When thinking about organizing our lives, a saying to remember is “A place for everything and everything in its place.” When each of our belongings has a place to go, it makes it much easier getting the house ready for company or tidying up the office after a long week to prepare for the week to come.
Your business accounts will thank you when you have a place for each transaction. A wonderful tool that is vital to all bookkeeping systems is a Chart of Accounts. This labels each account with a name and a number so you will learn where each transaction goes.
Let’s back up a minute. You might be wondering, “What are you talking about? What is a Chart of Accounts?” Well simply put, it is a list of accounts used to classify transactions. This tool organizes all transactions by putting each one in a specific place so you will know where your money is going, where income is coming from, etc. Most accounting software packages have a Chart of Accounts built in that can easily be customized for your accounting needs. These Charts of Accounts are not necessarily complete, but make good starting points that can be added to or deleted from to fit the needs of your business. Within the each software package you will find accounts and account types. If you are not currently working with accounting software, a Chart of Accounts can also be set up manually on a spreadsheet, or even on a hand written chart on paper. The important thing here is to get it set up to begin organizing transactions.
Some account types you will use include bank, credit card, cost of goods sold, income, and expenses. You name each account, then assign it an account type. It is best practice to also assign a 4-digit number to each account. As you can guess, there is a system for setting up these numbers as well. Each account type should begin with the same number. This will make it easy to find certain accounts within the chart of accounts.
This may seem like a tedious task at first, but if set up properly, it can be a tool that will make life easier from a bookkeeping standpoint. In the next blog post, we will be talking about the importance and the process of monthly reconciliation of your business’s books.
If you don’t have a chart of accounts set up, this step will make your monthly work so much easier. Go ahead and get started on this then we will talk later. Please let me know if you have any questions or if I can help you in any way. Good luck and go make that Chart!!