Welcome to our “Setting up for Success: Part 2” blog post. Part one focused on selecting a basis for your accounting and determining what information you need to track in your business.
Now that you understand what you need to track, how do you track this important information?
You can start by developing your chart of accounts. We know what you’re thinking: “develop my what?!”
Your chart of accounts is a listing of accounts that are needed to prepare financial statements and reports. A typical structure looks like this:
5000-5999 Cost of Goods Sold (COGS)
6000-6999 Operating Expenses (General and Administrative)
7000-7999 Other Income and Expense
8000-8999 Income Tax Expense
Account numbered 1000-3999 are used in preparing the balance sheet, while numbers 4000-8999 are used in preparing the income statement, which focuses on profit and loss. Of course, the number of individual accounts within each category will depend on the specific needs of your business.
A good rule to keep practice is to try to use the least number of accounts to attain the financial information you need, and structure it for growth.
What do we mean by growth? Let’s take a closer look at the assets section:
1000 Petty Cash
1100 Accounts Receivable
1300 Prepaid Expenses
1400 Fixed Assets
1450 Accumulated Depreciation
You probably noticed the account numbers aren’t in sequential order. This allows for room for growth in your business.
You can also use the chart of accounts to track different jobs, departments, segments, etc. For example, maybe your business has locations across the Midwest in Fargo, Minneapolis and Sioux Falls. You want to be able to see how profitable you are at each location. You can track each location by assigning a division number, such as 01-Fargo, 02-Minneapolis, 03-Sioux Falls, and then attaching each division number to each of the accounts, like this:
Now that you know what information you need and how to track it, you can select an accounting system to help you track and keep information in order.
There are two options for tracking your information: manually or electronically (think desktop or cloud based). While there is no right or wrong way, computerized accounting is usually more efficient, which is leading to manual accounting becoming a dinosaur in today’s accounting world. Cloud based accounting also gives you the freedom to access your information anytime, anywhere. Who doesn’t love simplicity and accessibility?
It’s important, as always, to remember that each business is different, so accounting systems usually aren’t one size fits all. Doing your research and truly understanding your business’ needs can help you select a system that gives you the best possible results.
If all of this seems overwhelming, fear not. We have the resources and talent to help you design an accounting system that can set your business up for success.