Your chart of accounts (COA) is important groundwork for your business to organize your financial transactions. The specificity of your COA will determine how clearly you can view your financial statements. You want enough detail to delineate categories of cash inflow and outflow that are important to your business, but not so much detail that your financial statements are a jumbled mess of detail.
Each account in your COA is a category, or cubby hole, if you will, where you put the amounts for your business transactions and look at what’s in there as needed. Setting up your COA specific to your distributorship will help you better understand, analyze and track your business. For instance, we as distributors buy self-promotion items for our businesses to promote ourselves. You could put it into marketing expenses, but then you wouldn’t know how much you spent on general marketing versus self-promotions—you would just have one lump sum. Setting up accounts to track both of these would allow you to look at these expenses without additional time and effort—just the click of a button.
When you assign account numbers to your accounts, they are typically organized numerically by account numbers beginning with the following numbers by category:
- Assets
- Liabilities
- Equity
- Income
- Cost of goods sold
- Expenses
And here are three other factors to consider when designing your COA:
- What information do you want at your fingertips each month? What reports would provide that, and does your chart of accounts allow for those reports? Do you want to know what the income or expense portions of your orders are from freight? Do you want to track samples?
- How complex is your business? Do you have multiple sources of income that might require multiple income accounts or multiple cost of goods sold accounts?
- Do you have to report to owners, shareholders, banks, etc.? What information do you need for them?
Your chart of accounts can work to show the information you need in a clear, organized fashion.
Take the time to customize your chart of accounts for your business. It will be instrumental in providing information to help you analyze and run your business.
Harriet Gatter, owner of Accounting Support LLC, was an ad specialty distributor for 23 years and an adjunct professor of accounting at Neumann University. She sold her promotional products business in 2012, became certified as a QuickBooks ProAdvisor and now works exclusively with ad specialty distributors nationwide on their QuickBooks and accounting needs.
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