Congratulations, you have started your own business. You have purchased or rented property for your business. You have furnished the space with everything you need to run your particular business. You have hired employees to work for you. Now you are ready to set up your accounting system.
One of the first things you will need is a chart of accounts. A chart of accounts will allow you to organize your transactions into categories. When you record transactions, you will post them to an account and then you can print various reports using some or all the these accounts.
Depending on your industry there are some accounts you will need and others you don’t need. For example, if you are in construction, you will need a WIP (work in process) account, if you are a retailer, you will need an inventory and COGS (cost of goods sold). A not-for-profit business will need restricted and un-restricted funds account, a law firm will need a retainer account to record deposits from clients. These are just a few examples of the different accounts a business may need.
Depending on your accounting software, you may be able to choose your industry when setting up your chart of accounts. If this is the case, choose your industry or the one closest to it. Go through the accounts and delete the accounts you know you will never use. Edit some of the other accounts, giving them names that make sense for your company.
If you have to set your chart of accounts up manually, it’s easy. The first group of accounts are your Balance Sheet accounts. All your asset accounts will be listed first. List your current assets first, other current assets next, and finally other assets. Next are your liabilities, listing your current liabilities first, then your short-term liabilities, and finally long-term liabilities. Next on your list are your equity accounts. Depending on your entity depends on the name of these accounts. You will have at least two, your retained earnings (the accumulative sum of your net income (loss)) and your net income (the current year’s sum of your net income (loss)). You may have other equity accounts such as a draw(s) account, treasury stock, etc.
The next group of accounts are the Income Statement accounts. List your revenue accounts first, followed by COGS accounts and then the expense accounts. If your software allows, you can assign numbers to your accounts with numbers starting with a #1 your asset accounts, starting with a #2 your liabilities, #3 your equities, #4 your revenues, #5 COGS, and #6 your expenses.
Some accounting programs will also let you use segmented account numbers, you can define how many segments your company needs, how many digits each segment is, etc. This would be good for tracking revenues and expenses for departments, locations, etc.
I personally like to use sub-accounts when I set up a new chart of accounts. The two accounts I use these on the most are the payroll liabilities and payroll expense accounts. With the payroll liabilities account, the main account is called payroll liabilities and then each of the sub-accounts are named whatever the withholdings are, i.e. FICA & Fed W/H Payable, State W/H Payable, etc.
Don’t forget, when setting up your chart of accounts, to set up any contra-accounts you may need, for example, if you have a fixed asset account, you will also need an accumulated depreciation account. But, don’t go crazy on creating your chart of accounts. Only set up the accounts you know you need, you can always add more later.