Is your Chart of Accounts set up correctly for your business type?

When you start a new business, you set up your chart of accounts. Small and medium-size service-based businesses don't have the same chart of accounts as other businesses. For example, as a service business, you don’t need an inventory account, cost of goods sold, and any other inventory-related account. However, you need to build a CoA thinking about the future. What does it mean? It means that maybe you don't have any employees now, but in 5-year maybe you need at least one and you will need the account to classify the transactions related to that new expense.

When you start with Quickbooks Online it creates a basic chart of accounts for you. You’ll find many options to classify your business transactions but you will need to add more categories and accounts to get personalized reports that are useful for your financial decisions. Also, the Chart of Accounts needs to be personalized to match your legal entity type (sole proprietor, LLC, Corporation). Following we share with you the main categories and subcategories you can use to organize your finances:

1. ASSETS

The asset category is where you keep track of what your company owns. 

Bank - Current assets will include accounts for cash on hand, such as cash in your checking and savings accounts.

• Cash on hand

• Checking

• Money Market

• Rents Held in Trust

• Savings

• Trust Bank account 

Accounts Receivable (A/R) - You may have customers to whom you extend credit, so you will need accounts receivable account

Fixed Assets - Buildings, Machinery & Equipment, Vehicles

• Accumulated Amortization - for intangibles assets

• Accumulated Depletion - for natural resources

• Accumulated Depreciation - for tangibles assets

After your fixed asset account, put in an account for accumulated depreciation. It is always a negative number on the balance and is directly related to your fixed assets since that is what you are depreciating. 

Other Current Assets

• Allowance for Bad Debts

• Development Costs

• Employee Cash Advances

• Inventory - If you sell products, you will need an inventory account.

• Investment - Mortgage/Real Estate Loans, Tax-Exempt Securities, U.S. Government Obligations and Others

• Loans To Officers, Others and Stockholders

• Prepaid Expenses

• Retainage

• Undeposited Funds

2. LIABILITIES

The liabilities category is where you keep track of your company's debt obligations or what your company owes or may owe in the future. 

Accounts Payable (A/P)

Credit Cards

Other Current Liabilities

• Federal Income Tax Payable

• Insurance Payable

• Line of Credit

• Loan Payable

• Payroll Tax Payable

• Prepaid Expenses Payable

• Rents in trust - Liability

• Sales Tax Payable

• State/Local Income Tax Payable

• Trust Accounts - Liabilities

• Undistributed Tips

Long Term Liabilities

• Notes Payable

• Other Long Term Liabilities

• Shareholder Notes Payable

3. OWNER’S EQUITY

Owner Contributions - in there you include your investment in the business.

Owner Distributions - in there you classify the transactions In case you decide to take money from your investments.

Retained earnings - You will want an account for retained earnings for any profits you plow back into the company. 

4. INCOME

• Sales of Product 

• Sales of Services

• Discounts/Refund Given

Sales Income is the primary source of income for your business. Along with the sales revenue account, you may want to include an account for sales discounts and sales returns and allowances. 

5. COST OF GOOD SOLD

In this section, you include accounts for discounts from suppliers, costs of shipping, and miscellaneous sales costs.

• Cost of labor - COS

• Equipment Rental - COS

• Other Costs of Services - COS

• Shipping, Freight & Delivery - COS

• Supplies & Materials - COGS

6. EXPENSES

The last category listed on the chart of accounts is the expense category. You can include all expenses related to the business purpose. This category includes Other Expenses and Other Income Accounts.

• Advertising and Promotion

• Auto and Truck

• General and Admin

• Insurance

• Bank and Interest

• Professional Services

• Payroll Expenses

• Meals and Entertainment

• Occupancy Costs / Rent

• Utilities

• Taxes Paid

• Travel Expenses

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SOURCE: https://www.thebalancesmb.com/develop-the-chart-of-accounts-for-your-small-business-392997