For a lot of new founders and business owners, accounting and finance is a foreign language. While it’s true that you need financial professionals (bookkeeper, controller, CFO, etc.) to help take your business to the next level (and keep you out of trouble with the IRS), there are things you can focus on today to begin building a solid financial foundation for your business.
One of the most important foundational items for any good accounting backbone to your business is a clean, well-organized chart of accounts. No matter what industry you’re in or the size of your business, a thoughtful, well-designed chart of accounts is table stakes, because it serves as the very foundation to clean books and good financial analysis.
After all, you can’t improve what you don’t measure; if you want to grow your startup or small business in 2023, then you need to prioritize regular financial statement reviews and analysis. And if you want to prioritize financial statement reviews and analysis, then you need to first prioritize your chart of accounts.
The good news is that if you have a good bookkeeper, then this is something they should already have prepared for you. If you’re not yet at that stage or if you simply want to evaluate your bookkeeper’s work, then what follows are some quick, easy tips for how to organize your chart of accouns in QuickBooks:
- Enable account numbers
Account numbers are essential to getting your chart of accounts organized, and they make the day-to-day bookkeeping process 10x easier.
To enable account numbers in QuickBooks, follow these steps:
a. Click the gear icon in the top right corner
b. Click “Company settings”
c. Click “Advanced”
d. Look for “Chart of accounts and click the pencil icon to the right
e. Toggle “Enable account numbers” to on and check the box beside “Show account numbers”
f. Click “Save”
- Mark all the irrelevant, unused accounts as inactive
Don’t worry…if you change your mind later, you can undo this.
Simply navigate to your chart of accounts, check all the accounts you want to mark inactive, scroll up to “Batch actions” and click “Make inactive.”
This will declutter your chart of accounts and make the tagging part of the bookkeeping process much easier going forward (your future bookkeeper will thank you).
- Use a consistent, thoughtful numbering system with account headers and sub-accounts
Everyone approaches this part slightly differently, but the important thing is that you’re thoughtful and consistent.
What follows is a simplified template of how we organize and number most of our client’s chart of accounts:
BALANCE SHEET ACCOUNTS
- Cash/Bank Accounts: 11000-11999
For example, 11000 – Cash and Cash Equivalents is the summary account.
Sub-accounts might be: 11100 – Chase Checking (x1234); 11200 – Chase Savings (x5678); etc.
- Accounts Receivable: 12000-12999
For example, 12000 – Accounts Receivable is the summary account.
Sub-accounts might be: 12100 – Trade Accounts Receivable (where your actual invoiced AR is booked); 12110 – Allowance for Doubtful Accounts; 12200 – Receivables from Employees; 12900 – Misc. Receivables
Following a similar methodology, the rest of the balance sheet accounts are structured as follows:
-Prepaids & Other Current Assets: 13000-13999
-Inventory: 14000-14999
-Fixed Assets: 15000-15899
-Accumulated Depreciation: 15900-15999 with the last number matching the corresponding Fixed Asset (e.g. if Computer Equipment is 15100, then Accumulated Depreciation-Computer Equipment is 15901; Furniture & Fixtures is 15200, then Accumulated Depreciation-Furniture & Fixtures is 15902)
-Intangible Assets: 16000-16899
-Accumulated Amortization: 16900-16999
-Intercompany Assets: 17000-17999
INCOME STATEMENT ACCOUNTS
-Revenue: 40000-40900 (with 40999 is for intercompany revenue)
-Cost of Revenue/COGS: 50000-50900 (with 50999 is for intercompany COGS)
-Operating Expenses: 60000-69999, but this one is more involved because you’ll want to further segregate these based on type.
Below is how we do ours:
-Payroll/Compensation: 61000-61999
-Travel and Entertainment: 62000-62999
-Facilities: 63000-63999
-People/HR: 64000-64999
-Professional Services: 65000-65999
-Sales & Marketing: 66000-66999
-Research & Development: 67000-67999
-General & Administrative: 68000-68999
-Operating Taxes: 69000-69999
And then finally, for below-the-line items:
-Depreciation & Amortization: 70000-70999
-Other Income & Expenses: 80000-80999
-Income Taxes: 90000-90999
As you can see, there’s plenty of room for customization and variation. Again, the important thing is order and consistency.
This may seem like a lot and like the level of time/effort required wouldn’t be worth it, but investing time to thoughtfully organize your chart of accounts will pay dividends down the road.
Of course, this is often work that’s performed by a bookkeeper or accountant. If you’d rather leave that work to a professional, then we’d love the opportunity to help. Don’t hesitate to reach out to us here at Margin for a no-hassle conversation. We’d love to learn more about you and your business, and tell you more about our services and how we can help you manage and grow your business.