| While installing your new accounting software you | | | | existence. Usually you will not be posting to this |
| have most likely been asked whether you would like to | | | | account, as this is the account your software program |
| use one of the default charts of accounts included | | | | will use to close out your end of year income |
| with the program or develop your own. Unless you are | | | | statement accounts. |
| very familiar with setting up a set of financial books | | | | Moving on to the Income Statement segments, you will |
| you will want to choose from one of the selections | | | | want to have in the Income segment accounts to |
| offered. And even if you have the experience | | | | record each type of income you earn in the course of |
| choosing one of the defaults will save you a great deal | | | | your business. You may want to break out your sales |
| of time. But you may ask what if I don't need all these | | | | income into more than one account if you have more |
| accounts and how do I know which accounts I should | | | | than one type of service or product. For example if |
| keep. And should I use a numbering system or not? | | | | you are a general contractor you may want to track |
| Let me help you by explaining just what a Chart of | | | | how sales compare between remodeling and new |
| Accounts is and how to adjust the default list to your | | | | homes. |
| needs. | | | | Cost of Goods Sold or Direct Costs are those |
| First of all a Chart of Accounts in its simplest definition | | | | expenses that relate directly to the sale of a product |
| is a list of accounts used to track all financial | | | | or service. Again if you are a contractor these typically |
| transactions that flow through a business. This list is | | | | would include payroll and payroll expenses of your |
| typically broken in to eight segments: Assets, Liabilities, | | | | workers, materials, subcontractors, permits, general |
| Equity, Income, Cost of Goods Sold, General and | | | | liability and workman's compensation insurance, |
| Administrative Expenses, Other Income and Other | | | | equipment rentals, etc. They would not include rent or |
| Expenses. You might see Equity referred to as Capital, | | | | office supplies. |
| Cost of Goods Sold referred to as Direct Costs, and | | | | General and Administrative Expenses are business |
| General and Administrative Expenses referred to as | | | | expenses incurred that are not dependent on the sale |
| Expenses. Companies that wish to track Sales | | | | of a product or service. They include rent, phone, |
| Expenses such as commissions, salaries and related | | | | office payroll and payroll expenses, employee benefits, |
| expenses of sales personnel and other costs related | | | | office supplies, utilities, etc. |
| directly to sales activity might also add a Sales | | | | Other Income typically includes non-sales income such |
| Expense segment. | | | | as interest income. Federal and State Income Taxes |
| The first three segments represent the accounts you | | | | and any related interest and penalty expenses are |
| will find on a Balance Sheet and they will be broken | | | | what you will find in the Other Expense segment. |
| down into sub-segments. Under Assets you will find | | | | Now that you have an idea of how a Chart of |
| sub-segments for Current Assets, Fixed Assets and | | | | Accounts if typically set up, how do you pick and |
| sometimes Other Assets. Current Assets accounts | | | | choose what accounts to keep and which to delete? |
| are used for assets that can be readily liquidated into | | | | Print out the default list and go through it choosing the |
| cash, such as cash, investments, accounts and notes | | | | accounts you think you will need. You will need at least |
| receivables, and deposits. You may choose when | | | | one cash account, an account receivable and |
| setting up more than one cash account or receivable | | | | accounts payable account. If you do not have |
| account to create a further segment. This will allow | | | | employees and don't ever expect to have any than by |
| you to summarize all your cash accounts, for example, | | | | all means delete all accounts with payroll in the name. If |
| on your balance sheet while keeping a separate | | | | your company will not be making investments than |
| recording account for each bank account. Fixed | | | | delete all accounts having to do with investments |
| Assets accounts are used to record the cost of items | | | | under Current Assets. You get the picture - however it |
| purchased that have a useful life that extends beyond | | | | is easier to keep what you think might be needed |
| one year. The Fixed Assets segment also includes | | | | sometime in the future. Your program may not let you |
| contra-accounts (reduction of the value of an asset) | | | | delete some accounts because they are being used in |
| that are used to record the depreciation of your fixed | | | | conjunction with another account or accounts. Let |
| assets. These contra-accounts are typically named | | | | them be. You can also edit account names - as long |
| "Allowance for Depreciation - (name of type of fixed | | | | as the new account name belongs in the same |
| asset)". You should have a fixed asset account and | | | | segment as the one you are replacing. |
| corresponding depreciation account for each type of | | | | Now, to number or not number. Numbers are used in a |
| fixed asset you purchase. Some examples are | | | | Chart of Accounts to sort the accounts correctly. |
| vehicles, office equipment and furniture, building or | | | | Also, between you and me, accountants are much |
| leasehold improvements. The Other Assets segment | | | | better at remembering numbers than they are at |
| is used for all other types of assets. | | | | names so they prefer numbers. When using numbers, |
| Likewise the Liabilities segment is broken into Current | | | | each segment is assigned a specific group of |
| Liabilities and Long-Term Liabilities. Current liabilities | | | | numbers. Typically these are as follows: |
| represent the company's liabilities that are to be paid in | | | | Assets - 1,000's |
| less than one year. Examples are Accounts Payable, | | | | Liabilities 2,000's |
| Payroll Tax Liabilities, and Note Payables. Long Term | | | | Equity 3,000's |
| Liabilities represent liabilities that are to be paid over a | | | | Income 4,000's |
| longer term than one year such as mortgages, | | | | Cost of Goods Sold 5,000's |
| vehicles loans and other long term debt. | | | | General & Administrative 6,000's |
| The third segment of the balance sheet is the Equity, | | | | Other Income 7,000's |
| or Capital, segment. This segment consists of | | | | Other Expense 8,000's |
| accounts that record the owner's, partners or | | | | When a Sales Expense segment is used it is assigned |
| shareholders investments, draws of profits taken from | | | | the 6000 range and each of the remaining segments |
| the company by the investors and the net earnings of | | | | move up a range. Leave room between |
| the company. For each owner or partner within a | | | | sub-segments so you will be able to add if needed. |
| business entity there should be an individual investment | | | | And when setting up numbers within a segment make |
| account and draw account. When a company is | | | | sure you leave some room between each account as |
| incorporated than the capital investment by the | | | | you may also want to add accounts. |
| shareholders is recorded into capital stock accounts. | | | | And when in doubt ask a professional. Your software |
| These accounts may be broken down further if | | | | advisor or accountant can get you started in the right |
| different types of stock are issued. The Retained | | | | direction from the start which may save you a lot of |
| Earnings account is used to record the profit, or loss, | | | | time and aggravation down the road. As with most |
| the company has earned from the beginning of its | | | | endeavors, doing it right the first time is always best. |