If your startup has launched and started generating revenue, chances are you’re using an accounting system – I hope so. Regardless of which accounting system your company uses, at its core is the chart of accounts (COA). Essentially, a COA lists all the accounts a business has, organized in a specific order; each account has a description that includes the type of account and the types of transactions that should be entered into that account. A COA reflects your company’s financial structure and should provide the level of detail needed to generate your financial statements.
In a nutshell, a COA is created around two key financial reports: the balance sheet, which shows what your business owns and what it owes, and the income statement, which shows how much money your business took in from sales and how much money it spent generating those sales.
Because every business operates differently, you’re unlikely to find two companies with the exact same chart of accounts. However, some basic characteristics are common to all charts of accounts. We recommend relying on a professional for setting up and maintaining your COA, but you still need to understand what’s involved and how it impacts your business. So here’s the 411:
Create a classification
The chart of accounts starts first with the balance sheet accounts, which include:
- Current Assets: This category includes things your company owns and expects to use in the next 12 months, such as cash, accounts receivable, and inventory.
- Long Term Assets: This category includes things your company owns that have a lifespan of more than 12 months, such as buildings, furniture, and equipment (if any).
- Current Liabilities: This category includes debts your company must pay over the next 12 months, such as accounts payable (bills from vendors, contractors, and consultants), interest payable, and credit cards payable.
- Long Term Liabilities: This category includes debts your company must pay over a period longer than the next 12 months, such as mortgages or our revenue based financing.
- Owner’s Equity: This category includes all accounts that tracks the owners of the company and their claims against the company’s assets, which includes any money invested in the company, any money taken out of the company, and any earnings that have been reinvested in the company.
- Revenue: This category will include all sales of goods and services as well as revenue generated for the company by other means. Remember to keep track of your sales taxes (GST/HST/QST) on each transaction if applicable.
- Cost of Goods Sold: This category will include all accounts that track the direct costs involved in selling the company’s goods or services.
- Expenses: This category will include all accounts that track expenses related to running the businesses that aren’t directly tied to the sale of individual products or services. Example of expenses would be: advertising and marketing, employee benefits, professional services, etc. You can always add additional line items for other costs that are specific to your business.
The future is now
Keep in mind that your startup will grow and shift. When you set up your accounts, keep that vision in mind, as it will help you think about what accounts you may need five years down the line. Deleting unused accounts is a lot easier than cleaning 5 years of financial records.
Keep your chart of accounts clean
Figure out which accounts are important for your startup and don’t waste time on unnecessary ones. If you’re a SaaS company, you probably don’t need to include an account for inventory.
Tailor accounts to your needs
Some accounts that are highly dependent on your industry may require more detail than other categories. For example, if your business incurs a lot of legal fees, then it’s probably wise to break down legal and professional services into their individual accounts.
You’ll probably tweak the accounts in your chart annually and, if necessary, you may add accounts if you find something for which you want more detailed tracking. You can add accounts during the year, but it’s best not to delete accounts until the end of a 12-month reporting period.