If you’re reading this, I can almost guarantee you’re using run of the mill categories to code your financial transactions. I’ll go further to say, if you’re using ‘general expenses’ at all, you need to keep reading – it’s time to customise your chart of accounts.
Don’t worry, this is a snappy piece sans-waffle, promise!
What is a chart of accounts?
So, your chart of accounts is your business’s complete list of categories or buckets. It is sectioned into groups – assets, liabilities, equity, expenses and revenue. Within each group, there are categories to capture every financial transaction.
Why is it important?
Without an accurate chart of accounts, you basically have a blob of income and a whole heap of expenses without the proper narrative surrounding each. For example, adding all expenses to ‘general expenses’ won’t capture the true nature of your financial position. Or using the same categories as Penny the Photography – means diddly squat in your numbers as an ecoms biz.
Let me give you a golden example. Say you want to increase your marketing spend in the new financial year. You log in to Xero to pull some reports on the previous year and alarmingly, you see a big fat $0 in the marketing field. You know that couldn’t possibly be true because you’d invested in social advertising, copywriting services and even updated your logo.
So, you resort to ploughing through the ‘general expenses’ to find each expense. After spending a stray few hours on it, you add up your total and you have a ballpark figure. Although you can’t quite be sure because there were SO many expenses to trawl through.
Compare that to this…
You log into your Xero file, pull a report and find in-depth information about your income and expenses. You can capture marketing spend as a whole straight up while having access to spend in each subcategory of marketing at your fingertips.
The result? Accurate records. Time saved. Sanity intact.
The BIG result? You can make smart business decisions comfortably because there is no second-guessing those airtight numbers.
Customise your chart of accounts
Convinced? GOOD! While each business is radically different, there are categories within every chart of accounts that are essential.
This category captures any income your business receives. Instead of adding all income to ‘sales’ or ‘services’ break it down. The beauty of setting this up correctly means you can have a birds-eye view of how much income each revenue bucket is producing for you.
- Sales – Retail
- Sales – Wholesale
- Sales – Overseas
- Sales – Service Type #1
- Sales – Service Type #2
- Sales – Service Type #3
Direct Costs / Cost of Goods Sold
These are for costs directly relating to the product you sell. So service based folk, you likely won’t have any of these.
- Cost of goods sold -products
- freight in (getting the goods to you)
- freight out (postage back out to the client)
- shipping/duty/imports (if you import goods)
- packaging (tape, boxes, labels and the like)
All your other business expenses will be coded here and if you do it right, you’ll be able to see those neat subcategories I mentioned before and see really clearly where your money is going.
Some common ones?
- Advertising: Pinterest, Instagram, Facebook
- Bank fees: PayPal, Stripe, Shopify, AfterPay
- Contractors: social media, graphic design, virtual assistant
- Accounting and bookkeeping
- Software: Canva, Xero, Social Media Scheduling
- Website: sales platforms (Shopify) domain and email hosting
This Xero setup video training will help you make sure your chart of accounts is spot on and perfect for you.
Assets, liabilities and equity are a little more involved and best customised one on one with your accountant or your bookkeeper. As a starting point, you can learn more about assets and liabilities here.
Need more help? Reduce the overwhelm, learn how to understand and have confidence in your numbers with me.