If you work with the software Quickbooks, which many small to medium businesses do, you have certainly come across the term, Chart of Accounts (COA).
What you may not know is how that works to help make up the picture of your finances, or how it relates to your tax return.
There is a lot of information we could go over for the COA purpose, but we will just touch on a few basics in this blog to get started.
Each industry can have a specific COA. Quickbooks helps determine that in the original set up, however it can be changed at anytime if need be. So for example, a retail shop and a construction company would each have different Accounts in their list.
- There are different types of accounts to determine how the account functions in any transactions.
- For example, the credit entry to an account that is a ‘BANK’ type will record differently than a credit to an ‘EXPENSE’ type account.
- A positive balance in an ‘ACCOUNT RECEIVABLE’ type account can be a good thing to the company financials, where a positive balance in an ‘ACCOUNTS PAYABLE’ may not necessarily be good to the company financials.
- Some account types have depreciation adjustments made, such as the type ‘FIXED ASSETS’ so the number reflected on the Balance Sheet report may not be accurate throughout your fiscal year.
- Each account serves a purpose for recording and tracking.
- The more you spend on an ‘EXPENSE’ type account titled, ‘Office Supplies’, the higher the balance is as it accumulates what has been spent during a specific time frame. These numbers can help develop a budget.
- An account type ‘LIABILITIES’ determines an amount that needs to be passed thru the company financials, but may not necessarily be the companies expenses, such as Employee payroll taxes.
So when thinking about how these accounts relate to the reports, Income and Expense type accounts produce the Profit and Loss Statement. This report does not include items like the Receivables or the Asset accounts. Those items come in to play with the Balance Sheet report.
If you are struggling with how your chart of accounts relate to your financial reports, contacted your CPA or your bookkeeper. Many companies set up their chart of accounts incorrectly and this then flows thru and the reports are inaccurate. The COA is more important than most people realize. Ask for help if you are unsure. The more you understand how to interpret your accounts, the better decisions you can make to grow your business.
Please contact me directly if you have questions on your bookkeeping or need assistance setting up your Quickbooks Company file. I can guide, assist or manage your bookkeeping needs. If you have comments or suggestion for subjects you would like to see in a blog please contact me thru this site or with the information below.