Establish a Chart of Accounts
A chart of accounts is a list of accounts used by your company that are typically grouped by type and have a work item type associated with a number to keep times together in accounting programs and to make it easy to charge expenses. properly and consistently. You can prepare accurate financial statements and maintain accurate cost records to prepare future budgets, including budgets for production and overhead.
An example of a chart of accounts we use in the housing industry was one recommended by the National Association of Home Builders that can be found on the NAHB website.
When I took over the SCUBA shop, the former manager, who knew a lot about diving but very little about business, recorded expenses in accounts created in QuickBooks. He had very little understanding of the difference between income and expenses. He guessed which account to charge the expenses based on the name alone regardless of whether it was income or expenses or even assets or liabilities.
When the accountant came to do the taxes, the financial statements didn’t make sense. Before we could even start the year-end accounting, we had to go back and correct almost every transaction. We also noticed that there were several accounts with similar names. There was an Asset Account called SCUBA Equipment and an expense account with the same name. We changed the asset count to ‘1280 – Equipment rental ‘and the expense account to ‘3680 – Cost of goods sold – Diving equipment.‘We assign four-digit numbers to all accounts. All asset accounts started with similar numbers and all expenses started with similar numbers. We also conducted training with employees who had access to the accounting system.
Accurate accounts and bookkeeping will make it easier to plan your overall budgets and make sure you’re charging enough to at least cover your costs. A good chart of accounts will make it easier to keep your accounting accurate and consistent. In a future article we will talk about cost accounting as a method to accurately control and predict your costs.
The National Home Builders Chart of Accounts can be found here http://www.nahb.org/generic.aspx?genericContentID=29577
Original Content Copyright 2010 Thomas Robinson