A Chart of Accounts is simply a list of accounts used by your business all in one spot. A great chart of accounts also includes a guiding numbering system that tells you what types of transactions go into each account. A Chart of Accounts, while not complex in nature, does require a lot of management, maintenance, and diligence so that the financial side of your business can operate smoothly.
Why is creating a Chart of Accounts important?
It is the very foundation of your financial record keeping system especially if you are a Real Estate Investor. Therefore it is important that you keep improving on it! This doesn’t mean that your Chart of Account has to be complex, but it is important not to overly simplify it as well. Here are some basic steps to set up your chart of accounts.
Step 1: Decide Between a Computerized or Manual System
Many businesses start off with a basic, manual tracking system before they go computerized. If you are a small business, it may not be necessary that you invest a great deal of money into an advanced accounting software; however, if your business is rapidly growing, then it is recommended that you seek the software consultation of a CPA company and see what software they recommend.
Step 2: Organize Your Chart of Accounts
If you decide to create a manual account spreadsheet, or even on paper – the very first thing you will need to do is to organize your chart of accounts. This means that you will be required to have three columns:
- Account – This column is going to have a list of all the account names. Examples of names would be: Automobile expenses, Bank Credit, Subscriptions, Accounts Receivable, Furniture, Office Equipment, etc.
- Type – This column is very important as it details the exact nature of the account. Is the account an expense, accounts receivable, fixed asset, revenue/income, an expense, or a liability?
- Description – This should contain a very brief, yet informative summary on the type of transaction that should be recorded on the account.
Step 3: Assign Numbers to Code Charges
When there is a transaction in your organization, it is critical that each type of account has a code so that the money can be easily tracked. A very basic example of this would be:
- Sales & Costs of Sold Goods: 1-100
- Expenses: 101-200
- Equities: 201-300
If you plan on a large growth, then it is a very good idea to leave a wide amount of numbers in between. If you have accounting software then, you will not have to worry about this aspect as the software will automatically assign numbers to your transactions.
Bonus Tip – Try to Get It Right the First Time
This is something that is easier said than done, but it is always a great idea to get it right the 1st time. Why is that? It’s quite simple – if you are constantly adding and removing accounts on a regular basis, it will begin to affect your monthly, quarterly, and annual reporting. Therefore, make sure you include as much as possible and group things together as well.
Foundation to an Efficient Accounting System
By creating a strong chart of account, you will be laying the foundation to a smooth and efficient accounting system – helping your Real Estate Investment business flow more smoothly which will help keep you out of financial distress!
For more information on how to set up your charts of account, contact ABIP CPA today!