Eeny, meeny, miney, moe… Where does this transaction go?

In any business with money coming in and going out, you’ll need to have some way of keeping track of your money.

When you receive money or someone takes money from you, it is called a transaction, and each transaction has a home in your chart of accounts (a list of categories where you assign each transaction.) Think of your chart of accounts as an apartment building complex. It contains a bunch of apartments, each with their own number on the door. People live in the apartments and “belong” in a certain number – George in #5, Sally in #38, and Little Johnny in #16.

The financial transactions in your business are the same as these apartment dwellers. Each transaction has an “apartment” it calls home, and you get to decide which apartment that is. The categories in your chart of accounts are all numbered, just like your apartment doors. But unlike an apartment complex, if you need a new category, you can just make one!

Try to start off with a simple chart of accounts, and add categories as you need them. Don’t add too many categories though – you’ll just make it hard on yourself! You probably don’t need separate accounts for “printer paper” and “office supplies”.

Whether you use a notebook, an excel sheet, or a bookkeeping program, it’s sometimes hard to know where to send a transaction – what apartment number they belong in. I’m going to simplify the process for you a little, and provide you with a starting place.

I’m assuming that if you’re doing your own bookkeeping, you don’t have very complicated categories or a whole bunch of monthly transactions. Hiring a bookkeeper (Like me!) to manage your books for you can be a really smart decision if your bookkeeping is complicated. It would be a wise choice for you to stop spending a lot of your time on it and instead focus your time and energy on the aspects of your business that you truly enjoy. Time is something you can never get back!

But if you do want to manage it on your own, here’s how to get started with your chart of accounts.

If you want to keep things really simple, you can skip the numbers for each account and just go by category names that make sense to you. That would be like Sally in apartment #38 just having her name on the door, instead of a number. If your business is small and you would rather avoid the numbers, that can be done.

An important thing to remember is that you want your chart of accounts to be consistent – preferably from the day you start your business until the end, or at least one that won’t change for several years. This allows you to compare how your business is doing now with previous numbers that actually give a clear picture.

A second important thing to do is to keep your original chart of accounts saved, and not let anyone mess with it who isn’t qualified to do so. You don’t want your employee to change a number because they like another number better, or to miscategorize something.

If you find you end up with way too many account categories, you can always close them and move the transactions they contain into a different category. Doing this once in awhile will keep your accounts nice and tidy.

There are several sections in each chart of accounts – similar to floors in an apartment complex. Each section tells you about the types of transactions that will “live” there. There are five main sections: assets, liabilities, income, equity, and expenses. Three of these are usually seen as good: assets, income, and equity. And the other two, liabilities and expenses, are usually seen as bad, though that isn’t always the case. For example, taking out a loan is a liability, but if it serves to further your company’s growth and you don’t become a slave to your loan payments, it may work out as a benefit to you.

Now, the numbers next to each category in your chart of accounts can be whatever you want them to be. Three digits long or ten digits long – you can choose. I recommend four digits, because it gives you wiggle room to add more categories and still keep things in order, but keeps the numbers from getting way too long.  Or of course, you can skip the numbers.  But I think it does help you to figure out what category belongs where. Once you get the hang of the numbering system, it isn’t too complicated.

Here’s the basic skeleton to a chart of accounts:

You’ll see eight categories here, instead of the five I mentioned above.  But they still fit into the five main categories. “Cost of Goods Sold” is a more specific type of expense, “Other Revenue” and “Other Expenses” are pretty self-explanatory where they fit in, and there you have it. Back down to five main categories.

The numbering system in the first column shows where you would put sub categories in each account. Your “Accounts Receivable” (money owed to you) would be an asset, so you would number it in the 1000’s. “Advertising” would be an expense, so it would be in the 6000’s. There is a rhyme and reason for the numbering done the way it is. According to accountingtools.com,

Accounts are usually listed in order of their appearance in the financial statements, starting with the balance sheet and continuing with the income statement. Thus, the chart of accounts begins with cash, proceeds through liabilities and shareholders’ equity, and then continues with accounts for revenues and then expenses. Many organizations structure their chart of accounts so that expense information is separately compiled by department; thus, the sales department, engineering department, and accounting department all have the same set of expense accounts.  

Here are a few more major accounts and the suggested numbering for them.

It is not an exhaustive list, but at least it is somewhere to start.

I’m indebted to Ben Robinson for his suggested Chart of Account numbering and account descriptions.

If you have other categories you want to add, look at the first table – the 8 blanket categories – and think about what you are wanting to add. Is it an expense? Then you’d probably put it in the 6000’s. Within the number, you can try and keep categories alphabetical if you would like, to make it easier to find things.  For example, if you wanted to add “Printing and Stationary” as an account, you would put it below #6410 (Meals and Entertainment) and above #6700 (rent). A nice round number like 6500 would give you space on either side. So now you have:

6500 – Printing and Stationary 

to add to your chart of accounts.  Again, make sure you have a master Chart of Accounts somewhere and update it as you add categories.

Now, that wasn’t so awful, was it? I hope that I made the whole concept just a little bit easier to grasp.

Having a well organized chart of accounts might be annoying to set up in the beginning, but it’ll make your life a whole lot easier in the end!

If you have any questions, let me know!