Keeping it simple: Basic accounting chart of accounts
Simplicity is underrated. Too often, we think too hard and over analyze processes making them much more complicated than necessary. The art of keeping it simple is something that gets lost in today’s busy business world. The more intricate the process, the harder it is to maintain. This especially rings true when it comes to setting up a chart of accounts. The biggest problem many companies face when dealing with their chart of accounts is that it is too complicated. The chart of accounts shouldn’t be more complex than the business itself.
When setting up their chart of accounts, many companies enter too many account numbers or enter duplicate accounts. This can cause a lot of confusion when trying to post items into the accounts. When creating the accounts, it’s especially important to remember to keep it simple. A conventional chart of accounts is a lot like mini financial statements and breaking them up into four accounts will help to keep things under control.
The four basic accounts are assets, liabilities, equity, and profit and loss. Keeping with these four account types will help keep your chart simple and easy to manage.
Here’s a list of the four accounts and what information corresponds with each:
Asset
- Bank
- Accounts Payable
- Fixed Assets
- Depreciation
- Other – security deposit, rent, etc.
Liabilities
- Accounts Payable
- Payroll Taxes Withheld
- Sales tax due
- Lines of Credit
- Long term notes payable
Equity
- Stocks
- Retained Earnings
- Current profit (loss)
Profit and Loss
- Income
- COGS (Cost of Goods Sold)
- Expenses
How can you tell if your chart of accounts has gone awry? Take a look at your lists, if they’re too long, chances are you’re chart of accounts is too complicated. Also make sure to take a look at the Balance Sheet and Profit and Loss reports. If your accounts are set up with an incorrect type or there are duplicates, they will show up in these reports.
The chart of account will vary based on your industry, but keeping it simple with these four categories will help you stay on track.
Need an example to get you set in the right direction? Download our Sample Chart of Accounts.