Your Chart of Accounts
Episode #1 of the course Basics of bookkeeping by Kaitlin Kirk, CPA
Welcome to the course. My name is Kaitlin. I’m an accountant living in Canada. I help small business owners work less and get paid more by teaching them how to create good processes, streamline their bookkeeping, and plan for their taxes.
In this course, we’re going over the basics of bookkeeping. I’ll take you through the chart of accounts, the different financial statements, how to categorize expenses, how to reconcile your bank account, and so much more—everything you need to know to do your own bookkeeping!
Today, we’re talking about why bookkeeping is so important and your chart of accounts.
Using Your Financial Data
Up-to-date bookkeeping allows you to make data-driven decisions about what products or services you offer, prices you charge, your customer capacity—the list goes on. If you’re not using your financial data to make these decisions, then it means you’re just guessing. It’s kind of like trying to plot a course from Nova Scotia to Portugal without any equipment. You might get there, but the odds are against you.
Understanding who your most profitable clients are, which offerings are bringing in the most revenue, and where you’re spending money will allow you to focus on the activities that bring in the highest profit and to choose the services or products to focus on. Knowing which offerings are underperforming will give you the confidence to cut them from your line-up and focus on the ones that are making money. Let’s start with the framework, your chart of accounts.
Chart of Accounts
A chart of accounts is the listing of all the accounts in your books. Before we jump into the list, let’s chat about what an account is. You’re probably familiar with a bank account, which is a place to keep your money. When an accountant talks about accounts, they’re not talking about bank accounts. It’s the same idea in that it’s a place to store money, but it’s not an actual account at a bank. It’s more like a bucket to sort information into. It’s your company’s financial organization system. It holds information on what you owe, what you own, your income, and what you spend money on.
For example, let’s say you sold a pen for cash. In your books, you would record the sale as an increase in your sales account and an increase in your cash account.
The chart of accounts is the list of all the buckets into which you sort your financial information.
There are two different statements that use these accounts, the income statement and the balance sheet. We’re going to talk about those later on, so I won’t get into it right now, but know that your chart of accounts will be broken out into those statements.
Your accounts should make sense to you and help you run your business. If you pay for an email service, a website service, and accounting software, maybe it makes sense to you to have all these grouped into one expense account called, “Online Software Expenses,” or maybe it makes sense to have them in three separate accounts. Whichever you prefer, I would caution you to ensure that the accounts don’t get too granular. Don’t create accounts with store names, for example. Create them based on the types of things you spend money on.
The important thing to remember is that your financial information and statements should be useful. Create accounts that make sense to you and ensure that you know what goes in each one.
Create a list of all the reasons you’d love to have your bookkeeping caught up. Make it as specific and personal as possible. This will help you later if you feel like you want to quit. You can pull out the list and remind yourself why you started in the first place.
Task: Start a list of all the things you spend money on. Keep it with you and add to it throughout the day as you think of more expenses for your business.
Tomorrow, we’re going to talk about how to create a map for where your expenses should be categorized, and touch on receipt management.
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