Financial management is crucial for any business, especially small businesses in Australia. With a good financial management system in place, you will be able to have reliable financial information, cash flow, you will know your business’s profitability and plan for growth. If you want to get success in your business, you must understand the basics of a chart of accounts. A chart of accounts is often overlooked, but it is important to get accurate financial reports about your business. The right categorisation must be applied to categories and GST when creating an accurate chart of accounts. A professional bookkeeper in Melbourne can also help keep your business finances organised. This guide will explain everything you need to know about the chart of accounts, setup, the main account types, and how it can benefit your small business.
What is a Chart of Accounts?
A chart of accounts has a list of all the accounts used in the general ledger of a company. The list is used to organise the business’s accounts and to segregate similar accounts. The account categories can be divided into five categories: assets, liabilities, equity, revenue, and expenses. A well-maintained and formatted COA ensures clean bookkeeping, GST and BAS filing. It makes bookkeeping easy and simple for small businesses.
How Does a Chart of Accounts Help Small Businesses?
Here are some of the benefits highlighted here:
- It maintains the financial transactions of the business records to facilitate easy creation of a bank reconciliation statement and bookkeeping.
- A well-structured COA allows for GST tracking and transaction classifications if accounts are set up with appropriate tax codes.
This will give you the ability to prepare Profit and Loss Statements, Balance Sheets, etc. - A structured COA makes it easy to track expenses, profitability, and thus the business ownership.
- Provides well-organised monetary facts to help you with cash flow planning, financial plan forecasting and, of course, business growth.
What are the Five Core Categories in a Chart of Accounts?
The five main types of financial accounts are as follows:
- Assets: Assets refer to anything owned by a company that has the potential to produce profit or increase the value of the business. Assets can be current assets like inventory, cash, prepaid expenses, accounts receivable, and non-current assets or fixed assets, which include property, vehicles, and equipment. Business assets contribute to the real worth of your business in the market.
- Liabilities: Liabilities are defined as the financial debts, legal obligations and duties that a business owes to its employees, creditors, lenders, and government institutions. Liabilities are accumulated over time by transfer of goods, money, and services. Business liabilities usually account for business loans, PAYG withholding, accounts payable, GST payable, and superannuation payable.
- Equity: Equity is the worth of the owner or shareholders’ interest in a business after subtracting liabilities from its assets. An equity account includes owner’s capital, drawings, share capital, and retained earnings.
- Revenue: It is the cash flow resulting from the sale of products and/or services to clients. The revenue account includes subscription income, sales, consulting revenue, and service revenue.
- Expenses: Cost of sales is the amount of money that a company spends to run and manufacture its product. Expenses are the direct costs and the operating expenses.
It’s always suggested to seek help from a bookkeeper for small businesses and keep your business ATO-compliant, along with your profit and loss statement and balance sheet.
How to set up a chart of accounts for your business?
- Know your business structure, its income stream and type. This information will give you information about the type of accounting your business needs.
- Have a clear set of main account classifications on your chart of accounts that can include any combination of expenses and income, assets and liabilities, and capital and equity. Assign account numbers within your categories and leave space between sections for expansion.
- Create several accounts in each category according to actual financial transactions related to your company as follows: rent, sales revenue, service income, wages, GST payable, business loans.
- Set up your GST codes if your business is registered for GST in your accounting software. Record your GST collected and GST paid, and ensure your tax settings will allow you to prepare your BAS correctly.
- Configure your chart of accounts in your accounting software, such as MYOB, QuickBooks, and Xero. You should assign account names, account categories, account codes and tax information to all of your accounts.
Contact the best Melbourne bookkeepers and hit the ground running.
Conclusion
Good business bookkeeping, GST and BAS preparation and accurate financial reporting all rely on an organised chart of accounts. We hope this guide has clarified the meaning of a chart of accounts, how to set it up, and the five main types of accounts so you can effortlessly keep your business on the road to growth.