| A chart of accounts is defined as a list of accounts | | | | want to set up an income account for each of the |
| used to categorize the financial transactions of a | | | | profit areas you would like to track - Custom Homes, |
| business. But if set up with thought it can be one of | | | | Remolding, and Rehab. You would also set up sub |
| your most useful tools in analyzing your business. A | | | | accounts for each of the Cost of Goods Sold |
| chart of accounts usually consists of five areas - | | | | accounts tying each sub account into a profit area. If |
| Assets, Liabilities, Equity, Income and Expenses. Some | | | | you had an account called Materials (or Labor, or |
| companies segregate their transactions into the | | | | Subcontractors) you would set up a sub account |
| additional segments of Cost of Goods Sold, | | | | under Materials for Custom Homes, Remolding, Rehab, |
| Advertising Costs, General and Administrative | | | | and Warranty Costs. While you don't need an income |
| Expenses, Other Expenses, Other Income, and Taxes. | | | | account for Warranty you will want to track the |
| But by designing your chart of accounts with the | | | | expenses you incur. In fact you might want to set up a |
| financial analysis of your company in mind, you will be | | | | Warranty sub account for each profit area under |
| able to see just where your profits are coming from | | | | each Cost of Goods Sold account, thereby allowing |
| and where your expenses need to be examined. | | | | you to see where your warranty costs are adding up. |
| By setting up income accounts for each department | | | | For each account in your Cost of Goods Sold section |
| or segment of your business you will get a view of | | | | repeat this process of setting up sub accounts for |
| which areas are working for you. And by breaking out | | | | each business segment. |
| your expenses, both direct and indirect, within these | | | | If you wished to get a more concise view of each of |
| income areas, you will also see which areas are most | | | | the segments of your business, then you could assign |
| profitable. For example, if you are in the business of | | | | a percentage of General and Administrative Expenses |
| general contracting, you might build custom homes, do | | | | to each of profit centers. |
| remolding, rehab older buildings and incur warranty | | | | With these facts available you can make good |
| costs. Wouldn't it help you if you knew how much | | | | decisions as to what areas it makes sense to extend |
| income was coming in from each of the services you | | | | growth, or perhaps to cease operations. And while I |
| provide? And how much profit each of the areas was | | | | have used the construction industry as an example, |
| bringing into the company? If you are lumping warranty | | | | this works in every type of industry. And your chart of |
| costs into general expenses then how do you know | | | | accounts can be expanded or compressed as your |
| how much it is costing you? In this example, you would | | | | business needs arise. |