where you record your company’s debt obligations or the amount your company owes or could be owed in the near future. You might want to start by naming the liabilities section starting with the year 2000. Similar to the asset category, you should adhere to the standard format of the balance sheet when creating the section for liabilities in your chart of accounts. There will be the current liabilities section and an extended section on liabilities.
In the current section, you will comprise the accounts for short-term debt like accounts payable, which is the account in which you record the amount you owe suppliers. Also, you will have an accrual account that includes the amount you owe on payroll taxes and sales tax. Additionally, you will have an account for accrued earnings. There is also an account with a current liability for credit cards payable as well as short-term loans due.
In the near future, you might incur long-term debts, like mortgages. It is important to include space in the chart of accounts to include other accounts with long-term debt.
The equity accounts of the owner are your investments in the business. If you choose to acquire others investors in the future it is recommended to have the accounts of common stocks as well as maybe preferred stock. It is important to have an account to keep the retained earnings of any earnings you are able to reinvest into the business. The typical way to start your equity account of the owner with 3000.
Revenue from sales is usually the primary account in the account chart that is linked with the statement of income. Sales revenue is the main source of revenue for your company and this part in the chart of account generally begins with 4000. Alongside the account, for sales revenue, it is possible to include a separate account that accounts for discounts on sales as well as allowances for sales returns and allowances. Additionally, you’ll want to include a separate account for the interest earned from the income you earn from your investment portfolio.
Costs of sales or the cost of products sold are typically the next kind of account that you should take into consideration. Service businesses too must look at the cost of sales. Include the accounts for discounts from suppliers, shipping costs, and miscellaneous costs for sales.
The last category that is listed in charts of accounts is the expense category typically listed as by 5000. One way to organize expenses on your chart of accounts is to review IRS Form Schedule C. Form Schedule C and follow the manner in which expenses are listed on the form. This will make it easier for both you and your accountant to keep track of expenses when tax time arrives. Create an account for each of the expenses on Schedule C and any other expenses that are specific to your business. Make sure you have several bank accounts for the event that you require them at some point in the near future. Give a number within the range 5000-5999 for each.