A chart of accounts is a list of categories used to classify your assets, liabilities, equity, income and expenses. An account, when used in this context, is not like a bank account, but is a category that is used to organize your business’s finances in order to gain a deeper understanding of what is occurring within your company. For example, depending on your business (we’ll pretend that it is a construction company in this article), you will have a chart of accounts that will contain an office equipment account, along with a building materials account. Under the building materials account, you may further organize your chart to include lumber and roofing material. When you are recording your expenses, you will record that you spend $2,275.50 on office equipment and $8,550.00 for lumber and $4,035.00 for roofing material.
It should be clear that without a good chart of accounts, you will not be able to properly analyze the performance of your business. If you begin to see your profits slumping, it will be difficult to understand the reason why. Are your lumber costs rising? Is it perhaps that roofing materials are more expensive. If you are not tracking your lumber or roofing material expenses individually, but have lumped them together in your building materials account, you will not be able to tell. By creating a detailed chart of accounts, it becomes simple to find where your money is being best spent, and which products or services are most profitable.
Many industries have a chart of accounts that is standard among the industry group. As your business grows and seeks financing as well as investors or buyers, the need for a standardized chart of accounts will increase. Once a standard chart of accounts is adopted, your firm will be able to analyze your business in comparison with benchmarks across the entire industry. Using these benchmarks, you will be able to compare your costs for overhead and materials with industry averages. This is attractive to you as business owner because you will be better able to understand where you can bring your costs under control, or where to focus production efforts. This is attractive to lenders and investors because it lets them compare your business with everyone else in your industry and to evaluate your business’s performance relative to the industry as a whole.
At Integrated Accounting Services, LLC, we understand the importance of setting up a standard chart of accounts. Our experience spans industries, from construction and hospitality to manufacturing. Our experienced CPAs can organize your standard chart of accounts in a manner that will give your business a competitive advantage, whether you are starting your first business or growing your existing business. Call us at (602)944-0423 to get started!