Setting up a Chart of Accounts

You just bought an accounting software program to track your business.  After you enter some basic information about the company, you will need to set up the accounts you will use.  Accounts are divided into types – Asset, Liability, Equity, Income, Cost of Goods Sold and Expense.  Assets include bank accounts, petty cash, land, building, equipment (which will be depreciated), inventory, and monies owed to you by customers.  Liabilities are what you owe to someone else including items you have purchased by credit card or on account and loans.  Equity represents the net value of the company.  Income represents what you have earned through sales or charges for services rendered.  Cost of Goods is a type expense which is directly related to how you earn money.  For example, commissions paid to sales staff based on sales they have made.  Expenses represent things you buy or other charges such as rent, utilities.

Start by setting up your banking accounts.  You will need to enter the beginning balance from your bank statement or based on when you open the account.  Give each account a name that will make it easy to identify the type or purpose of the account.  If you only have one checking account, then you can just identify it as Checking.

Equity accounts will be based on the type of business you have – sole proprietor, partnership, incorporated, non-profit.  You should not have to enter any additional Equity accounts.

If you have selected an industry specific version of the software, income accounts will have been included in the basic Chart of Accounts.  You may want to have sub-accounts to track various services or business lines.  For example, in a service company you may have an account called Service Income.  You can create accounts for the specific types of service you provide and make them sub-accounts of Service Income.

Cost of Goods Sold may be those goods purchased to make or assemble something you sell, supplies you buy for a construction project, commission costs to sales staff or other expenses directly related to producing income for your company.  You may want to create specific accounts to indicate the type of costs incurred, i.e. Inventory, Direct labor, Commissions.

The basic expense accounts will be included in the base Chart of Accounts.  Once again, you may want to add sub-accounts to better track where your money is being spent, such as adding Water & Sewer, Gas & Electric as sub-accounts under Utilities.  Are you in a service industry where continuing education is required?  Then create an expense account for expenses tied to this training, including seminars and the purchase of printed materials.

You do not have to add your accounts when you first set up your books.  Live with the accounts that came with the program and make additions as you get a feel for your business and see which income and expense accounts you want to add to track various aspects of your business.