Setting up your chart of accounts is one of the first things you do when starting bookkeeping for your business, and it can also change over time.
There’s not a “one size fits all” chart of accounts; the categories on it will vary based on your business’s needs and the information you want to focus on. How do you know if you have the right categories? What if it’s too long – or even too short?
At CSI Accounting & Payroll, we’ve worked with small business accounting – including setting up and changing charts of accounts – for over 50 years. We’ve gotten a lot of questions about charts of accounts, including:
- What is the purpose of a chart of accounts?
- How do you make a chart of accounts, and how long should it be?
- How can an accountant help clean up my chart of accounts?
The Purpose of a Chart of Accounts
Why does your chart of accounts matter? It’s simple!
A chart of accounts is essentially the framework for your accounting. It shows which categories will appear on your Profit & Loss Statements (also called Income Statements) and Balance Sheets. In turn, those financial statements will help you make informed business decisions.
This is especially true if you receive monthly financial statements from a year-round service like monthly accounting, where you also get unlimited one-off advice from your dedicated accountant.
The Right Size for Your Chart of Accounts
When you’re setting up or adjusting your chart of accounts, you will probably be wondering if you have too many categories (or not enough). While a chart of accounts can be too short, we find that they’re more often too long, or too detailed. Both have their downsides because there’s a sweet spot in the middle.
Too Short
If your chart of accounts is too short, then you won’t get enough details to make any informed business decisions. This could be why so many people include too many categories in their chart of accounts.
Too Long
If your chart of accounts is too long, then you can get lost in the details. As an example, you may have several different kinds of insurance, but at the end of the day, they’re all insurance and don’t necessarily have to be separated.
Including this level of detail is useful for managerial accounting, but not for a financial accounting perspective. It makes your financial statements harder to understand.
Rule of Thumb
Every business is different and will need a different chart of accounts. However, we use a couple of general rules to determine if yours is too short or too long. Since the chart of accounts generates the financial statements, let’s talk about the length of those statements.
The typical small business should have a Profit & Loss Statement (also called an Income Statement) that is one to two pages long. Any longer is not recommended.
Their Balance Sheet should fit on one page. It’s intended to be clear and concise to help you execute your strategic plan. It shows where your money is going.
How an Accountant Helps Clean Up a Chart of Accounts
As we mentioned, CSI can help our startup clients establish a chart of accounts, and we can also help clients re-evaluate what categories should be on theirs during our onboarding process (called our Initial Strategy Sessions). It can be a very long process since it can involve merging accounts and moving transactions.
Many business owners don’t like to change their statements if they’ve gotten used to them looking a certain way. However, we’ll thoroughly explain why we might recommend some changes. Plus, we go over these statements in your monthly meetings if you have any questions about them.
When your accountant helps you evaluate your chart of accounts, they’ll set up some common expense and income categories for businesses like yours, then dive in to discover your unique categories. Plan to discuss loans, equipment, liabilities, and much more.
Use Your Ideal Chart of Accounts to Strategize
Now that you know about the importance of your chart of accounts, how long it should be, and how an accountant can help you find your ideal categories, are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about the cost of a monthly accounting service by clicking the image below:
