What Is a Chart of Accounts, and Why Does It Matter for My Small Business Bookkeeping?

By the SherOps Bookkeeping Team, Edmonton, AB

A Chart of Accounts (COA) is the organized list of accounts used to record and categorize all the financial transactions of your business. Think of it as the structure behind your bookkeeping. Every transaction recorded in your accounting software needs to go somewhere, and your Chart of Accounts determines where that transaction belongs. If you’re setting one up for the first time, QuickBooks’ explainer on chart of accounts basics is a good primer on the mechanics. As a certified QuickBooks ProAdvisor, this is where we spend a lot of our onboarding time, and it’s rarely as simple as accepting the software’s default template.

We work with a wide range of Edmonton businesses, from trades and construction to professional services, property management, and solopreneurs, and one thing we’ve learned from setting up dozens of these is that no two Charts of Accounts should look exactly alike.

What Is Included in a Chart of Accounts?

The Chart of Accounts is generally organized into five main categories:

• Assets: What your business owns, such as bank accounts, Accounts Receivable, equipment and vehicles.
• Liabilities: What your business owes, such as credit cards, loans, Accounts Payable and GST/HST payable.
• Equity: The owner’s or shareholders’ interest in the business, including contributions, withdrawals and retained earnings, as applicable.
• Income: Money earned from the products or services your business provides.
• Expenses: Costs incurred to operate your business, such as rent, insurance, advertising, professional fees and office expenses.

Within these categories, you can create accounts that reflect the specific activities of your business.

Why Does Your Chart of Accounts Matter?

Your Chart of Accounts determines how your transactions are organized and ultimately how they appear on your financial reports. If your accounts are too general, you may not have enough information to understand where your money is going. If you have too many accounts, your financial reports can become unnecessarily complicated and difficult to understand. The goal is to have a Chart of Accounts that provides enough detail to understand your business without making your bookkeeping more complicated than it needs to be.

Your Chart of Accounts Should Reflect Your Business

Not every business should have the same Chart of Accounts. An Edmonton construction company, a medical clinic, a consultant, and a retail business have different activities and may need different accounts to properly track their income, expenses, assets and liabilities. Your Chart of Accounts should be designed around the information you need to manage your business.

For example, instead of putting every cost under a general account called “Expenses,” separating advertising, insurance, subcontractors, office expenses and professional fees gives you much more useful information about where your business is spending money.

More Accounts Don’t Always Mean Better Bookkeeping

A common mistake is creating a new account every time there is a transaction that doesn’t seem to fit anywhere else. Over time, this can result in duplicate or unnecessary accounts and a Profit & Loss statement that is difficult to read.

For example, having separate accounts called Advertising, Marketing, Online Marketing, Facebook Ads and Google Ads may not always be necessary. Depending on what the business needs to track, some of these expenses could be organized under one main category or structured using subaccounts. The purpose of the Chart of Accounts isn’t to create as many categories as possible. It is to organize your financial information in a way that is consistent and useful.

A Good Chart of Accounts Leads to Better Financial Reports

Your Chart of Accounts is the foundation of your financial reports. When it is properly structured and transactions are consistently categorized, your Profit & Loss and Balance Sheet become easier to understand. That allows you to answer important questions such as: Where is my money going? Which areas of my business are costing me the most? What does my business own? What does it owe? And is my business actually profitable?

Your Chart of Accounts isn’t just a list inside your accounting software. It is part of the financial structure of your business, and it’s one of the first things we set up properly when we onboard a new client onto QuickBooks. If some of the signs in our post on when your books need a cleanup sound familiar, a messy Chart of Accounts is often part of the problem.

Want your Chart of Accounts built around how your business actually works? Learn more about SherOps’ bookkeeping and QuickBooks onboarding services, or book a free consultation.