4 Common Mistakes that Make your Chart of Accounts a Mess
by Kevin Clark, CPA
If the financial reports you're seeing for your small business are hopelessly unreliable (like my mirror first thing in the morning), you may need to do some clean-up on the foundation of your accounting system - the Chart of Accounts.
My what? Your chart of accounts is simply the list of all of the different categories that you see on your financial reports (balance sheet, income statement...etc). Every single transaction in your business, no matter how small or unusual, will change at least two accounts, and all of your accounts fall into one of five categories:
Assets - things you own or have a right to collect
Liabilities - debts and obligations
Equity - your owner's capital
Revenues - money in
Expenses - money out
If your reports are muddled or don't make sense, you could have one of these common errors in your chart of accounts:
An account in the wrong category If you see "Sales" in the expense category, or a bank loan in the revenue category, you might have a problem.
Too much detail If each of your accounts has 17 subaccounts underneath it, chances are your financial reports will be way too long to make sense of. You really may not need as many accounts as you think you do in order to see the detail you need - that depends on your accounting system and software.
Duplicate accounts How many lines do you need for postage expenses? "Postage Expense", "Shipping Expense", "Freight Expense", "Office Postage",...blah, blah, blah. If more than one person is working on your books, this is a very common oversight that just clutters things up.
Not enough detail Just the opposite problem. Maybe you do need more than one Sales account - "Sales - Retail", "Sales - Wholesale", "Sales - Products", "Sales - Labor",...etc.
Your reports should be telling you the facts, in a way that speaks accounting language but also tells you what you need to know about your business. You don't have to be an accountant type (like me) to know when the system just isn't working correctly. Talk to your accountant today and see if your Chart of Accounts needs work.