What is the Chart of Accounts?

Ever feel like your accounting software is speaking a different language? That's probably the Chart of Accounts at work. You can think of it as the filing cabinet for your business's financial activity—everything has a place, and knowing where things go makes all the difference.

Basic Organization

A Chart of Accounts (COA) is a list of all the categories your business uses to track money. These categories are called accounts, and they're grouped into five main types:

• Assets: What your business owns (e.g., cash, equipment, inventory)

• Liabilities: What your business owes (e.g., loans, credit cards)

• Equity: Your ownership in the business

• Income: Money coming in (e.g., sales, service revenue)

• Expenses: Money going out (e.g., rent, payroll, supplies)

Each transaction that runs through your business gets assigned to one of these types of accounts, helping you keep your books organized and your reports accurate.

Why It Matters

A well-structured Chart of Account helps you:

• Stay organized: Know exactly where your money is going

• Understand your financial health: Make sense of your Profit & Loss and Balance Sheet.

• File taxes accurately: Avoid misclassifying expenses or income.

• Make better decisions: Use clean data to guide your strategy.

Real-World Examples

Let's say your buy a new laptop for your business. Instead of just calling it "computer," you might categorize it the Chart of Accounts as "Equipment" under Assets. This will inform your tax preparer to calculate and claim depreciation on your tax filing.

Consider your business sells different types of lawncare services. To see if you make more revenue on private projects or commercial projects, you can add these two income accounts to your Chart of Accounts. Payments on private project invoices will be added to "Private Projects" under Income, and payments related to commercial project invoices will go to "Commercial Projects" under Income.

If you're using software, like QuickBooks Online, that is paid through a monthly subscription, you'll want to make sure that monthly charge is consistently assigned to the same expense account to capture the full expense on your taxes. Rather than calling it "miscellaneous expense," you might categorize it as "Software Subscriptions" under Expenses.

Tips for Small Business Owners

As a small business owner you'll want to prioritize organization, accuracy, and consistency. Here are a few tips for managing your Chart of Accounts:

• Keep it simple: Start with a basic COA and expand as your business grows. It's best to add accounts as they are needed.

• Use consistent naming: Avoid confusion by sticking to clear, descriptive account names. Generic or duplicate names can make organization extremely difficult.

• Review annually: Make sure your accounts still reflect how your business operates. You may need to modify accounts as time goes on.

Need Help with Your Chart of Accounts?

At Basswood we specialize and helping small business owners maintain organized financial data with a customized chart of accounts for your business. If you want to learn more about our services, connect with us for a free consultation.