Chart of Accounts Effects on Small BusinessApparently bubble gum was created by an accountant – I think it’s because accountants needed something to chew on besides their nails at the end of every month and especially at the end of every year! With all that there is to learn within accounting it could very well be since we need to have bubble gum available all the time! As I sit here chewing on some while writing this blog!

Where does it all start when it comes to accounting? What makes accounting work? The chart of accounts – you don’t have anything if you don’t have a chart of accounts. I know some people would say debits and credits but without your chart of accounts you don’t have anything to apply those debits and credits to!

Chart of Accounts:

 So what is a chart of accounts and what makes it so important? A chart of accounts is a list of accounts to which your money is allocated (income, parts, equipment, labor, office equipment, etc.)

A chart of accounts is exactly that a chart of accounts. For instance:

Checking Account

Income – Labor – Materials – Equipment – Advertising – Communications – Office Supplies

I cannot stress how critical it is to take the time and the effort required to have a properly constructed chart of accounts. The chart of accounts has a direct impact on your financial statements. If you have too few accounts or too many accounts it will have the same effect on your financial statements.

A great example of having too few accounts is having everything you spend thrown into a miscellaneous account! I have seen it time and time again when I ask a client how much they spent on anything from credit card fees to materials and they’re not able to answer the question. Due to a poorly created chart of accounts the owner had absolutely no clue where he was spending his money, which in turn caused a complete lack of visibility and control.

Defining and Redefining a Chart of Accounts:

Defining and redefining a chart of accounts is not as difficult as it sounds. As with anything worthwhile in life it does take some time, but if done correctly it is time well spent and the return on investment can be overwhelming in a very short amount of time.

Go back to the basics look at your existing chart of accounts what is it telling you and is it telling your everything you need to know? For instance, does it tell you how much you spent on materials verses equipment? Does it tell you how much you spent on the different types of advertising? Are you long term and short term debts separated? Do you know how much you have given away in discounts to your customers?

The information received from all of these accounts can be critical to how you make informed decisions on how to allocate your money and if money is allocated to you. You may not owe any creditors but if the accounts are not set up correctly or are not being used correctly you may not receive that loan from the bank that is critical to the growth of your business.

Your chart of the accounts is the key to your financials. We here at Applied Management Group can work with you to set up your chart of accounts so that it gives you the information you need. Do not let something as fundamental be the downfall to your business. Contact us today to move forward with creating a chart of accounts that works for you and your business.

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