The most common question I get asked is “what account should I book this expense to?”. So in this article I am going to give you the lowdown on your internal accounts – also known as Chart of Accounts or COA.
Many people do not realize that government departments such as the Canada Revenue Agency, do not care what you book your expenses too. All they care about is how much profit you made at the end of the year so you can be properly taxed.
Making sure your expenses, liabilities, assets and sales are correctly recorded is really for the business owner’s benefit. In order to operate a successful business, YOU need to know where your money is going and where your money is coming from.
I find that the easiest way to configure and understand your COA is to number each of the internal accounts. Then you can tell at a glance which is an asset account, which is sales and so on. Here is the numbering traditionally used in accounts and the system that I use, however there are no rules and this is YOUR business so you can code it however you like.
- 1000 – Asset Accounts
- 2000 – Liability accounts
- 3000 – Equity accounts
- 4000 – Sales/income accounts
- 5000 – Expense accounts
- 6000 – Cost of goods/Services sold
Your Liability, Equity and Asset accounts are called permanent accounts in that they never reset to zero, however your sales, expense and cost of goods accounts are temporary and reset back to zero at the end of every fiscal year.
Once you have these configured, you can start to add as many internal accounts as you need. The key is to think about pulling reports and what you would like to see reported. For instance I have clients, I also have affiliate income and residual income and I like to see all of these separately on my reports so I have the following accounts set up for income:
4001 Client sales
4002 Affiliate sales
4003 Residual sales
My sales totals all roll up into the 4000 account to give me a total income number, but I can also see what income I had in each category. The same for my expenses:
5100 Office supplies
5101 Software subscriptions
5203 Travel Meals
The same goes for all your other accounts, you can split things out as many times as you like, be careful though not to be overly analytical in your approach though otherwise you will end up with hundreds of internal accounts and won’t be able to remember where to put what. Remember there is no right and wrong for this, only what you would like a breakdown on.
Most accounting software will allow you to set up your COA like this, many come with internal accounts already set up and you can change the name on them to suit your needs. There is nothing written in stone to say you have to have a “meals and entertainment” category even though most systems will give you one!
So now when you have expense receipts and you want to know which account you should book your hotel to, or printing costs – ask yourself which category you would like to see them in, what makes the most sense to you. If you don’t have a pre-existing account set up that works for you, create another one!
Have fun setting up your COA and as usual if you have any questions just comment below and I’ll answer them for you!